It lowers the villages efficiency...so yeah it lowers the number of goods you can craft. There were something like close to 10 people in Peshmi and it was down to 70% efficiency.
You see this makes things very confusing, as chadz clearly stated:
There are 2 different crafting values: The first percentage is a general percentage for this fief. It's a general yes or no random pick per hour. If this is 100%, you will get to stage 2 every hour. If this is at 0%, you will never produce anything
This means that either chadz changed something without telling us, something is not working properly, or it doesn't really matter if it's at 70% or 100%, as long as it's not at 0% you will still craft. Can we get some sort of confirmation on this?
In the long run I think we need to wait and see what happens. There are rapid daily changes going on, so sitting down and theory crafting things is almost a waste of time because tomorrow some new variable will be added in that completely changes everything. Horses were just made to affect movement speed, but you need a rider per horse. It looks like the troop upkeep formula was changed as well.
At the moment I think things are set up so that once the economy machine is turning gold will come easy, but there is quite a hump to get that initial investment going. Eventually people will have small armies with horses to carry goods and will move much more quickly across the map, allowing them to go further, get better bonuses, and make more gold more quickly. Once the larger clans have achieved this then they can afford to outfit larger armies, which makes travelling to trade more dangerous. You'd have to keep up with your neighbors if you wanted to trade safely.
The problem is at the moment this looks like it could take a couple of weeks for a larger clan to start getting this rolling. Smaller clans can forget about it as they don't have the members to produce and move goods reliably. They may be able to get enough going to set up a very small army and try to ambush an unprotected caravan.
I'm really excited for where this is all going, though. We just need to piddle around making money and trying to adapt to the changes while we see what happens in the end.