The foolish economist takes on power and poverty

The Foolish Economist

Takes On Power and PovertyA. Arkay (not an economics major)

Foolish Economics

• I confess – I studied economics in my freshman year and my

junior year in college.

• So, a long time ago, I learned all this stuff about how the

economy works.

• But I hardly remember any of it and as I listen to the -crats and

–icans battle to the death I wonder if they learned the same

thing that I did.

• So, I decided to reconstruct something from the past.

• But with the passage of time, I must have forgotten something

because, this is what came out.

7/14/2012 The Foolish Economist 2

The canonical eco-world: John vs. Bill

• Two farmers, John and Bill are the sole people in the world. If

you wish, you can think of them as aggregating all the others

behind them.

• For instance, John and Bill could be two nations.


Simplifying assumptions

• Like all economists, I have simplifying assumptions:

1. It’s a closed world with only two people, John and Bill.

2. John and Bill don’t have dependents with varying demands and

future ability to support them.

3. John and Bill don’t age or become weak or sick or change.

4. John grows grapefruit; Bill grows mangoes.

5. Each of them needs 1 grapefruit and 1 mango for every planting

cycle (“year”, if you will).

6. To grow this minimum amount takes them 1 hour of work per fruit

each day.

7. At the start of each year they must have enough for the whole year.


Why these assumptions

• We live in a closed world. No foreigners to save us.

• Dependents add complexity. Maybe add this later?

• Aging, Dying, being supported by past dependents, etc., add

complexity.

• Real people need thousands of things – that’s complex.

• They have different skills, and that encourages them to form a

society. Humans live in societies. Societies are complex, but

this one has only 2 people, so looks simple.

• Studies have shown that hunters and foragers spend between 2

and 4 hours daily getting what they need and the rest of the time

doing nothing. Hence the assumption about the work needed.


The First Year


John Bill

John works 2 hours/day Bill works 2 hours/day

John produces 2 grapefruit Bill produces 2 mangoes

John to Bill: I can give you a

grapefruit, in exchange for a mango

Phew! Thought you’d never ask!

Here’s a mango.

And so, they were healthy and happy!

Accounts at end of Year 1


Action John Bill

Initial State 1G + 1M 1G + 1M

Grew 2G 2M

Transferred -1G+1M -1M+1G

Held 2G + 2M 2G +2M

Consumed 1G + 1M 1G +1M

Final State 1G +1M 1G+1M

Delta (Final-Initial) 0G +0M 0G +0M

Note: This is a “normal” year and they accumulated nothing (Delta). This

is a subsistence-basis culture that values leisure over accumulation. At the

end of 1 year they have not become richer or poorer.

Year 2


John Bill

I am going to work extra hard this year Why?

I want to be rich! Huh?? “rich” – what’s that?

You’ll never get it<

John works 3 hours/day producing 3

grapefruit

Bill works the usual 2 hours/day

producing 2 mangoes

Accounts at end of Y2


Action John Bill


Grew 3G 2M


Held 3G + 2M 2G +2M

Consumed 1G + 1M 1G +1M


PARTY! -1G


• Still subsistence, but with occasional parties thrown by a hard-

working guy to gain respect (!) as a BIG MAN.

What happened – End of Year 2


John Bill

John to Bill: I have one extra

grapefruit. Why don’t you buy half a

grapefruit from me?

Buy? What’s that?

You give me half a mango for my half

grapefruit

Huh? I don’t have ½ a mango!

That’s alright – you’ll just owe me ½ a

mango and give it to me next year

Owe? What’s that?

Next year, you give me ½ a mango for

nothing.

OK. I will only have ½ mango left --

You can give me 1 grapefruit and I’ll

give you the second half of the mango

Of course not! You will get ½G when

you give me ½ M

Huh? No way. I need 1G!

At the end of Year 2 cont’d…


John Bill

But it’s so easy! All you have to do is

work 3 hours a day like I did!

I don’t want to do that!

OK. So, how will you pay back the

half-grapefruit you bought from me?

I can’t<gee< I guess I don’t want to

“buy” that half-grapefruit.

That is SO UNFAIR! You must buy it

from me!

You want me to buy something I don’t

need?

Yes! It doesn’t make sense! I don’t need it.

Why should I do it?

Because, I should be rewarded for

working harder.

Why don’t you just give it to me as a

gift!

I didn’t work harder just to give you a

gift!

OK, so why DID you work harder?

Oh, god! You are hopeless and lazy to

boot! You aren’t going to amount to

anything!

Huh?



