Guns or Butter?

I have come to realize that opportunity costs are a huge part of Civilization 3. Every decision I make about what to produce has a positive effect on one thing and a negative on another. An economic principle that I have learned in Economics David by Colander is that an economy can only produce so many goods, and therefore a decision has to be made about which goods should be produced and also how much. A production possibility curve demonstrates how many goods can be obtained (the output) based on how much is put into the production process (the input). Assuming the same input, many times the output of one good is much higher than that of another. When this is the case, the focus of production should be on the good with a better output, and the other good should be obtained by some other means that is more efficient (usually by trading).

The problem I am facing in Civilization 3 relates to the "guns or butter" dilemma. Since there are many very powerful civilizations in close proximity to my civ I feel there is a strong need to build up my military. A strong military would prevent other civs from easily defeating me in a war or bullying me into paying a tribute to them. At the same time, however, a strong military is also very costly and the opportunity cost is that my civ won't have as many luxuries and improvements for the citizens to enjoy. Unhappy citizens are unproductive citizens, so there is obviously a great need to cater to the "butter" side of the dilemma as well.

The principle of increasing marginal opportunity cost states that "in order to get more of something, one must give up ever-increasing quantities of something else". This means that the opportunity cost increases at a very unfavorable rate, and therefore it would be smart to strike a balance between the production of goods to minimize the opportunity cost. In the game I keep this principle in mind and make sure that I produce a fairly even proportion of military improvements to food/luxury improvements. A rule of thumb I use is to first increase my civ's population and build improvements, and then I produce a few more soldiers to defend my now larger civ. This ensures that one good is not over-produced at the increasing expense of another good. The only problem with this plan is that it will be hard for me to expand my civ because without an extremely large army I won't be able to conquer my neighbors. My mistake in the beginning of the game was not expanding fast enough, and now I have no room to start a new city outside my borders without encroaching on my neighbors' borders. My plan is a good one to merely survive, but not grow. I am still looking to form military alliances with other civs to conquer a neighbor, but I have not yet been able to do this.