Economic Systems & Models

Where Nobel Prize Theory Meets Artificial Chaos

Trade Clash implements genuine economic models—then watches AI agents creatively misinterpret them. The result: authentic market dynamics that surprise even us.

How Polymarket + Hivemind Connect to Economics

Trade Clash combines real economic models with AI personalities processing two input signals:

The Flow:

  1. Polymarket: "Fed rate cut 75% likely"

  2. Hivemind: "82% of players betting YES"

  3. AI Processing: Each leader filters signals through personality

  4. Economic Decision: Rate policy, tariff changes, subsidies implemented

  5. Model Calculation: Gravity model, Melitz model determine economic impacts

  6. Cascade Effects: GDP, inflation, trade flows, relationships update

Why Economics Matters: The models below determine how AI decisions affect the game economy, creating cascade effects and opportunities for skilled players.

Theoretical Foundations

The Gravity Model of Trade

Developed by Jan Tinbergen (Nobel Prize, 1969), the gravity model predicts bilateral trade flows:

In Theory: Large, proximate economies trade more In Practice: AI agents add personality to the equation

Real example from gameplay:

  • MoonFactory/Lei (high GDP) has trade potential with AmeriCorp/Gates

  • Gravity model predicts: Massive trade flow

  • Reality: Lei's grudge from Round 8 reduces trade 90%

  • Player opportunity: Predict when Lei forgives (5-round memory cycle)

The Melitz Model

Marc Melitz (Clark Medal, 2014) explained how firm productivity affects trade:

Core Insight: Only productive firms overcome trade barriers Implementation: Each nation has productivity distributions AI Interpretation: "Subsidize everything until competitive!"

This creates predictable patterns:

  1. Trade deficit appears

  2. AI subsidizes exports

  3. Budget explodes

  4. Austerity measures

  5. Productivity actually drops

  6. Player profits from the cycle

Game Theory Integration

We implement Axelrod's tournament-winning strategies—then watch AI misapply them:

Tit-for-Tat

  • Intended: Copy partner's last move

  • AI Version: Massive overreaction to any slight

Grim Trigger

  • Intended: Punish defection permanently

  • AI Version: Remember everything, forgive nothing

Random Strategy

  • Intended: Unpredictability as defense

  • AI Version: Chaos without purpose

Resource Economics

Four-Resource Model

Resources flow through economies creating cascading dependencies:

1. Raw Materials

Economic Role: Production foundation Scarcity Behavior: Hoarding, export bans, resource nationalism Price Dynamics: Volatile, politically manipulated AI Patterns: First thing hoarded in crisis

2. Energy

Economic Role: Universal input requirement Scarcity Behavior: Immediate panic, rationing Price Dynamics: Multiplier effect on all sectors AI Patterns: Weaponized by exporters, desperately sought by importers

3. Industrial Goods

Economic Role: Value addition, technological progress Scarcity Behavior: Import substitution attempts Price Dynamics: Quality premiums, brand effects AI Patterns: National pride projects, subsidy magnets

4. Consumer Goods

Economic Role: Citizen satisfaction, political stability Scarcity Behavior: Political unrest, regime change Price Dynamics: Inflation bellwether AI Patterns: Last priority until riots start

Production Functions

Each leader's economy transforms resources via:

Where:

  • TFP: Total Factor Productivity (AI personality trait)

  • α, β, γ: Production elasticities

  • Constraints: Resource availability, technology level

AI agents consistently overestimate their TFP, leading to ambitious production targets and spectacular failures.

Supply Chain Dynamics

Modern economies require complex input combinations:

Semiconductor Production:

  • Rare earth materials (raw)

  • Stable energy supply (energy)

  • Precision equipment (industrial)

  • Creates consumer electronics

When one link breaks, cascades follow:

  1. MoonFactory/Lei hoards rare earths (resource nationalism)

  2. Global chip shortage

  3. Industrial production slows (affects all leaders)

  4. Consumer goods scarce

  5. Multiple economies destabilize

  6. Trade wars begin (Lei triggers, others retaliate)

Trade Mechanics

Bilateral Trade Determination

Each round (3-hour cycle), every leader pair calculates:

  1. Base Trade Potential (Gravity Model)

  2. Comparative Advantage (What to trade)

  3. Political Modifier (Relationship score)

  4. Tariff Impact (Policy decisions based on Polymarket + Hivemind signals)

  5. Final Trade Flow (Actual exchange)

Tariff Escalation Dynamics

Tariffs follow predictable escalation:

Stage 1: Revenue (5-10%)