At this point John is unhappy and Bill is bewildered. Bill has an

idea

John Bill

Bill to John: How about I sell my 1 mango

to you for 1+1/2 grapefruit?

JOHN IS CONFUSED< What does that

do for me?

It’s called the law of supply and demand!

They must balance. That can be slow and

difficult (my god Milt says so).

That’s no good and you know it! I worked

harder and got nothing for it. Instead we

have inflation – the price of my grapefruits

has fallen.

You are right. But that’s how economics

works!

JOHN HAS AN IDEA.

(I can’t sell the grapefruit even on credit!

Let me at least get some respect.)

BILL IS WORRIED. HE HASN’T SEEN

JOHN SO DEPRESSED!



John Bill

John to Bill: I’m throwing a grapefruit

party

JOHN: ( My reputation grows – I am a

BIG MAN! Even Bill says so).

All because of my hard work, if I say

so.

(Whoa! Maybe John isn’t depressed

after all. A party sounds like a good

idea.)

To John: That’s a great idea!

JOHN AND BILL HAVE A PARTY

< burp!...

< burp! Great job Steve, you really

know how to work hard and play hard!

You are a BIG MAN!

JOHN: ( My reputation grows – I am a

BIG MAN! Even Bill says so).

All because of my hard work, if I say

so

Year 3…


• Year 3 is a crisis – bugs attack the trees. John and Bill respond

and save the trees. But they have to work harder to make

enough. 50% of the crop is going to be destroyed!

John Bill

John to Bill: We have to work harder or

else we’ll die! Our civilization will come to

an end!

Bill to John: What do we do? How do I

work harder? You’ve done that before –

you’ve got to help me! You are the BIG

MAN. Tell me what to do.

Don’t worry Bill. All we do is work four

hours a day. That way I would have

produced 4 grapefruit.

And I would have produced 4 mangoes.

But we lose half of that to the bugs. I will

have 2 grapefruit left.

And I will have 2 mangoes left! Just like

Year 1. We are saved!

See! You should listen to me! Yes! You knew what to do!

I am a LEADER! Not just a BIG MAN. SURE!!

Accounts at end of Y3


Action John Bill


Grew 4G 4M

Lost to Bugs -2G -2M


Held 3G + 2M 2G +2M

Consumed -1G - 1M -1G -1M



They survived the crisis by working harder under the “leadership” of John – they had to live at a subsistence level and John did not give a party this year. They worked 2 hours a day but at the end of the year they have not become richer or poorer.

Year 4…


Something has changed. Both John and Bill begin with 1G and 1M, but John is now the “leader” who can tell Bill what to do. John wants everybody to work harder – this will lead to success, just like it did for him. John wants a cut (“tax”) of Bill’s production – as leader he works hard at “supervising”.

John Bill

Let’s continue to work hard, like last year. Why?

Because I’m the Leader! Didn’t you

agree?

(squirming)

Yes, I did. You are the chief, I’ll obey

As leader, I’ll keep ¼ of your crop! Yes boss.

Accounts at end of Y4 before Y5


Action John Bill


Grew 4G 4M

Tax +1M -1M

Ate -1G -1M -1G -1M

Sub-Total 5G + 1M 0G + 3M

Note: John no longer needs to “buy” a mango from Bill. Bill still needs to get a grapefruit from John. This leads to the next problem – a demand from John.

Before the start of Y5


Bill has been snookered. His labor is worth less, prices are going up,

and it all looks “natural”. The only thing not so natural is that John

still calls himself Bill’s friend while screwing him, excuse the French!

John Bill

I don’t need to buy any mangoes I need 1 grapefruit

Hey John, Here’s a mango, please

give me a grapefruit.

Hmm< Sorry, Bill, Grapefruit are now

worth 2 mangoes

Since when?

Since I grow them, and I am a leader,

growing grapefruit takes a higher level

of skill. That’s why.

That’s not fair!

Tough! You want one or not?

Before the start of Y5, contd…


So Year 4 ends on a happy note of over-consumption at a party sponsored by John.

John Bill

I have had a great year. It is time to

celebrate. Bill, don’t you agree!

You have certainly done well

That’s the secret of the capitalist

system, my friend. But let’s skip the

philosophy. It’s PARTY time!

I can’t bring anything, sir.

Bill, Bill, don’t worry. I’m your friend

aren’t I. I’ll provide 1G and 1M. You

remember the party many years ago –

we only had 1G!

Thank you sir. Your memory is

prodigious.

