Gem gens were removed for a number of reasons. Some of them are arguable (e.g. micromanagement), but the most egregious effect of their presence was the disconnection of income from land.
Imagine the situation: it's mid-to-late game, and you declare war on a neighbouring nation. You play well and they play badly. You raid effectively, outwit their armies, kill their SCs and seem to be on a winning course. Finally you reach their capital and lay siege.
But now something becomes apparent - your opponent has been playing a gem gen-heavy strategy, while you haven't. You own lots of land, he owns none - but still, invisibly, his gem income is much higher. He can hold his fort indefinitely, produce more gem gens every turn, use Wish to turn pearls into other gems, produce SCs at will etc.. You've played a much better game than him, but you can't win. Is that fun?
Although this sounds far fetched, this is a common situation in the gem gen-containing dom3 world. The late game degenerates into a gem gen rush, territory becomes irrelevant and it becomes a somewhat abstract and dull game. Not using gem gens is not a valid option, which means you *must* find a way to get a W3N1 mage (as well as an E3 mage for hammers). If you were playing Abysia, say, this involves a big detour from your thematic strengths.
In fact forging gem gens is not necessary for very small games, because for small games the game will finish before they become overpowered. The cost of the gem gens determines the game size at which they become a good choice. So increasing the cost of gem gens only moves the problem. If gem gens were more expensive, they would be a clearly bad idea for small games, but still a necessary tool for victory for very large games. There is only a small window of game size in which they are "balanced", and even then they are not balanced in a fun way, since as discussed they represent an income source which is disconnected from a player's territory.
It's worth noting that the game is *not* balanced for the inclusion of gem gens. KO explicitly said that he did not expect people to forge them in large numbers, but rather thought they would be a handy portable gem source for travelling armies. So it's not as if all the rest of the game were based around an expectation of gem gen forging.
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In general I think CBM has made a lot of mistakes over time in making big changes, where little ones could often accomplish the same thing.
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Well these things are always open to opinion, but people have at least put a great deal of thought into it. These things have been *heavily* discussed, and quantum_mechani (the author of CBM) is a smart and generally conservative guy.
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For instance, wouldn't adding the cursed flag, if possible, to dwarven hammers accomplish the reduction in micro desired, and be a small nerf that applies evenly to all nations, yet still leave them as a viable option.
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That suggestion might be worth discussing if it were possible.