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Let’s preface this by saying my overall knowledge of the science of economics can be summed up with the term “laughable”. So this is a more sociological look at Erebor as I see it (or would write it in an AU such as this), and how it would look in a theoretical AU where Smaug never came. This will primarily be based on movie canon, dipping only a little into book canon.

First of all, the words “Tolkien” and “Economy” don’t really go together. There’s clearly money in Middle Earth, but Tolkien also clearly had no interest in figuring out how it worked. As one better essayist than I stated, “Who does the laundry in Rivendell?” Then you run in to the fact that Erebor itself mines gold. In theory, and this is one I subscribe too, Erebor is the wealthiest kingdom in Middle Earth. However, wealth is defined by scarcity. Erebor can’t just open the doors and allow all that gold to go pouring out into the world, there’s likely not enough goods in Middle Earth to even spend it on.

Dwarves as a race, as far as we can tell, have an almost biological imperative to create beautiful things. I tend to see this trait as being the basis of what is referred to as “greed” by outsiders, but I tend to think of the dwarvish “love of gold” to be more a love of art or beauty, but simply in the mediums of precious metals. By this theory, Erebor isn’t valuable in the way Fort Knox is, but rather in the way that the Louvre is. This is very hard for outsiders to grasp, especially Men, hence the poor reputation the dwarves enjoy.

So you’re Erebor. You’ve got more money then you can ever hope to spend without the risk of making money itself worthless. You have an extremely homogenous culture living in what amounts to a city-state in size. You have outsiders to do all the things your people don’t like to do, like farm. In exchange you give out a controlled amount of cash so that those who provide for you are well taken care of, and to create a hub of trade for the goods you sell (this would be Dale). 

Then what does Erebor look like on the inside? 

You could go with Dragon Age’s rather bleak Orzammar model, with a polarized society defined by extreme wealth and extreme poverty, with those who leave for “the surface” stripped of all titles and rank. However, this is where I’m going to pull out the Tolkien hammer, because rarely is Middle Earth bleak in such modern ways as you see in Dragon Age, though this means it’s also less realistic of course. There’s no evidence in canon of “poor” dwarves except for the exiles once they lose their home. The shot we get of prosperous Erebor at the beginning shows dwarves who, in my opinion, seem to enjoy their work. As I said, on a biological level it seems dwarves enjoy mining, crafting, and smithing. They would do it on their own even if those items weren’t creating wealth. If anything, the reason they’d have to be careful with the items they allow to leave Erebor is that they probably make so damn many of them that the supply could even outpace demand, making dwarven crafts worthless if they ever were unleashed in large numbers, because dwarves just like making them. 

Erebor with all its wealth, if it is careful, can basically make sure that every dwarf within the city 1) has all their needs met 2) has leisure time to make beautiful objects. This is, by the way, an almost direct quote from The Hobbit (p. 23), and they paid for outside goods either by apprenticing the children of Men or by selling their own works, so no menial jobs probably have to be done by dwarves at all. This would mean being a dwarf of Erebor is like belonging to an extremely exclusive club. In our own terms, “universal income” is probably a baseline “right” of all the dwarves there, an arguably socialistic model.

However, to begin extrapolating on this (since now we’re going the boundaries of what Tolkien discussed) this could easily be the basis of their poor reputation elsewhere (except as crafters). You’d have to be very careful managing these assets, you wouldn’t want to release too many goods so you don’t devalue them, since your entire culture now depends on protecting your citizenry, and wealth and the structural integrity of the mountain itself are what protects you. You can’t outlast a siege because your economy isn’t self sufficient in terms of food or menial labor. This would probably make dwarves quite unpopular with some people on the outside, who would see them as uncaring of others, or greedy. Also, any sort of outreach to other races (see: the Council of Elrond) would have to be weighed and measured in terms of material cost and loss of lives, since dwarves don’t have a high procreation rate, and their wealth is used to keep their very small citizenry alive and up to their preferred standard of living. Which, you know, since no one seems to be offering them help in return and the mythology itself says they’re a hidden and unwanted race, I don’t particularly see why they’d even want to be all that generous outside the boundaries of trade. The best way to define the attitude of Middle Earth towards dwarves that I seen is “casual disdain”. 

I suppose this is a bit long and rambling, @irzhava and I were discussing it mostly in the context of a fic where the Mirkwood elves were exiled and called upon the aid of a still-strong Erebor. In such a case of petitioners, I can see a very long bureaucratic process with a lot of discussions before the city-state of Erebor as a whole makes a decision. Or maybe you’d just see dwarvish goodness, passion, and impulsiveness, I’m sure on an individual basis that would be the case. 

