1000 Castaways, Chapter 1: System One

1000 Castaways: Fundamentals of Economics, Economics, Macroeconomics

(←Introduction       Chapter 2→)

Chapter 1

System One

A  FLEET OF A THOUSAND COLONISTS are blown off course for weeks by a series of violent cyclones, eventually crashing onto the reefs of a large uncharted island. All of their ships and provisions are lost to sea. They wash ashore, all surviving the stormy night. As morning breaks they begin their search for water and possible food sources.

The survivors struggle in this foreign land at first. They collect crabs at the rocky tideline, forage along the dense forest-edge, and weave simple palm leaf baskets to collect the many unidentifiable fruits they find in the forest. Eventually they begin to be more successful at fishing and manage to get some shoots of wild yam-like tubers to sprout in small raised-mound gardens. Eventually they begin to have enough food and to build stronger, larger, and more permanent shelters.

In time they have enough goods to live in relative comfort and began to produce more of what they each specialize in than they need to survive. They do this in order to trade the products they specialize in for other things they need or want. A fisher catches an extra basket of fish, for example, to trade for someone else’s extra yams. This way both of them end up with more variation than they might otherwise. READ MORE…

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Introduction

Chapter 1

Chapter 2: System Two

 

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16 thoughts on “1000 Castaways, Chapter 1: System One”

  1. So, you’re not a believer in the credit theory of money which holds that money developed from credit and commodity money was a later invention. Since your island comes around to credit money in the end, and we don’t use commodity money at all any more, I’m not sure what value including it in your parable has.

    Also, while private ownership of capital is a feature of capitalism, it is not the unique or defining feature. That would be that the owners of capital get to decide how the surplus is divided.

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    1. “the owners of capital get to decide how the surplus is divided.” Profit I assume you mean? They can only divide the surplus if they are the owners of the capital, can they not?

      “I’m not sure what value including it in your parable has.” I think that will be more clear in by Chapter 3, but thanks for the feedback 🙂

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      1. The surplus is what is divided into wages and profit. The owners of capital take it for granted that ownership gives them the right to decide how to divide the surplus. That is Capitalism. Workers–the operators of capital–sometimes think they are also entitled to a say. That is Socialism.

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      2. So, if we don’t take for granted that ownership of capital gives an exclusive right to decide how the surplus is divided we could imagine any number of other ways that decision might be made. They would not be Capitalism even if the capital remained in private ownership.

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  2. Re. the Soviet Union you ask “What kind of production might a society have if they do not have funding for private production using capital goods?”

    I believe the answer, at least during the Stalin years, is “spectacular”. Presumably Stalin discovered some alternative mode of funding, but took the secret to his grave.

    I don’t think putting superficial treatments of big and important topics in little sidebars is the way to go.

    For some reason I was expecting a modern, iconoclastic story but so far you have not deviated much from the classical Liberal myth.

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    1. ” superficial treatments of big and important topics” I assume you mean the demise of the Soviet Union. Fair enough, but I am only concerned here with getting the reader to think about the role of private credit for economic wellbeing. There is no point in pursuing in-depth analysis of the USSR here, as that would obviously be an entirely different book (and many exist).

      “so far you have not deviated much from the classical Liberal myth”. 1) The public and many economists are not clear on how the horizontal money system works 2) when it is explained clearly, the mistake is made to treat the most interesting emergent property of the private banking system as being the emergence of credit-money; it is not usually pointed out that the most important aspect is not the fascinating emergent property we know as “credit-money”, but rather the way in which this system does indeed make us all materially much better off by “allowing John’s nets to be made”. However, as Chapter Two discusses, it is by no means the only system, and many make the mistake to think it is. Chapter 3 will go into detail why and how each are good and how to balance them. You may not like “Liberal myths”, but we had better understand the banking system better as right now we are allowing it to be run in a very foolish way (I imagine you agree with me on that). The key is to understand it better to control it better, not to dismiss it as a “Liberal myth”.

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      1. Well, I quibble with the content of both sidebars, and I think they are jumping the gun too as John has not yet caught any fish with his big net and Heidi has not yet demanded a share of that catch.

        The Liberal myth is the “natural” progression of barter->commodity money->representative money->banking as intermediary

        The modern story would be more like private credit->state credit money->private credit creation by banks

        You seem to have mixed them together somewhat. Perhaps you intend to straighten them out as you go on.

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  3. Clearly it is profitable for the farmers’ group and the net maker to create their own money to fund net production. Trouble is that that ignores macro-economics, i.e. the effect on the wider economy.

