Tuesday, November 17, 2009

Oy...Again with the Desert Island

Imagine you were on a desert island with 100 other people.

In scenario 1, every person works extremely hard. Some people cut wood for fire and to make shelter. Others hunt and fish. Some build tools with which to cut wood, make clothes, wagons, weapons, etc.. Work that provides subsistence allows some of the brightest people to focus on more advanced projects like building a battery powered radio or a boat. The group gets together and authorizes several individuals to act as police, judges, all under the executive power of an island leader which is elected by the others. Property rights are recognized and a simple barter system emerges where each person's production serves as demand for products or services offered by others. There is no shortage of desire as each person wishes to make their life as fulfilling as possible. Each does as much as he can given his ability and the few that struggle through no fault of their own are eagerly helped by everyone else voluntarily. On the rare occasion when someone steals or commits a crime, he is quickly ostracized and/or punished. Since everyone is so productive, the least able person is still able to afford shelter, clothing, plentiful food, and some minor conveniences. As each person becomes more productive, it affords each person more time to devote to other more advanced projects or hobbies. The wealth and quality of life on the island grows exponentially as does the population.

In scenario 2, no one really does much of anything. Everyone sits around and complains about hunger and chastises their neighbors for not giving them some of their stuff. Some walk around with IOU's written on parchment that promise others payment in the future if they give up their valuables now. Very few value the paper IOU's. Frustrated with the lack of product, eventually, a few of the biggest and meanest form a gang and shakedown anyone who gets up enough energy to produce anything. Pretty soon, even the relatively productive give up on producing anything since they know it will soon be expropriated from them. They are able merely to subsist while the weakest die of starvation. The gang is able to enslave some of the people for a while and threaten them with beatings or death if they don't work for them. The "richest" person is the leader of the gang. He enjoys complete and unquestioned dominion over those still alive. He beats an occasional fish dinner out of them which he is able to cook with fire if his servants were motivated enough by his whip that day. He has the biggest hut of anyone. A few of his trusted associates in the gang eat with him and enjoy their relative bounty while the slaves beg for rations. Most, including the gang leaders, live a short, brutish existence. The island is mired in a primitive state for as long as the population survives their miserable subsistence.

The lesson of scenario 1 and 2, among others, is that life requires production. Production is demand. When people produce goods they create wealth. The more goods they produce the more wealth they create. Reality allows no shortcut to this process. Economists call this principle Say's Law. Furthermore, individuals can and will only create wealth if their rights are respected and if they regard their own lives as a value.

Keep this parable in mind while you read articles by economists such as Roubini and Krugman that continually call for more government stimulus, i.e., more smoke and mirrors to obfuscate reality and delude people into believing that there exists some central planning alchemy that can turn wishes into wealth.


mtnrunner2 said...

Krug. Ugh.

What good is a Nobel Prize if he still doesn't know squat about what political system will facilitate human safety and flourishing? Why Princeton and the NY Times give Krugman so much as the time of day is beyond me.

Oh, wait, it's not beyond me... they're all members of the Altruist Club.

Doug Reich said...

I was actually embarrased to some extent publishing this post as it borders on the infantile from a logic perspective.

Then I thought, who should feel worse, me or the Nobel Prize winning economists that make it necessary to post such arguments!

Anonymous said...

rewrite scenario 1 with a 'scarce resources' scenario

Doug Reich said...


What do you mean? What resource is not scarce?

Beth said...

Sorry - but I can't resist sending you my favorite quote on Krugman:

"It’s always impressive to see one person excel in two widely disparate activities: a first-rate mathematician who’s also a world class mountaineer, or a titan of industry who conducts symphony orchestras on the side. But sometimes I think Paul Krugman is out to top them all, by excelling in two activities that are not just disparate but diametrically opposed: economics (for which he was awarded a well-deserved Nobel Prize) and obliviousness to the lessons of economics (for which he’s been awarded a column at the New York Times).

It’s a dazzling performance. Time after time, Krugman leaves me wide-eyed with wonder at how much economics he has to forget to write those columns."
~Steven Landsburg

bathmate said...

good posting.i like it. thank u. :)-