My Little Economy

Twilight oversaw the setup the morning of the festival. Admittedly, there was little to manage, with Twilight’s role being mostly restricted to trotting around Looking Officially At Things (for who could say that the festival was ready until it had been officially deemed so?), asking questions like “Is this exhibit registered? Have you thought of—oh, you have? Okay, well, make sure to—oh, you’ve done this before. Of course. Sorry. I’ll get out of your way.”

With the Ponyvillians capable of taking things into their own hoofs, Twilight had everything checked off her list by midmorning. She didn’t mind. There was nothing like the feeling of checking things off a list. Sometimes she made lists just so she could check things off of them.

With her time free, she checked out the food stands and the stalls selling various items like model Banks with small parts a filly or colt could glue together and NGDP-controlling magic horns (Twilight tested one and confirmed it was fake—Princess Celestia didn’t manifest with the burning fire of a thousand suns to snuff out the magic. Princess Celestia’s attitude towards interference with the One Bank was far more direct and pointed than in the case of taxation), while other ponies prepared puppet shows, songs and dances.

That left it an hour until noon, when the sun would be at its peak in the sky and Princess Celestia would, well, target the NGDP. The festival was in full swing now. Ponies thronged the field, eating candy apples, wearing pink party hats and admiring the way Rarity had lined up the stalls so their colors made a series of rainbows throughout the field. The petting zoo, despite the lack of official oversight, was overwhelmingly popular. Fluttershy introduced all the colts and fillies to the “naturally evolved organisms” and watched them closely as they fed and petted the odd assortment of creatures she had collected. All of the animals wore black bands around one of their limbs. Had it been that way yesterday too?

Applejack had deployed a small army of relatives to cook and serve all the food. She raced up and down the stands inspecting things, barking orders to her cousins and exchanging how-do’s with everypony there. Pinkie Pie was up on stage performing some kind of vaudeville show, and Twilight spotted Rainbow Dash playing cards at a table with several sunglasses-wearing Pegasi. Everything seemed to be in order. It was no NGDP Targeting Festival like they had back in Canterlot, but this one she had managed. Sort of. It mostly seemed to be managing itself.

Spike waddled over to Twilight hefting a bag of caramel popcorn almost as big as he was. “Twilight, you can relax now and have some fun. Eat something and play one of the games. Princess Celestia won’t be establishing the new money growth target for another hour.”

“I am going to go inside and read something until noon,” Twilight said.

Spike wrapped his tail around her leg and tugged. “Come on, there are water balloons.”

Twilight allowed Spike to lead her away. “I suppose it can’t hurt to have a little fun every now and then. Admittedly, I’d normally prefer to have a lot of fun by reading something, but….”

Two minutes later, Twilight discovered that prodigiously magically powered Unicorns who have been trained since a young age by Equestria’s ruler and foremost Alicorn, Princess Celestia, had something of an advantage when it comes to large-scale water balloon fights. About three seconds after that, Twilight discovered that large-scale water balloon fights were really, really fun.

“That’s what you get for dog-earing books!” she cackled as she magically fired several dozen water balloons at speeds so fast the rubber shell almost split open before impact.

Time passes fast when you're crushing ponies beneath your hoofs. Spike waved urgently to her. “Twilight, it’s 11:55!”

Twilight turned and sprinted for the stage where Rainbow Dash’s screen displayed the economic data. She pushed her way to the front of the crowd and gazed up proudly at the screen. Soon her mentor and the greatest pony in the world, Princess Celestia, would use her magic to guarantee economic order for another year. She felt a pang at the knowledge that the princess hadn’t wanted her protege at her side for the festival, but Twilight saw it as a sign of growing trust. One day, Princess Celestia had hinted, Twilight Sparkle herself would be the occasion of the festival. It was only fitting that she should manage one.

The clock ticked at a torturously normal pace. 11:56…11:57…11:58…11:59…12:00…

12:01. Twilight gasped.

12:02. The ponies began to stir.

