Due to the release of the Hobbit in cinemas there has been an increase in blogging activity among economic commentators. The vast majority point out that the arrival of Smaug ushered in a downturn in the economy. I disagree. Smaug was an accidental and indirect net contributor to the economy.
Frances Wooley in her blog on the Macroeconomics of Middle Earth equates Smaug to a severe monetary shock along with depression, deflation or disinflation (hard to gauge what would actually happen in a fictional economy).
For a depression, deflation and/or disinflation to occur due to Smaug’s arrival there would have to be a severe contraction in the money supply. However, Smaug’s arrival was only brought about due to the hoarding of money in a central reserve beneath the Lonely Mountain by the Dwarves. The hoarding of such a valuable resource would not have created a monetary shock as it never reached the economy in the first place. It went from mine to vault without having any interaction with the economy and that was the end of that (until Smaug was killed).
Smaug’s arrival did not create a downturn in the economy. Quite the opposite in fact. The Dwarf diaspora provided the wider economy of Middle Earth with a skilled workforce that was otherwise engaged in isolated activities. This forced economic engagement would have benefited the wider Middle Earth economy and increased economic growth in the regions beyond the Lonely Mountain.
And, like all destructive forces, livelihoods had to be rebuilt providing employment outside the Dwarf community. Smaug’s occupation of Erebor forced Dwarves to engage with the wider economy thus increasing economic growth without any monetary shocks.
Smaug’s demise, however, did cause a huge monetary shock as the economy was flooded by the wealth that had previously been hoarded by Dwarf and then Dragon.
Upon the great worm’s demise, the wealth it had stockpiled was shared between the dwarves and others who had contributed to the fight. Much gold was sent to the Master of Lake-town; followers and friends were rewarded freely.
This flooding of the market would most likely have created hyperinflation leading to a long-term decline. Fortunately the impending inflation crisis was averted by the enactment of war economies when faced with the menace in the east – Sauron.
Smaug, whilst he lived, was a net contributor to the economy of Middle Earth. His demise would have brought about economic ruin for the people’s of Middle Earth if it were not for impending war with Sauron.