Tuesday, July 5, 2016

How the economy works

money, money, money

Ten people are shipwrecked on a deserted island. Each has 10 silver dollars in his/her pockets.

Rod is a gifted hunter, so he quickly finds food for all of the others, and demands 1 dollar from each. He now has 19 dollars, and each of the others has 9.

There is no fresh water on the island. However, Adam knows how to build and operate a solar-powered still to turn seawater into fresh water. He charges each of the others a dollar for water. He now has 18 dollars, Rod has 18, and each of the others 8.
Rachel is a great cook. She agrees to cook everyone’s meals for 1 dollar each. She now has 17 dollars, Adam has 17, Rod has 17, and each of the others has 7.

Of course, she needs firewood. Fortunately, Paul found an axe in the wreckage, and he agrees to bring her some firewood, for which he charges her 2 dollars. He now has 9 dollars, Rachel has 15, Adam still has 17, Rod still has 17, and each of the others still has 7.

Don is a builder and gets busy making everyone huts. This is a large task, for which he charges each person 2 dollars. However, he has to pay Paul 6 dollars for all the lumber. Don ends up with 19 dollars, Adam has 15, Rod has 15, Paul has 13, Rachel has 12, and each of the others has 5.

Ellen is an entertainer. She decides to put on a show for everyone, and charges 1 dollar admission. She ends up with 14 dollars, Adam has 14, Don has 18, Rod 14, Paul 12, Rachel 11, and each of the others 4.

Sam manages to build a radio from the wreckage of their ship, with which he picks up a distant radio station. He charges each of the others 1 dollar to listen to it for one hour. (After 10 hours the battery dies.) He now has 13 dollars, Adam has 13, Don has 17, Ellen 13, Rod 13, Paul 11, Rachel 10, and each of the others 3.

Donna is a seamstress. She uses the sails to make replacement clothing for everyone for 1 dollar each. She ends up with 12 dollars. Adam now has 12, Don now has 16, Ellen 12, Sam 12, Rod 12, Paul 10, Rachel 9, and each of the others $2.

Tiffany has no saleable skills, but she offers her “companionship” to the guys in exchange for “gifts” of 3 dollars each. This moves her up to 20 dollars and Adam down to 9, Don down to 13, Sam to 9, Rod to 9, Paul to 7. Ellen still has her 14 dollars, Donna her 12, and Rachel her 9.

If you’ve been following all this, you are no doubt wondering, What are they going to do for money as the days drag on? With housing completed, Don is unemployed, as are Donna and Sam; Adam, Rod and Paul will continue to derive income from natural resources; Rachel and, perhaps to a lesser extent Ellen and Tiffany, will continue to find customers for their services; but who can afford them? The guys will be broke before a week is out. Both men and women will decide they can’t afford to watch Ellen perform; It seems likely, in fact, that everyone will end up giving their last dollar to Adam the water boy. And watching your customers die of thirst doesn’t seem to be a successful business model.
However, there is one castaway we haven’t spoken about yet.

Bernie is a banker. At this point he owes Tiffany a dollar. Like Tiffany, he has no saleable skills, but he did manage to salvage some paper from the wreck. He draws Tiffany an IOU, a fancy one with a lot scroll work. He even does a fairly credible sketch of himself in the middle.

Tiffany quickly realizes that she could use some of these IOUs to keep her companions coming back, as long as Rachel and Adam will accept them from her. Rachel, in turn, agrees to accept the IOUs from her and Bernie so she will have repeat customers, after first ascertaining that Rod and Paul will accept them for payment for wood and meat.

Of course, Bernie can’t be expected to do all this drawing for nothing. He sells his ‘artwork,’ the completed IOUs, at the rate of 100 of them for 1 silver dollar.

So, Bernie ends up holding all 100 silver dollars. There are now about 10,000 IOUs in circulation. That should be more than enough to prevent anyone from running out. Except:
With the batteries dead, Sam has nothing further to contribute to this society. When the 900 IOUs he bought from Bernie run out, how will he earn more? Donna and Don may get the occasional repair job, but they will certainly be living at the poverty level. People will tire of Ellen’s act; what if she can’t come up with a new one? And Tiffany’s, uhm, assets, may begin to pale, as well.

Even Bernie has no way of earning more money, except to draw more IOUs…

Originally, I wrapped this up in a nice bow – Bernie ends up a millionaire and marries Tiffany, Sam manages to build a radio transmitter and gets them all rescued, etc. Before publishing it, however, I decided to send it to my friend Mark who actually does understand how the economy works. His input convinced me that my story could not possibly end well.
What’s to prevent Bernie from writing IOUs whenever he feel's like it? What happens to the island economy as Bernie writes more and more IOUs? Even if he does, how does he work them into circulation now that he holds all the silver dollars? What happens to Martha’s prices if food becomes scarce? What if firewood runs out? Suppose Sam, Don, or Donna learns to fish, scavenges some valuable flotsam, or unearths a pirate treasure?

While our U.S. economy was once as self-contained as the island described here, no country anywhere in the world is an island anymore. That’s why the economic problems in Greece last summer threatened to sink Spain. And why riots in Egypt are pushing up gas prices in the United States.

And why no one, no matter how well off, no matter what country they live in, can afford to be confident that, somehow, the economy is going to right itself and everything will be fine.

And you're right, the names are not accidents. Feel free to guess who all of them are. Have fun.

Read a sample of my latest book, Resurrection Day, at If you prefer paperback, both of my novels are available in print at

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