    To illustrate, assume there is enough money in the form of gold to induce everyone to spend at a rate that brings full employment. In that scenario, various people will lend to others and some sort of genuine free market rate of interest will establish itself. Thus there is no need for farmers’ group money to be produced in order to enable loans to take place.

    But if the farmers’ groups DOES PRODUCE home made money and lend it out, the effect will be inflationary because the economy is already at capacity.

    The French economics Nobel laureate, Maurice Allais, described commercial bank home made money as “counterfeit money”. He had a point. See opening sentences of a paper by Ronnie Phillips entitled “Credit Markets and Narrow Banking”. David Hume, writing 350 years ago made much the same point near the start of his essay “Of Money” (start at 4th para).

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      1. The question as to whether the farmers’ group should be allowed to set up their own home made form of money is basically just the old full reserve versus fractional reserve argument. Or the “full reserve versus defenders of the existing bank system” argument. And this is a complicated argument. Here’s a VERY QUICK summary of some arguments against privately issued money.

        1. As Jospeh Huber explains on p.31 (2nd para) of his work “Creating New Money”, if money lenders and print their own money, that is effectively a subsidy of those money lenders (aka commercial banks).

        2. A large number of prominent economists have opposed money creation by private / commercial banks, including Irving Fisher, Milton Friedman, Lawrence Kotlikoff, John Cochrane, Merton Miller (co author of the Modigliani Miller theory). I could go on.

        3. It is precisly the fact of letting commercial banks fund loans via deposits which leads to their creating money and to bank fragility, as pointed out by Messers Diamond and Rajan in their NBER working paper 7430. I.e. it is pretty much true to say that it was commercial bank issued money that lead to the bank crisis ten years ago and all other bank failures.

        4. Given that central banks can issue any amount of money, in particular whatever amount is needed to bring full employment, and at no risk, why bother with a risky form of money creation?

        5. It is debatable as to whether so called money issued by commercial banks really is money unless it is backed by taxpayer backed deposit insurance, as millions of people discovered to their cost in the US in the 1930s, when a third of all deposit money vanished into thin air. I.e. those so called deposits were really more in the nature of shares since shares can lose some or all their value. Clearly government / taxpayers can back those deposits, but it is not normally the job of taxpayers to back commercia ventures, i.e. people who want a bank to lend on their money.

        6. Moreover, in helping private banks create money, government and central bank are into duplication of effort. That is, they create base money (gratis the central bank), so what’s the point of a second and spearate method of creating money?

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  4. Any readers, I changed “gold” to “barley”, [as an undergrad I brewed Mesopotamian beer as my senior project and am well versed in how Barley was at the heart of ancient trade systems, what was I thinking not using it straight away? I guess bc barley is not usually found on tropical islands 🙂 ]as that is both more accurate and makes clear I want nothing to do with any goldbug type view, “barter” type view (as being fundamental), nor any goldsmith “fractional reserve” (which is a myth) point of view. I only have a commodity VERY early in the story (and briefly) to explain how a Unit Of Account arose. This would have happened even in gift-based early economies, as there does have to be a unit of account. But that it is the only point. Cheers 🙂 And thanks to Ernest Jones for emphasizing that I should change it (and I am still thinking how to add gift-based social aspect in, but in a non distracting way)

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    1. Yes, much better already.

      The gift-based/primitive communism thing could be how the castaways operate on the first day. They all go out hunting and gathering and at the end of the day they all throw everything they have found into the pot which feeds all of them.

      I believe you can do away with commodity money entirely by introducing IOUs. At first they are a one-to-one thing. Then people begin to accept IOUs of known third parties. Some bright spark realises that more people will accept IOUs for barley than for puffer fish so makes all his IOUs out in barley. The farmer’s group spots this trend and announces its IOUs will henceforth all be denominated in barley. Suddenly all IOUs are denominated in the new unit of account and money is born.

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  5. Ralph – a lot in there, I will have to get back to it. I think Chapter 4: The Real World will address some of those issues. By the way, you mention “Irving Fisher, Milton Friedman, Lawrence Kotlikoff, John Cochrane, Merton Miller (co author of the Modigliani Miller theory). I could go on.” What are some of the others? Also, you should make the fullest list you can and maybe a quote or one sentence mention of any peculiarities in each view (if they exist). Would be a useful resource.

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  6. Pingback: 1000 Castaways: Introduction – Clint Ballinger

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