12:04. Twilight stepped on stage and levitated a microphone to her mouth. “Excuse me, everypony,” she said, trying to sound more confident than she felt. “It appears that Princess Celestia will be delaying the NGDP targeting until this afternoon, so how about that neat puppet show? Uh, Pinkie Pie, has, I believe, uh….”

12:05. Panic broke out.

“We’re all doomed!” A stallion sank to his knees, wailing. “We’re all doo-hoo-hooooomed!”

“No we aren’t!” Twilight shouted above the noise. “Please, everypony stay calm!”

“Yup, we’re doomed,” Applejack said matter-of-factly. “Apple Bloom, get your brother and gather up all the leftover food. Don’t let any go to waste.”

Fluttershy whimpered into the shoulder of one of the band-wearing cows. “There, there, Fluttershy,” the cow said. “Barter is a more natural mode of economic transaction.”

“I am livid!” Pinkie Pie screamed. “I am the CEO and proprietor of Sugarcube Corner, and I pay more than my share of voluntary defense funds! Princess Celestia owes me an explanation!”

“Sacré bleu!” Rarity swooned and fainted, her arm draped artfully across her forehead. No pony noticed, so after a minute she got up and did it again.

“Yes!” Rainbow Dash squealed. “I bet a thousand bits at sick odds that Princess Celestia wouldn’t show! I’m rich!”

“Ponies, please be calm!” Twilight struggled to be heard above the noise and pandemonium. “There is nothing to worry about!”

If you’re wondering what the ponies of Ponyville were worried about, consider an economy in general equilibrium. That’s an important term. Write it down.

An economy is a system where ponies buy and sell goods and services. Producing and selling something on the market is hard work. It’s risky and takes effort, so ponies don’t do it for fun. They only sell goods on the market so that they can buy goods on the market. Applejack, for example, makes and sells apples and apple products in exchange for clothes to wear equipment for her farm, and a hundred other things that she wants. All the ponies that make and sell clothes, equipment, and a hundred other things do so because they themselves have innumerable wants that can only be satisfied on the marketplace. Everypony convinces other ponies to do them favors by doing them favors in anticipation of their own needs.

What this means is that everything that is sold on the marketplace is sold only in the expectation of being able to purchase something else. When expectations are accurate, no good is sold on the market without its corresponding purchase-good also being sold on the market. Thus there is a balance, a harmony, an equilibrium among all production and trade, with every good accounting for and being accounted for some other good.

In short, everything bought is paid for by everything sold, and particular things bought are paid for by particular things sold.

Let’s look at an example. Say that Applejack trades apples for Orange Blossom’s oranges (if Applejack will forgive the slander). Now, ponies are not all-knowing, perfect calculators, and sometimes they make mistakes, producing a good for sale in the false expectation its corresponding purchase-good will come into existence. Sometimes, Applejack makes more apples than Orange Blossom wants to buy—Twilight would call this an excess supply of apples. But recall that all ponies produce only in the expectation that they can buy! So if Applejack produces more apples than Orange Blossom wants to buy, then Applejack cannot buy as many oranges as she intended! This shows that an excess supply in one sector must, must be balanced by an excess demand in another sector.

Neither Applejack nor Orange Blossom are pleased with this situation. In order to salvage what they can, Applejack will adjust the exchange ratio: she will offer more apples for each orange until all the apples and oranges are bought-and-sold. Recall that the apples and the oranges both are supplied in the first place only to be sold, and it, ahem, behooves neither Applejack nor Orange Blossom to hold onto any of their fruit. The exchange ratio will adjust until the market for both apples and oranges clears, that is to say, when there is no fruit left over and no excess supply and no excess demand

This harmony is called Say’s Law, named after its discoverer, the famous Unicorn Sunday Sayonara. It shows the impossibility of a general glut in the economy, as a surplus in one sector must be balanced by a shortage in another. This is a good thing. A general glut is one in which all the fruit lies spoiled and uneaten on the ground. The factories are empty. The machines are still. Nopony works the land. Everything is for sale, but nopony is buying….

