Friday, August 10, 2012

“Robinson Crusoe” Economics - Robert P. Murphy

“Robinson Crusoe” Economics

How even a one-man economy illustrates economic concepts and categories.

The importance of saving and investment.

How economists explain individual choices.

In the first three lessons you learned that economics is the study of exchanges, and you also learned that the apparently simple decision to classify human behavior as “purposeful action” leads to many insights that will help us explain how modern market economies operate. In Part II of this book, we will begin our full-blown analysis of a market economy with buyers and sellers using money in their transactions. This is what most people probably think that a book on economics is supposed to do!
Yet before we dive into the deep end, in the present lesson—the last of our “Foundations” section—we will sketch out some of the basic economic truths that apply even in the very simple case of a single person on a remote island. There are a surprising number of conclusions we can draw even in this extremely limited case.
Over the years, many critics have derided this so-called “Robinson Crusoe” economics, named after the shipwrecked mariner in Daniel Defoe’s famous novel.1 Obviously, we are not saying that an isolated person is an accurate description of a modern economy Rather, we are saying that before we can analyze an economy composed of billions of interacting people, we should start with just one person and make sure we understand what makes him tick.
As you will see, in this lesson we are developing general principles about an individual’s purposeful actions in the face of scarcity. These general principles will still hold true, even when Crusoe is rescued and returned to civilization. But to avoid overwhelming students at step one, we are here starting out with the simpler case in which Crusoe is (initially) all by himself and must act to improve his situation, given his circumstances.

Crusoe Creates Goods With His Mind Powers
All alone on his tropical island, Crusoe quickly realizes that he doesn’t like the way things are developing. His stomach is starting to rumble, his throat is dry and itchy, and he doesn’t see any natural shelter from the horrific rainstorms that must occasionally strike the island. Rather than resign himself to his fate, Crusoe decides to take action to alter the unfolding of history, so that events transpire in a manner more to his liking.
Before he can make a sensible decision on how to proceed, Crusoe first needs to see what he has to work with. He climbs to the top of a hill and surveys the island. Crusoe notes that there are plenty of coconut trees, as well as some small streams of running water in the distance. There are several rocks of varying sizes, as well as strong vines. Crusoe’s mind begins whirring as he decides what to do first.
At this point we can stop and describe the situation in terms of economic concepts. You probably realized, with Crusoe, why the particular items mentioned in the previous paragraph were relevant to his situation, and would be among the facts that you would consider if you found yourself in Crusoe’s place. In economic jargon, Crusoe took an inventory of the goods at his disposal. That is, he appraised himself of the stockpile of physical items available for his use that exhibited scarcity.
After all, Crusoe could have truthfully said, “Hmm, this island is subject to the earth’s gravitational pull, meaning I won’t drift off into outer space and freeze to death. There is a plentiful supply of oxygen here, meaning I won’t suffocate. And the presence of an atmosphere is very good for transmitting sound waves, so that I can hear a storm approaching.” These attributes of the island are also extremely useful to Crusoe, and contribute to the achievement of his goals. But Crusoe wouldn’t focus on them when formulating his plans, because they aren’t scarce. Crusoe doesn’t need to economize these general, background conditions the way he needs to exercise stewardship over the coconuts, vines, etc.
The distinctive mark of scarcity is that there are tradeoffs involved. Until he finds another source of food (such as fish after he constructs some tools), Crusoe needs to make sure he doesn’t eat his coconuts too quickly. (He also wouldn’t burn down a bunch of coconut trees just for kicks.) If he decides to use certain rocks in order to make a shelter, Crusoe can’t simultaneously use those same rocks when building a fire. And even if the supply of vines is ubiquitous, even so Crusoe must be considerate when cutting them down to make a fishing net, because it takes him time to walk deeper into the jungle and get more vines.
As these examples all demonstrate, Crusoe needs to think through the consequences of his actions whenever his plans involve the rocks, vines, coconuts, and so on. Because these items are scarce, Crusoe might later regret the influence on them, because this will impair his ability to satisfy goals in the future. Items that can help a person achieve his or her goals, and could help the person achieve even more goals if there were more of these items available, are called goods. In contrast, background conditions like gravity and oxygen are not (typically) goods in the economic sense, because no action Crusoe takes will render them less useful to the achievement of his goals. Crusoe doesn’t need to worry about sprinting too fast and thereby “using up all the oxygen,” and he doesn’t face any tradeoffs in relying on gravity when knocking down coconuts with a long stick.2 Further, there aren’t any goals that Crusoe could accomplish, if only he had “more oxygen” or “more gravity” So although oxygen and gravity are necessary for his very life, Crusoe doesn’t have to economize on their use, and hence they are not classified as economic goods.
It’s important to realize that an object becomes a good when a person incorporates it into his plans. A coconut on the tropical island is not a good because of its physical characteristics per se, but rather because (a) it can serve to alleviate hunger, (b) Crusoe would prefer to not feel hungry, and (c) Crusoe is aware of point (a). If Crusoe were ignorant of the fact that coconuts are edible, then he might not consider them as goods. For a different example, certain plants on the island might have medicinal properties, but if Crusoe doesn’t know it, then those plants will not attain the status of economic goods.

Lessons for the Young Economist

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