Bernanke Moves the Sun-Dried Fish (Fun With Austrian-Style Crusoe Economics)

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February 23, 2009

In this adventure of Robinson Crusoe, the writer is so bitter that he takes it out on innocent characters in his own imagination, meanly depriving Crusoe of tools, supplies and opportunity.

Seven hundredths of a second after Crusoe thinks, 'I wonder if I could rescue some supplies from the ship?', it sinks almost instantaneously with a perverse Champagne cork popping sound, into a trench a thousand fathoms deep.

Fish leap and play daily in Crusoe's sight, but too far off for hand fishing. The giant dwarf coconuts are 500 feet tall, but with mini-nuts that take ten minutes each to crack and yield one calorie. The island's unique tortoises can outrun him.

Scrounging for enough food to starve over years instead of days is an exhausting grind. Crusoe can only dream of capital projects. There appear to be sources for tool making, but always a little too far from food sources to consider risking.

The problem that Crusoe has, as delineated by many Austrian School economists, is that he must have savings in order to produce tools (higher order capital goods). Without savings of food, he has to continue as he is, hand gathering for subsistence. Crusoe plans, estimates and saves a few scraps.

Then Friday shows up. The two divide the subsistence chores and start to do a little better.

They work out a detailed plan--by the standards of the island, it's a massive capital project. It involves building tools, and tools for building tools, in assembly line fashion. The savings needed for them to complete their capital project according to their estimate--a 30 day supply of food.

Crusoe has been maintaining a rather ambitious food storage cave. He shows this to Friday. It contains some pathetic food scraps of surplus over subsistence--the space carefully organized for the bounty that never comes.

Friday, now with considerable excitement about the 30 day plan, examines the potential of the space. After all this waiting, Crusoe is also catching emerging economy fever, and so as difficult as communication is for them anyway, they're both hasty, and tragically fail to understand each other.

Friday thinks that Crusoe is showing a food storage cave prepared for Friday to store Friday's surplus. Crusoe had only intended to convey that Friday should prepare a similar larder.

The two men dive into the tasks of hand gathering food, sometimes working together, sometimes apart, in accordance with the master plan. When they work together, Crusoe makes sure to leave half the production outside the food storage cave for Friday to move to his own larder. Friday is a little puzzled by the extra work that Crusoe keeps leaving for him, but doesn't wish to confront his friend, and so simply moves the food into the same cave later.

When Crusoe's tally indicates that he has 30 days supply, he asks Friday what help he needs with finishing his supply, and is amazed at Friday's indication that everything's finished. Both men are so elated that the savings plan went better than they'd dared to imagine, that they even expand the tool building plan. They dive in with a near delirium of hope and ambition.

They're so excited and work so hard over the following days, that their savings are almost depleted before they realize the error.

The more they look at it, the more sobering the disaster begins to appear.

Without adequate saving to deal with all of the plan's dependencies, it has turned into a trap. None of the tools on their assembly line are more than half completed.

A lot of the early production went to make fresh vine lashings. These lashings need to be in place on the constructed item within a few weeks at most, or they become useless.

A half completed fish weir will wash away without ever endangering a fish. They become despondent as they look at the same picture everywhere--it looks like some aggressively inattentive kids have been playing--half dug pits, trampled brush, scattered rocks, chopped trees.

How could they have been so foolish?

As a matter of fact it's pretty easy. Crusoe and Friday have just engaged in an accidental experiment with fractional reserve banking, absent the banks. Perhaps (since most central bankers have magic powers), Ben Bernanke was even there, sneaking in to rearrange the supply cave to make it look like the savings were abundant for a little longer so as to protect the illusion of growth. Regardless, Crusoe and Friday both perceived that the same savings were available for their particular use. The illusion lasted until they realized their mistake, and then their economy crashed.

As Crusoe and Friday try to recapture their subsistence methods, there'll be further depressing damage assessment as they see how much of the low-hanging fruit, in some cases literally, they've stripped away. The assumption had been that the completed capital projects would more than make up for any lack of care and husbandry during early stages (something we duplicate in real life bubble economies). For Crusoe and Friday, it may be a more serious issue than just wasteful projects--the upcoming time of malnourishment may kill them before they can regain their footing. (From that perspective, we can also see that the quicker the crash came to their economic boom, the better off they were.)

Of course they note a radical difference in work energy from the period of boundless hope, to that of seemingly bottomless despair. But noticing it won't entirely cure it. (Rather similar to the way it's useless for some idiot financial analyst on TV to decry that consumers are turning their pessimism into a self-fulfilling prophecy by failing to spend and/or borrow.)

Both 'Crusoe Economics' and identification of the bubble-inducing problem of credit expansion are traditions of Austrian Business Cycle Theory. I've borrowed particularly from economist Jes's Huerta de Soto for the above Crusoe and credit adventure.

But since I've personally found a sarcasm-engendered catharsis to roll back the bitter tide for perhaps even as much as a full day, it's at this point, while Crusoe and Friday have their heads in their hands, that a disoriented whale beaches next to them, and before they can recover from their astonishment, a lightening bolt knocks over and flames a dead palm, creating an impromptu barbecue pit. (In the roots of the flaming palm, the two discover more than their collective weights in plump, wild sweet potatoes, with a scattering of wild herbs.)

Great rejoicing.

A barbecued whale for our sliding economy, however, absent an intervention from an advanced alien culture, would seem to have a problem of scale. Too many credit bubbles have been layered on top of each other. There's nothing Fed Chairman Bernanke can do, with money or fish, to hide the waste any more. Credit expansion from fractional reserves--credit money out of 'thin air'--must always leave us high and dry (and whaleless) at some point, but as perverse as it may seem, the sooner the better.

Les Lafave writes about banking reform at

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Bernanke Moves the Sun-Dried Fish (Fun With Austrian-Style Crusoe Economics)

by Les Lafave

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Les Lafave works in the insurance industry.  The opinions in this column are his own.