This holds true until we introduce money. Money is amazing. It makes trade so much easier. Remember how Applejack sometimes sells apples so she can buy farm equipment? Imagine if she could only buy plows and tractors and so on when the plow-and-tractor makers were hungry for apples, and imagine if they could only buy apples when Applejack wanted new equipment! It would be a very rare double coincidence for any trade to occur. More often, Applejack wouldn’t get the tools she needs to run her business, and the employees of Farm Equipment Incorporated would hunger endlessly for a bite of her family’s famous apple pie.

The marvel known as money allows our dear ponies to circumvent this problem. With money, Applejack can sell her wares not just to the ponies who have something to sell to her but rather to anypony who wants them. In turn, Applejack can take the money and buy from whomever she wants, not just the ponies who are hungry for apples. For all the trenchant critiques from the radical New Earth Order movement, money is a necessity to any economy larger than a small village.

But money has a hidden downside. Recall again our beautiful general equilibrium, the marketplace where gluts are local and quickly resolved, for one good is always balanced by another. But this was achieved by the adjustment of exchange ratios. Now there are no exchange ratios between goods per se. Rather, there are exchange ratios between goods and money, which are called prices.

Let’s return to our good friend Applejack as she is trying to sell her apples for oranges on the market. This time, she and Orange Blossom trade with money. In the previous example, Applejack and Orange Blossom dealt with their excess fruit by adjusting the exchange ratio at which they traded their wares. Now they do it by adjusting the prices, measured in bits, at which they sell their goods. Usually this works even better than in the previous situation because a third and fourth and fifth and thousandth trader can enter this system without interrupting the process of exchange.

But this introduces a new possibility. Money isn’t simply a metric of exchange ratios. It is also something valuable in itself, something that allows ponies to sell without an immediate need to buy, and to buy without something available for sale. Ponies will want money. They will demand money. And so just like anything else for which there is a demand, there could be an excess demand for money. What happens then?

As ever, an excess demand in one market is balanced by excess supply in another. In the barter market where apples are used to buy oranges and oranges are used to buy apples, then an excess demand for oranges implies an excess supply of apples and vice-versa. However, in a monetary economy, where bits are used to buy all possible goods, and all possible goods can be exchanged for money, then an excess demand for money implies an excess supply of all goods.

The glut of apples in the barter economy between Applejack and Orange Blossom was resolved by the adjustment of exchange ratios. But this works because there is nothing to do with apples other than sell them or eat them. So Applejack will either eat her excess of apples, solving the problem, or she will offer more of them to Orange Blossom per orange until she has bought all of the oranges that she wants.

But the reason that Orange Blossom will allow her oranges to be sold for an increasingly high amount of apples is because there is also nothing to do with oranges other than to sell them or eat them. One way or another, the excess demand for oranges will be resolved in the exact same way as the excess supply of apples.

But money is worth holding on to. It can act as a store of value. It is worth building up a reserve of them. So if you have a supply of money that is balancing the demand for goods and services, and that supply falls, then the demand for goods and services is no longer being balanced. Ponies like Applejack and Orange Blossom will have to accept fewer bits in exchange for the same number of apples and oranges respectively. This means a single bit buys more goods and services than it used to do…which means that ponies will want to acquire more money, which can only be done by selling goods. But the ponies they are selling to will be less willing to part with their money because it is more valuable now! Prices will have to go down, incomes are reduced, and bits are more and more valuable….

Now what happens to the products on the market, sold for dirt cheap to ponies who cannot afford to spend their bits at any price?

Nothing. Nothing happens to them. They sit there unnoticed and unused. No pony buys them because they don’t have enough money.

And you have a general glut. Or, in colloquial terms, a recession.

Money! Brilliant, terrible money! A general glut, an excess supply of all the goods in a market is impossible in the absence of money. But with money, rare though it is, an excess supply of all goods can be balanced by an excess demand for money.