As for someone coming to live in Erebor, I can see that being almost impossible. Like other modern insular, homogenous wealthy states (Norway, Switzerland) with their own internal source of wealth (oil, banking, in Erebor’s case gold) they’d be very expensive for outsiders. What exactly can you pay the dwarves with as far as currency that they don’t already have? Presumably labor, food, books, and textiles, which are more cumbersome to carry than coins. You’d have to come as a trader, most likely, or you’d have to deal in intangibles like news and stories. So basically, I can see non-dwarves who want to live in Erebor needing to petition the government for some sort of guest status, where either their trade goods or their services buy them in to the social network of available wealth, since gold or gems would probably be useless as currency within the city, it’d be more of a bulk crafting item, like bronze or iron. The exchange rate for outsiders coming into the city would be a nightmare. So essentially you have two economies - the economy inside Erebor, and the economy outside, which bear very little resemblance to one another? I’m wrestling with how luxury goods work inside Erebor and don’t really have an answer for what exchange rate the dwarves use, except that I imagine it’s a fairly closed system? 

You’d also probably have very little interest in immigration from the government, since the dwarves would have a pretty good thing going, you wouldn’t want to disrupt the balance, or inspire too much envy by letting outsiders see the lifestyle you have, you would in fact be fairly secretive about what you have. Erebor would have Dale to deal with outsiders in general, and with outside trade and menial labor/agriculture needs. I’m sure you’d still have warriors, obviously these are dwarves, but they’d be more about using their superior skill and weaponry to defend their outside interests like Dale, or the mountain itself. A lot of their military might probably would be in arms dealing more than in lending soldiers. 

For someone like Thorin, it would be a very protected world to grow up in. It would be very jarring to leave this sort of world behind, to go to a place where a chest full of gold is a king’s ransom when compared to Erebor, where a chest of gold was probably just seen as metal smithing equivalent of fabric cast-offs. It may even be difficult to find work as a dwarven smith in the wide world, since Erebor may have reserved its craftsmen for high-level work like armor and swords for kings, and other beautiful objects, not day to day stuff. It would definitely feel menial, if not insulting, to be hired to make things like pots and horseshoes, and the pay would insultingly low. Since the Erebor exiles may not have agricultural or textile skills within the refugee camp, you’d have to buy those items and that too would get expensive quickly. 

This is all the more reason a stable Erebor would be very, very careful not to have their economy crashed, as it would mean the literal difference between life and death for their insulated, isolated, leisure-rich population.

 

Part 2

Comparing gold to art is also a much better way of portraying it, in my opinion. It’s not about money or wealth, after all the dwarves only really exchange it for food and textiles with Dale, things that they need in order to free up more of their population to dedicate themselves to pursuit of beauty. It feels almost incidental that the other races view such items as valuable for exchange, rather than valuable to be treasured and admired. I could almost see the dwarves being puzzled by this, once upon a time, just as we might be puzzled to see paintings used as currency and traded willy-nilly (which, by the way does happen, and I think dwarves would feel a similar pang that I do at the thought that this trading is done with little appreciation for the inherent beauty of a piece, with only a focus on its utility and monetary value). They make use of it, but perhaps even coins themselves are a necessary evil to them, the smallest and least artistic measurement of gold they can exchange. One that for some reason Men and other races find valuable, but isn’t too much of a loss to the overall great works of beauty. Even then, they go out of their way to make those coins beautiful, because I imagine they can’t bring themselves to do otherwise. Perhaps too that is why they mostly gift weapons and armor to other races (Narsil was made by a dwarf, PJ *glares*, and so was the dragon-helm of Hurin, and Bilbo’s mithril shirt) because at least those items are treasured by the recipient for their utility if not always their beauty to the extent that dwarves would prefer. 

There is definitely a double-standard at play too, since the closest single “object” one can define as starlight to the Elves would be the Silmarils, and they surely wreak more havoc over those gems than the dwarves ever do, again, PJ putting Elves on a pedestal *le sigh* 

So yeah, long story short, I greatly appreciate fan works that properly describe gold in the context of dwarven culture as not at all similar to what it means to Men. It feels right to me, as a fantasy race that this happens, and I do endeavor to do so myself, never describing the value of gold to the dwarves as having very much to do with monetary wealth (except insofar as it comes to dealing with the other races, who are quite backwards) and everything to do with love of beauty, and craft, and all other good things. To dwarves, gold and other metalworks are part of their art culture, their legacy, their pride and value as a culture. To lose Erebor is to lose the equivalent of the Louvre, or the Vatican Museum, not the equivalent of the Swiss Bank. I even question if dwarves can be “greedy” in the sense that Men can when they “hoard” gold, it’s more about not putting the survival of their people as second to other things than it is about keeping the wealth, Thorin’s mistake was to say the inheritance of the dwarves was worth less than that dwarves themselves, not that he wanted to keep it at all. Because really no price can be placed on those works as a legacy of their people, except that they are worth less than the cost in dwarven lives, one more reason the loss of any lives in taking Erebor back is too high, except insofar as they’re trying to make a better life for other dwarves (which I truly believe was Thorin’s intention).