When commentators today talk about “Crusoe Economics”, what they are in fact referring to is the seldom-used analytical framework sometimes employed by economists to reduce complex market concepts down to basic first principals. As originally envisioned, it examines a hypothetical Robinson Crusoe stranded on a desert island with only a single friend, Friday, as his companion. The analysis then proceeds to distill the complexities of a modern economy down to basic elementary truths, emulating a simple closed economic system with only two individuals under conditions of resource scarcity.
While originally created as an educational tool for the teaching of core economic principals to the uninitiated, it has today become a euphemism for the debunking of popularized economic fallacies and a rebuttal to the increasingly pervasive and misguided policies of modern-day governments. In today’s new world of “muddle-through” economics where policy-makers bounce unwittingly from one failed policy experiment to the next, such simple frameworks are now more invaluable than ever.
Let us begin our analysis with perhaps one of the most pervasive and deeply-damaging fallacies that currently exists in modern-day economics – the erroneous belief, held by the vast majority of policy-makers and government economists, that consumer spending is the primary engine of economic growth. This profoundly damaging viewpoint is reflected in virtually all forms of public discourse and policy discussion concerning efforts by government and Central Banks to either increase economic growth or support the economy during times of recession.
These erroneous views are reflected most perniciously in the continued advocacy of the idea that the root cause of present-day recessions is insufficient “aggregate-demand” by consumers. For in the world of government policy-makers and mainstream analysts, it is always and everywhere consumer spending that stimulates economic growth, and a lack thereof which is the root cause of recessions. According to widespread present-day economic doctrine, every dollar spent by the consumer is in fact income for the businessman, which in turn becomes wages to the employee to be spent repeatedly throughout the economy, thus setting in motion a virtuous cycle of economic growth based entirely on the initial spending by the original consumer. Recessions must therefore be fought through the lowering of interest rates to stimulate borrowing and spending, and the curse of savings must be combated through inflation so to incentivize “hoarders” to unleash their stockpiles of cash into the broad economy.
And yet the problems inherent in the above fallacy are easily made clear through only a simple illustration which has nonetheless so befuddled the average government economist of the day. Turning our attention back to our hypothetical “Crusoe Economy”, imagine now a fictitious Robinson Crusoe suddenly stranded on a desert island and forced to turn immediately to the critical task of survival. Let us assume that he has found a nearby stream to quench his initial thirst for water, and must now turn his attention towards food, finding that he is able to catch only 2 fish per day through laborious and painstaking work. Crusoe finds that he must wade waist-deep into the ocean and stand completely motionless for hours on end in the unrelenting sun, hoping to snare the odd fish that happens to swim close enough to be caught by hand.
The work is tedious and difficult, and he soon devises that he will improve upon his means through the creation of a net, which he estimates will take him 5 days to complete. But Crusoe of course has not the time to dedicate 5 straight days to making this net, for in the meantime he will surely starve to death. Instead, he decides that for 5 straight days he will bear the hardship of consuming only 1 fish per day, and keeps the other fish in a small nearby pond to eat at a later time. At the end of 5 days, while he has indeed grown weary with hunger, he now has a stockpile of 5 fish to consume over the next 5 days while he toils away constructing his net. Fortuitously, at the end of the 10th day, Crusoe is suddenly able to use his newly constructed net to catch 20 fish per day and is now able to gorge on fish for days-on-end to at last satisfy his unrelenting hunger.
It should be obvious, however, that while Crusoe was indeed ultimately able to increase his consumption from 2 fish per day to 20 fish per day, he did so only through the initial act of under-consumption. In choosing to forgo the consumption of 2 fish per day in order to keep 1 for the future, Crusoe chose to save and invest so that he might increase his productive capacity, which only at the very end of the long and drawn-out process allowed for a final increase in consumption to 20 fish per day. What this simple example illustrates is that an increase in consumption does not magically appear out of thin air with the wave of the hand by some altruistic central banker. It requires savings to fund increased productivity, which only then creates a sustainable increase in consumption. Government economists have it precisely backwards in that they continuously enact policies to increase consumer spending before any savings or increases in productivity have taken place at all.
The problem is perhaps made clearer if we now introduce into the mix Crusoe’s lone companion Friday, who being native to the island, enjoys a vastly different set of skills than that of his friend. Friday, it turns out, has not the temperament to fish, but is instead more than apt at climbing trees to collect stockpiles of coconuts. After some time, reviewing his own situation, Crusoe realizes that he cannot hope to consume all 20 fish each day, and even after having set aside some quantity of fish for a rainy day he finds that he still has a large surplus which will over time go to waste. Seeing Friday’s skill at collecting coconuts and wishing to introduce these into his diet, Crusoe decides each day to offer Friday 5 fish for 1 coconut, which Friday gladly accepts, since he has in fact a surplus of coconuts while not the means to acquire fish.
What was perhaps not obvious from our original example of a lone Robinson Crusoe catching fish for his own consumption is hopefully now readily apparent with the introduction of Friday as an additional economic agent. Absent the introduction of the concept of money, we see now that Crusoe in fact pays for coconuts with fish, which is to say he pays for consumption with production. It should at once be obvious that Crusoe would never have been able to acquire the coconuts from Friday had he not first produced fish and, likewise, without first producing coconuts, Friday would have no means by which to acquire the fish in return.
Modern day economics has today become obfuscated with the construct of money, which while originally introduced into exchange economies for measures of convenience and efficiency, has today as a side-effect come to hopelessly confuse the fact that people do not actually pay money for goods. Rather, this is to say that they pay for goods with other goods – money is simply the common medium of exchange. These simple examples serve to illustrate just how far present-day economists have been led astray from basic economic fundamentals once increasing complexities are introduced into the system by way of artificial financial and monetary engineering.
It is a fundamental economic truism that society must ultimately pay for consumption with production, and in order to increase consumption in any sustained and permanent way, society must also increase its productive capacity, which requires savings followed by investment. Deliberate government policies to incentivize its citizens to go further into debt for the sake of consumption-based economic stimulation is an inherently flawed and backwards policy that over time erodes the real wealth of society. Under-consumption and savings happens first, and increases to spending happens last.
The failure to understand this basic concept is to decry the growth of savings by individuals as economically harmful, since by its very definition an increase in savings by society requires a corresponding decrease in consumption-based stimulus. The belief that savings is somehow damaging to society as a whole despite being beneficial when undertaken on an individual basis is what mainstream economists today refer to as the “Paradox of Thrift”. The problem with the Paradox of Thrift, however, is that there simply is no paradox. It is merely a name given by modern-day Keynesian economists to a phenomenon which contradicts their hopelessly confused models that consumption, not savings and investment, is the ultimate engine of economic growth. Instead of considering the possibility that their models are in fact incorrect, and that savings and investment are in reality beneficial for both individuals and society as a whole, they simply label the phenomenon as a curious “paradox” and move on to other stimulus-inducing measures that detract from future production and standards of living.
As Henry Hazlitt noted in 1946 in his book Economics in One Lesson with a warning still as relevant to investors today as it was over 70 years ago:
Elementary illustrations like this are sometimes ridiculed as Crusoe Economics. Unfortunately, they are ridiculed most by those who most need them, who fail to understand the particular principle illustrated even in this simple form, or who lose track of that principle completely when they come to examine the bewildering complications of a great modern economic society.
NOTE: A modified version of this article was published in the January 2019 edition of Canadian MoneySaver magazine. To read the complete version, click here