For a thousand years Princess Celestia has prevented general gluts by adjusting the money supply to match the market’s forecast for its own monetary needs. She uses her magic and wisdom to ensure that the supply of money is high enough that there is no excess demand for it and therefore no excess supply of goods in general on the market.

Only Alicorns can live long enough to remember the time before Princess Celestia and the Bank. To the rest of the population of Equestria, general gluts, the dreaded recessions of yore, are only a distant nightmare….

The mare is the color of the night sky. She is not black in the sense of absorbing all light but black because light does not dare touch her; she is the color of the empty, uncaring void that surrounds our small and insignificant planet. Her wings spread out behind her like the cloak of Death. Her horn is as long and sharp as a dragon’s tooth. On her flank sits the symbol of a crescent moon, and she towers over the equines assembled at the festival exactly like a goddess among ponies.

Twilight’s mind turned to fuzz at the sight of the dread apparition walking across the stage. This was completely impossible, her brain reasoned, and so, its logic went, this wasn’t happening. There. Problem solved.

The dark mare’s hoofs clicked across the stage. Twilight’s brain snapped back into reality. This was happening. The problem was, she couldn’t do a thing about it.

“Hi!” Pinkie Pie waved a hoof. “My name is Pinkie Pie! Who’re you?”

The Alicorn faced the crowd of ponies.

“I am the Mare in the Moon. I am the legend mothers whisper to their colts and fillies to scare them into bed. I am the darkness, the night, the glut to end all gluts. I am the Defeater of Discord, the Moon-Raiser, the Imprisoned Sister, the Betrayed and Forgotten, but I never forgot, for I AM NIGHTMARE MOON!” With this last declaration came a burst of power that amplified her voice a hundred fold. Ponies reared back in shock and fright.

“Neat!” Pinkie Pie said. “Want to bake cupmmph!”

Applejack withdrew her hoof from the pink pony’s mouth. “Not right now, Pinkie.”

Nightmare Moon regarded the crowd. “I seek your economist, mortal ponies.”

“I’m right here,” Twilight said as bravely as she could. This was braver than she would have expected, as reality was slow in dawning. So was, quite possibly, the dawn. “What have you done to Princess Celestia?”

“Only the same she did to me,” Nightmare Moon said. “I locked her in the sun for a thousand years. What can I say? I’ve always looked up to my big sister as a role model.”

“C-Could you let her out, please?”

“No. Oh, that reminds me. I believe your dear princess was supposed to do something about the money supply? Well, I’ve decided to tighten it.” She held a hoof to her chest. “I’m simply worried about inflation.” Her voice oozed with mocking self-righteousness.

“The economy needs more money, not less,” Twilight gasped. “If you shrink the money supply too much you’ll create a recession….”

Nightmare Moon smiled.

“What’s a recession?” one pony asked.

“It means no pony can buy anything because no pony can sell anything because no pony can buy anything,” said Applejack. Such things were written of in ancient Apple texts.

“Uh. Is that bad?”

“Eeyup.”

The ponies panicked.

“Silence,” Nightmare Moon spake.

The ponies were silent.

The dark Alicorn turned to Twilight. “Princess Celestia hid you well. It took me almost ten minutes to find you since she scrubbed your name from the magical records. Still, even I eventually stooped to simply asking a pony on the street. They were all too quick to betray you.”

“I…didn’t make many friends,” Twilight said.

“Economists don’t need them.” Nightmare Moon walked toward her and past, circling Twilight like a hawk stalking a mouse. “But where are your wings? Ha! Only a Unicorn? My sister wanted six of us, and it looks like she only managed two and a half!”

“I’m proud to be only a Unicorn,” Twilight said. “What do you want?”

“To destroy everything my sister created and rule over the vast emptiness for eternity.” Nighmare Moon walked back to the center of the stage. “And that means ending the last of the economists.”

Twilight concentrated. A magical glow surrounded her horn. “Try me.”

Nightmare Moon laughed. It was the sound of a scythe running across a whetstone. “I defeated Celestia. An Alicorn. What can you do?”