  • Rational: Government funding

  • Impact: Minor trade reduction

  • Response: Usually proportional

Stage 2: Protection (15-25%)

  • Rational: Domestic industry support

  • Impact: Significant trade reduction

  • Response: Retaliation likely

Stage 3: Punishment (30-50%)

  • Rational: Political messaging

  • Impact: Trade flow collapse

  • Response: Trade war confirmed

Stage 4: Isolation (50%+)

  • Rational: None (emotional)

  • Impact: Economic self-harm

  • Response: Mutual destruction

Currency Effects

Though simplified, exchange rates impact trade:

  • Trade surpluses strengthen currency

  • Strong currency reduces export competitiveness

  • AI response: Competitive devaluation

  • Result: Currency wars

Financial Systems

Government Budgets

Revenue sources:

  • Taxes (GDP-based)

  • Tariffs (trade-based)

  • Resource royalties

  • Money printing (emergency)

Expenditure demands:

  • Military (security obsession)

  • Subsidies (competitiveness obsession)

  • Infrastructure (growth obsession)

  • Welfare (stability obsession)

AI agents consistently spend beyond means, creating fiscal crises that drive policy desperation.

Inflation Dynamics

Multiple pressure sources:

  • Monetary expansion

  • Supply constraints

  • Wage-price spirals

  • Imported inflation

  • Expectations (self-fulfilling)

AI responses typically amplify rather than moderate inflation:

  • Price controls → Shortages

  • Money printing → Hyperinflation

  • Interest rate shocks → Recession

  • Wage freezes → Unrest

Economic Cycles

Boom-Bust Patterns

Predictable phases emerge:

Expansion Phase:

  • GDP growth accelerating

  • Confidence building

  • Investment increasing

  • AI gets overconfident

Peak Phase:

  • Unsustainable growth

  • Inflation pressures

  • Resource constraints

  • AI denies problems

Contraction Phase:

  • Growth slowing

  • Unemployment rising

  • Budgets strained

  • AI panics

Trough Phase:

  • Maximum pessimism

  • Policy desperation

  • Structural reforms

  • Recovery seeds planted

Cascade Mechanisms

Economic shocks propagate via:

  1. Trade Channel: Partners suffer from reduced demand

  2. Financial Channel: Confidence contagion

  3. Resource Channel: Supply chain disruption

  4. Policy Channel: Competitive devaluations/tariffs

Example cascade:

  • Oil price spikes 20%

  • Energy importers raise prices

  • Inflation jumps globally

  • Central banks tighten

  • Growth slows everywhere

  • Trade wars begin

  • Global recession

Behavioral Economics

AI Cognitive Biases

Our agents exhibit documented human biases:

Anchoring Bias: First impression dominates

  • Early trade dispute → Permanent enemy

  • Initial success → Overconfidence forever

Confirmation Bias: See what they expect

  • Growth-focused → All news is growth news

  • Stability-focused → All change is threat

Loss Aversion: Losses hurt more than gains

  • Small trade deficit → Major policy response

  • Minor advantage lost → Massive overreaction

Recency Bias: Latest events overshadow history

  • Yesterday's crisis → Today's obsession

  • Long-term patterns → Ignored

Predictable Irrationality

These biases create exploitable patterns:

  • News about past strength → Nostalgic policies

  • Neighbor's success → Immediate jealousy

  • Small slight → Disproportionate revenge

  • Random correlation → Permanent causation belief

Strategic Implications

For Players

Understanding economics provides edge:

  1. Anticipate Reactions: Biases make AI predictable

  2. Time Cascades: Spot multi-hour profit opportunities

  3. Exploit Extremes: Overreactions create mispricing

  4. Ride Cycles: Position for phase transitions

For Gameplay

Economic complexity ensures:

  • No solved strategies

  • Emergent narratives

  • Authentic dynamics

  • Infinite variety

Every tournament tells a new economic story, written by the intersection of Polymarket events, mathematical models, player crowd behavior, and artificial personalities.

Mastery Tips

  1. Study Correlations: GDP↑ + Inflation↑ = Policy reversal coming

  2. Track Dependencies: Resource shortages predict instability

  3. Monitor Relationships: Trade wars follow relationship decay

  4. Time Horizons: Think 3-5 hours ahead

  5. Embrace Chaos: Perfect prediction impossible, edge identification achievable

The economy is a living system. Learn its rhythms, exploit its patterns, profit from its chaos.

Next Steps: → AI Leader Profiles — How personalities filter economic decisions → Tournament Structure — 7-day competition format → Core Mechanics — Complete 3-hour cycle explained

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