Crusoe Economics

Einstein said it best; for a model of reality to be useful, it must be as simple as possible… but no simpler. The very simplest possible model of economics comprises one person… because one human actor is the smallest and simplest possible means of looking at economic reality.

Chopping the person into parts to simplify the model further won’t work, and adding more people to the mix makes the model more complex than needed to study the fundamentals… the gist of economics. Of course, mainstream economists scoff at this idea; ‘our modern economy is much too complex to worry about Crusoe economics’… snicker.

This is about as intelligent as the design engineers responsible for the Boeing 747-800 snickering at Newton’s apple; ‘our modern engineering is much too complex to worry about Newton’s law of gravity’! Any engineer guilty of this type of insane thinking would be summarily dismissed… if not, the 747 would never get off the ground… or if it did, the wings would likely depart at the most inopportune time.

Robinson Crusoe on his deserted island has no need –or use- for money, or credit, or barter; but the three fundamental laws of economics show up with stark clarity, un-muddied by any extraneous complications. The very first law is; ‘production must precede consumption’.

If Crusoe does not first catch fish, he will not eat fish… nor he will not eat apples unless he first picks apples, nor have a fire unless he first gathers wood, kindling, etc. Nevertheless, we hear every day in our ‘new economy’ that ‘demand drives production’… and if we ‘stimulate’ demand, all will be fine with the economy. This is strike one; claiming that demand precedes production.

The second law is; ‘saving must precede investment’. Crusoe cannot invest in financial products, only in real capital; that is, tools and such items that help him live better, more productively. For example he may decide to weave a basket, so he no longer has to carry the berries he gathers in his bare hands; but to do so, he will have to first save the vines, and he will have to put time into this work; he must not consume everything he gathers, but must put some aside… ie save… so that he can invest in his new tool.

Or, he may decide to make a fish net, to catch fish a lot easier than by ‘tickling’ them… same thing, he needs to put aside string, and food to sustain him while he attends to this tedious but important chore. Nevertheless, the arrogant and ignorant sociopaths of the Washington economics establishment claim that there is a ‘glut’ of saving, particularly  in the East; and they claim that this is the problem with the world economy… never mind that the East is prospering, while Washington is sinking quickly. This is strike two; claiming that consumption precedes saving.

The third law is not only fundamental to humankind, but is even obvious in the animal kingdom; hoarding is essential for survival. Even squirrels have enough brains… or perhaps enough ‘instinct’… to save nuts during summer, to tide them over the coming winter. According to geniuses like Mr. Munger, hoarding is for ‘uncivilized people’. Bah; if Crusoe does not hoard the essentials of life, like food or water or fuel, he will not survive the next dry spell, or the next winter.

Of course, in a more advanced economy it is not necessary for every person to hoard everything; it is only necessary to hoard money; honest money will serve to buy all the essentials of life. Just as money allows indirect exchange to take the place of barter, so money allows indirect hoarding to take the place of hoarding many necessities. Specialization is far more efficient in ‘hoarding’… like grain elevators, cold storage, etc… just as specialization through the division of labor is far more efficient than autarky.

But what does all this have to do with Bills and Bonds? In a sophisticated economy, one that has outgrown the Crusoe stage, and outgrown the tribal barter stage, and has progressed to a monetary system with developed markets, Real Bills are the very best means of funding production… and production comes before consumption. The very act of consumption is what brings Real Bills into existence; and the implicit value of the Real Bill is what enables production to be funded. In a modern economy with much division of labor, consumer goods go through many stages of production before reaching the ultimate consumer… and each stage has to be funded somehow.

Think of something simple, like bread; we start with wheat from the farmers, the wheat goes to the mill to be ground into flour, then to the bakery where the bread is made, then it is sold to the customer. If Real Bills do not circulate, then money (Gold) must be used to fund each transaction; the economy must work on a COD basis… this means Gold must change hands many times. By comparison, if Real Bills are in circulation, NO Gold changes hands until the ultimate purchase is made; no money is invested in the production cycle… the credit inherent in the Real Bills Doctrine funds the production process most efficiently and naturally.

Bills follow and support the first law, the law that production precedes consumption. In the very same fashion, Bonds follow and support the second law; saving precedes investment. Any fixed capital in the economy is financed through the bond markets; the farm used to grow wheat, the mill used to grind flour, and the ovens used to bake bread are all examples of fixed capital… and they are all financed through the bond market… from savings. No savings means no (real) capital available for investment purposes.

Finally, we come to the third law; ‘hoarding is essential for human survival’. The recipient of a salary or of wages faces three choices; hoard the Gold coin, spend the Gold coin, or invest the Gold coin… there is no other choice possible. Some coin simply must be spent, else the wage earner will starve or freeze in the cold; thus the bill market has a hard floor, it can never go to zero.

Some coin may be saved, or invested; this is not a ‘must’ but depends on risk and returns. If the return being offered is too low, then hoarding is a natural choice; the only reason one would invest is to obtain a reasonable gain for giving up the use of one’s Gold… for whatever length of time. This return is called interest… and the desire to earn interest is called time preference. Zero interest rates mean that there is NO capital available for investment; all money earned will be spent or hoarded.

Today we have a ‘zero interest rate policy’… strike three, we are out. The economy is dying, like the 747 with the wings departing. The so called Global Financial Crisis is in reality a monetary crisis. The world needs real money; the world needs Gold. The world also needs the clearing system that is the indispensable companion of God money, the circulation of Real Bills. Once this reality is accepted and acted upon, the GFC can be resolved… not before.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

About Rudy Fritsch

I was born in Hungary in 1947, and fled Socialist tyranny during the Hungarian Revolution of 1956. My family had lived through WWII and the consequent Hungarian hyperinflation, thus I have intimate experience with financial destruction. My Dad used Gold to buy our way out of Hungary. Paper money was as good as toilet paper. Later in life, during my studies of Austrian economics, I came to realize that only Gold could solve the Global Financial Crisis (which should be called the Global Monetary Crisis), just as Gold solved our otherwise insoluble problem of getting out of Communist Hungary.
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