“I can teleport.”

“What—”

Twilight vanished in a flash of light and reappeared on the other side of the crowd of ponies. She sprinted away as fast as a terrified pony can, which is pretty fast, but Nightmare Moon sent only her laughter in chase.

Twilight ran and ran through the dirt roads of Ponyville. She wasn’t thinking about where she was going, and so her legs took her home. Her brain had more important things to worry about, like the imprisonment of Celestia, the return of Nightmare Moon, and the prospect of a thousand years of bad monetary policy.

She needed help. She needed somepony she could turn to for trust, guidance and aid.

That pony had always been Princess Celestia. Twilight couldn’t run as fast for some reason when she was thinking about her teacher.

New plan. What did she turn to when the princess was busy?

Books. And by some coincidence, she had ended up back at the tree-shaped house Princess Celestia had acquired for her and Spike. Good job, legs.

Twilight burst inside and summoned a hundred books to her with her horn. The answer had to be here somewhere. She flipped through page after page, looking for something that she already knew didn’t exist. She thrust wildly aside an exposition on Banking by Princess Celestia—she couldn’t stop, couldn’t think—

Stop. Think. What was the threat Nightmare Moon posed? Disharmony, disorder, an evil economic equilibrium of doom. Twilight just needed to find a way to create a better equilibrium. And how did equilibrium come about? What were the…

“The Elements of Equilibrium!” Twilight shouted. “Of course!” She summoned the entire ‘E’ section to her, hoping, praying….

“You bore me,” said the voice of Nightmare Moon. Twilight jumped, nearly losing hold of the storm of books that surrounded her as she turned to face the dark mare.

“It’s impolite to enter without knocking,” Twilight said. She needed to stall for time while her search spell found the reference.

“You were muttering, ‘Princess princess princess,’ under your breath,” Nightmare Moon said. “You’re pathetic. My sister was only ever a tyrant.”

“You’re wrong,” Twilight said. Just a little longer. “Princess Celestia used the Bank for the good of all.”

“Yes, and so will I.”

“Liar.”

“Yes. Now die.”

Twilight teleported outside and charged blindly forward, levitating the one book she needed. She ran right into Nightmare Moon’s leg and stumbled back, dazed.

“Why would I let you do that twice?” Nightmare Moon seemed bemused. “What could you possibly be thinking?”

“That I’m going to be rich!” A physical rainbow hit Twilight from the side, carrying her down the street. “I’ve got you,” Rainbow Dash said. “You’re an economist, right? Can you fix this?”

Twilight tried not to think about how fast her body was currently moving. “I-I might have an idea!”

“Good, because I’m filthy rich and I need there to be an economy so I can get paid!”

A dark glow surrounded the both of them. Nightmare Moon didn’t even seem bothered as she pulled them toward her while they struggled helplessly against her magic

Nightmare Moon set them down before her and released her spell. Twilight concentrated magic in her horn to teleport again, but Nightmare Moon spoke. “What’s this about being able to stop me?” She sounded amused.

“Twilight Sprinkle is going to kick your butt so I can be rich!” Rainbow Dash said.

“It’s Twilight Sparkle, and there’s one thing you’ve forgotten, Mare in the Moon. Princess Cadance will stop you!”

“Who? I put Celestia in the sun.” Nightmare Moon sounded like she was talking to a child. “What do you not understand about this? No, that was not your plan.” She levitated the book out of Twilight’s grasp effortlessly. The pages opened and turned before her even faster than Rainbow Dash had gone through her own stack of papers.

“Ah,” Nightmare Moon said after too short a time. “The Elements of Equilibrium. Of course. That might do it. Thank you for warning me.”

Twilight tried to smile. “Princess Celestia knew you were coming. She left us a weapon so that we could defeat you even after she was gone!”

“Actually, it says here that the elements are kept in her castle.” Nightmare Moon laughed. “My poor sister must be growing senile to have sent her best economist halfway across the land and far away from her precious Elements of Equilibrium!”

