Crusoe’s way of saving

And why we won’t be consuming ourselves richer by staying on a certain level of technology. Mark Spitznagel illustrates this perfectly with the parable of shipwrecked Robinson Crusoe.

To illustrate, we return to the parable of shipwrecked Robinson Crusoe. In their discourses, the Austrians seized upon the example of Crusoe (whose name was corrupted from the familial German “Kreutznaer”) to illustrate with simplicity the evolution of a one-person economy, as Crusoe’s very survival depends on him moving beyond the hand-to-mouth direct satisfaction of his needs to become ever-more roundabout.

On his remote island, which Defoe called the “Island of Despair” (the geographic location of which coincided with the island of Tobago, north of Venezuela and a short distance from Trinidad), Crusoe’s first priorities are the basics of life. To obtain food, he begins with the most primitive of approaches: He goes after what he needs with his hands—or as Böhm-Bawerk called it, “mit der nackten Faust,” literally meaning “with the bare fist.”6 (Defoe equips Crusoe with the means for hunting, growing basic crops, and raising goats; here we focus on fishing to meet his most immediate needs.) Standing in water, Crusoe tries to snatch fish as they swim by, but these slippery and fast-moving creatures are hard to catch. And so he upgrades his approach with a primitive tool (a first attempt at an intermediate good): a branch that he shapes into a spear. Although he misses frequently, he manages to catch five fish a day; but when the last bone is picked clean, he must rest up for another day of labor. Thus, Crusoe’s quandary is how to catch the same amount of fish in less time and with less labor, or a greater number of fish in the same amount of time. The answer is to become more roundabout.

The problem, however, is that even with his spear, Crusoe spends so much time trying to catch five fish for the day that the only way he can invest in better tools (improved intermediate goods) is to cut back on current production. In other words, he has to “save” some of his effort instead of expending it all catching fish. This requires him to decrease his fishing time and catch perhaps only three fish a day (which means he’s going to be hungry), so he can spend the remainder of his day making a simple boat out of a hollowed log and a fishing net woven from vines. The process takes weeks, all the while Crusoe foregoes full satisfaction of his current wants (a stomach full of fish) so that he can position himself for future advantage with the intermediate goods of a boat and net. Hungry, he labors upstream for more fish downstream. Putting it in economic terms, he makes use of his meager surplus time now in order to create more productive means for later.

This is Umweg: Crusoe ultimately catches more fish by first catching fewer fish, by focusing his efforts in the immediate toward indirect means, not ends.
Importantly, Crusoe demonstrates that savings is not mere renunciation, nor is it simply deprivation. Rather, it is highly strategic, yielding or “losing” now to realize an advantage in the future that—the saver hopes—more than justifies the setback and waiting to be paid for the fruits of one’s labor and investment (if, indeed, there is ever a payoff; entrepreneurial ventures naturally do not come with any guarantees of feasibility or profitability). Here again we find the exchange across time: loss now for greater gain later. Thus, as Böhm-Bawerk recognized, savings is not negative, but rather deferred consumption, which provides the productive resources for greater consumption later.

At last the boat and net are ready. The hungry Crusoe takes to the water and in less than two hours catches five fish. Now, with his daily needs met, he can invest in other roundabout production, such as, in addition to repairing his boat and net, a rack for drying fish and evaporating seawater to collect salt to preserve them. Soon, Crusoe has an exceedingly efficient fishing operation: catching far more fish than he can consume and accumulating a stockpile of protein for his diet—and, equivalently, a stockpile of time for replacing and creating even more capital goods.
Now that he is more roundabout thanks to his boat and net, Crusoe can draw from his stockpile of dried and salted fish to keep up consumption while he makes a second net to replace the first when it finally wears out. Capital must be thought of as a temporal structure that is always dwindling away. Moreover, the advantages and gains that are realized today are due to capital that was invested previously. The same process, we recognize, is occurring with our conifers of Chapter 2 that seed into the rocky, inhospitable places where they initially will fall behind—growing slowly and hungry for nutrients—but from which they will realize greater growth and opportunism later, thanks to their buildup of advantageous efficiency, position, and vantage point.
But what if it had turned out differently for Robinson Crusoe—and for the conifers? Instead of taking a few weeks to make a net and simple boat, during which time he had to reduce his daily consumption by two fish (to three from his usual five), suppose the process took two months to complete? Similarly, for the conifers, what if it took longer for them to reach a faster growth stage, or if there were fewer land-clearing fires and thus less turnover in the fertile areas? What if it all took too long, because time is so costly? For Crusoe, the issue is whether the productivity gained from the net and the boat would offset his cost in time, which he measures in terms of forfeited fish (two fish times 60 days, or 120 fish)? How much weight would he have lost from caloric deprivation? To be sure, he would use the boat and net if someone gave them to him as a free gift, but would he invest the time and effort to make them at a cost of 120 fish? Would the increased productivity justify that cost? In Crusoe’s very real terms, would the payoff make up for the anguish—both physical and psychological—of being near starvation for two months? (Humans’ constant necessity of caloric intake creates a natural impediment to the immediate privation of capitalistic production.) Here, again, we can see economic productivity in action: It is not just enough to be physically more productive; it has to make economic sense as well.

Again, it is naïve to think that just because a process is more roundabout it will automatically be more advantageous. To take a silly example, Crusoe could use a “process” that involved climbing a tree every time he wanted to catch another fish; this obviously would confer no advantage over the more direct approach. However, Böhm-Bawerk concluded that the only reason for Produktionsumweg to take longer is to acquire a future productivity advantage (made better and/or with less labor, energy, or raw materials) in creating things that someone really wants—and when they’ll want them. Sometimes the roundabout method exhibits its physical superiority by making more units of output with the same amount of inputs. In other cases, however, the roundabout process yields a desired output good that literally cannot be produced by any shorter, more direct process. Thus, by using what Böhm-Bawerk called “wise circuitous methods,” “the superiority of the indirect way manifests itself in being the only way in which certain goods can be obtained; if I might say so, it is so much the better that it is often the only way!”7
As Crusoe shows us, entrepreneurs engaging in roundabout production must contemplate the basic considerations of how long it takes, what it costs, how many resources must be invested to get increased output, and how long one has to wait for a payback (all of which, as we will see, are impacted by the level of interest rates).

(Source: The Dao of Capital by Mark Spitznagel, pp 109-111)

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s