Aug 25, 2013

Robinson Crusoe Economics (The Coconut Magnate)

Real business cycle theory

In the Robinson Crusoe economy, there is only one individual – Robinson Crusoe himself. He acts both as a producer to maximise profits, as well as consumer to maximise his utility.[5] The possibility of trade can be introduced by adding another person to the economy. This person is Crusoe's friend, Man Friday. Although in the novel he plays the role of Crusoe's servant, in the Robinson Crusoe economy he is considered as another actor with equal decision making abilities as Crusoe. Along with this, conditions of Pareto Efficiency can be analysed by bringing in the concept of the Edgeworth box.[1] The basic assumptions of the Robinson Crusoe economy are as follows:[6] The island is cut off from the rest of the world (and hence cannot trade) There is only a single economic agent (Crusoe himself) All commodities on the island have to be produced or found from existing stocks
Robinson Crusoe Economy

In short, he must (a) choose his goals; (b) learn how to achieve them by using nature-given resources; and then (c) exert his labor energy to transform these resources into more useful shapes and places: i.e., into “capital goods,” and finally into “consumer goods” that he can directly consume. Thus, Crusoe may build himself, out of the given natural raw materials, an axe (capital good) with which to chop down trees, in order to construct a cabin (consumer good). Or he may build a net (capital good) with which to catch fish (consumer good). In each case, he employs his learned technological knowledge to exert his labor effort in transforming land into capital goods and eventually into consumer goods. This process of transformation of land resources constitutes his “production.” In short, Crusoe must produce before he can consume, and so that he may consume. And by this process of production, of transformation, man shapes and alters his nature-given environment to his own ends, instead of, animal-like, being simply determined by that environment.


Since economics is by definition about human action, the simplest imaginary construction in economics is that of a single, isolated human actor: a "Robinson Crusoe."[3] A key merit of "Crusoe praxeology" is that by simplifying things to the extreme, the praxeologist can get at what is logically necessary about all human action. He can do this by "assuming away" (or "abstracting from") conditions until he gets to a point where assuming away anything more will result in something that can no longer be considered action.
Mises on Action

  In the first essay in Part III of Robinson Crusoe’s Economic Man, Melanie Samson reveals four assumptions economists make when invoking Crusoe:

1. The economic subject is representative and autonomous.
2. The economic subject has freedom of choice.
3. There are no barriers to changing vocations.
4. Individuals in domestic markets model nations in international markets.

In response to these assumptions, Samson points out,

1. Crusoe is particular and has unique biases and aids that reveal his connections and dependency.
2. Race and gender biases heavily shape economic choices all over the world.
3. Changing jobs is far more complex than the Crusoe metaphor implies.
4. Nations are internally fragmented by inequities in labor markets.

Robinson Crusoe's Economic Man: A Construction and Deconstruction