“That’s what you think,” Twilight said. All she could do was bluff. “But Princess Celestia knew this day would come, and she has a plan to save Equestria even now.”

Nightmare Moon sighed. “For an economist, you don’t seem to understand self-interest at all. Grovel before me, and I might spare your life.”

Twilight lifted her chin. “There is more to life than economics.” Internally, she winced. Had she really just said that?

“Indeed,” the horrible horse mused. “Like utterly crushing your sister’s dreams. Very well!” Her voice clapped like a thunderbolt as her power fomented. A whirlwind of darkness and cold surrounded them. It howled like a wolf gazing at the moon.

“What’s going on, Twilight?” Rainbow Dash cried, clutching at the Unicorn.

“I-I don’t know!” Twilight shouted, tactfully trying to free herself from the Pegasus’s grasp.

The power faded. “I have summoned the Elements here,” Nightmare Moon said. “As the money supply tightens like a noose around Equestria, so the rope of my mercy tightens around your neck. Five tests I offer you, one for each Element of Equilibrium! Each will destroy an aspect of your pathetic economics, each will break you as I have broken my sister. Your mind in pieces and your heart full of hope, you will crawl into the chamber of my castle, hoping for the Elements, for the return of your savior, and you will find that they do not work for you.”

“I accept,” Twilight said. It was clearly a better deal than dying and letting Equestria be forever doomed. Adding a choice to her choice set could only make her better off…right?

“It is done. Face your fate in the Everfree Forest if you dare! HA HA HA HA HA!” With a clap of thunder and a flash of darkness, Nightmare Moon vanished along with the book, leaving only her laughter behind.

“Whoa.” Rainbow Dash wiped the sweat off her brow. “Glad she’s gone.”

“Rainbow Dash! Twilight Sparkle!” Pinkie Pie, Applejack with Spike on her back, Rarity, and Fluttershy appeared around the corner, running full tilt.

“You can’t fly ahead so fast, Rainbow Dash,” Applejack panted when they got near. “Who knows what that Nightmare Moon could have done?”

“Yeah, we’ve got to beat her up together,” Pinkie Pie snarled. “No pony threatens our friendship and gets away with it.”

“She’s after the economy,” Twilight said.

“That’s what I said.”

Twilight shook her head. “I don’t have time for this. I have to stop Nightmare Moon and save Equestria!”

“And we’re going with you,” Rarity said in a regal voice that brooked no disagreement.

Fluttershy nodded. “If there’s no money left, how will I take care of all my animal friends? I mean, my NEOs.”

“No use sharing our secret apple-baking methods with all our friends if Sweet Apple Acres don’t exist,” Applejack said.

“I can’t impress my friends will the latest fashion if I can’t afford new clothes,” Rarity said.

“How will I make all my friends smile with cake and balloons if there’s no market for them?” Pinkie Pie asked.

“And I can’t make friends with the whole world if there’s no stock exchange to play with them,” Rainbow Dash said.

“See?” Pinkie Pie hopped in a circle. “It is about friendship after all!”

Twilight sighed. “Fine, you can come. I might need help anyway. Economists never turn down a division of the labor, especially when the opponent is a magically super powerful Alicorn nightmare who’s about to destroy the economy. That’s in one of my books. Well. The first part is.”

“I’ll come too.” Spike jumped off of Applejack’s back. “Nightmare Moon is actually messing with my friend.”

“No, Spike.” Twilight sank to her haunches, bringing her eyes level with his. “I need you to stay here and guard the library. If I don’t come back, you will be Equestria’s economist.”

“What about Trixie?”

“DON’T TALK TO ME ABOUT THAT MARE! She was probably the one who ratted me out to Nightmare Moon. Or it was Twinkleshine, that—”

“Let’s defeat Nightmare Moon and become filthy rich!” Rainbow Dash stuck her hoof out. One by one the other ponies placed their hoofs on top of hers. They looked at Twilight expectantly.

“Nope,” Twilight said. “Not doing that.”