Accounts at end of Year 4 after price-change

and the great party


Action John Bill

Initial Status 2G + 1M 0G + 1M

Grew 4G 4M

Tax +1M -1M

Consumed -1G -1M -1G -1M

Sub-Total 5G + 1M 0G + 3M

Sale 1G = 2M -1G + 2M 1G -2M

Party -1G -1M

Final Status 3G + 2M 1G + 1M

Delta 1G + 1M 1G

Bill has enough to sustain himself for the next year. The good thing is he

does not owe John anything. John meanwhile has stocked up for 3 years!

Year 5 – another crisis


The rains are delayed and the drought almost kills everything. When the rains finally come, all the work of tilling and sowing has to be repeated. They had only planned to repeat Y4 so, despite John’s prodigious ability to plan ahead, a crisis is in the making. Who should make sacrifices?

John Bill

We have worked twice as hard as we

used to, and look. It’s pathetic.

Half the crop is gone. What shall we

do? Luckily we have enough.

Hold on, Bill. You forget that you owe

me tax.

How can I pay it? We only grew

enough food for the next year, not to

cover taxes.

So, I should sacrifice and not you?

That’s not fair! I’ll tell you what – I’ll

cut the tax in half. Instead of 1 M, you

can give me ½ M.

What ½ M?

And call me Sir, please. I’m your

leader.

What ½ M, Sir?

Year 5 contd…


John Bill

It is a problem. And don’t forget,

grapefruit are now worth 2 mangoes.

How can I pay for grapefruit?

Bill, you should have thought about

this before you ate like you used to.

We knew this was going to be a bad

year!

I can’t starve sir.

You’re right. We cannot let you starve!

But, there is a way. You work on your

land and you also help me on my land.

You can keep half of what you grow

my land.

But,<

I get to rest and enjoy my wealth, you

get to work and become free of debt,

as you were in the good old days.

You are right, sir.

This is not a year for a party – sorry!

Year 5 Accounts


Action John Bill

Initial State (before

party)

3G + 2M 1G + 1M

Grew +4G +4M

Lost to Weather -2G -2M

Tax +0.5M -0.5M


Sub-Total 4G + 1.5M 0G + 1.5M

Sale 1G = 2M -1G + 2M(owed by Bill) 1G -2M(owed to John)

Final Status 3G + 1.5M + 2M(debt) 1G + 1.5M -2M (owed)

Bill does not have enough to sustain himself for the next year. So he goes into debt with John. John proposes that Bill work on John’s land for wages of 50% of the produce.

Year 6(A): First year after crisis #2 – Bill

works 6 hours/day


Bill worked 6 hours/day while John worked 2 hours/day

Note: They do not need to sell or buy a G or an M. Also Bill pays off John. Bill is free of debt.

Bill worked 4 EXTRA hours every day but he still consumed only 1G and 1M!

Action John Bill on JLand Bill

Initial State 3G + 1.5M + 2M(debt) 1G + 1.5M -2M (owed)

Grew +2G +2G +4M

Tax +1M -1M

Rent +1G -1G


Sub-Total 5G + 1.5M + 2M(debt) 1G 0G + 3.5M -2M (owed)

Pay debt +2M -2M (debt) -2M +2M(debt)

Transfer -1G +1G

Final Status 5G + 3.5M 1G + 1.5M

Year 6(B): Bill only works 4 hrs/day


Bill worked 4 hours/day while John worked 2 hours/day

Note: Bill pays off his old debt to John..

Bill needs to go into debt (1M) for the next year.

Bill worked 2 EXTRA hours every day but he still consumed only 1G and 1M!


Initial State 3G + 1.5M + 2M(debt) 1G + 1.5M -2M (owed)

Grew +2G +2G +2M

Tax +1M -0.5M

Rent +1G -1G


Sub-Total 5G + 1.5M + 2M(debt) 1G 0G + 2M -2M (owed)

Pay debt +2M -2M (debt) -2M +2M(debt)

Transfer -1G +1G

Final Status 6G + 3.5M transferred => 1G + 0M

What Next?

Bill only owes 1M anything, but under the new system:

• He pays a “leadership” tax to John of 25% of the produce from

his own land

• He is required to work on John’s land and pay 50% rent

• John has tasted the pleasures of being rich – Bill does some of

his work!

• A grapefruit is now worth 2 mangoes by decree!


After Year 6 (A)


John Bill

Ha! Look at me – I am rich! You are

poor! All because of my hard work

and intelligence.

Yes, sir.

Aren’t I a great leader or what?! That

sounds nice. I think I deserve a

reward.

You certainly do, sir.

I am to be awarded the title of “Great

Leader”. That’s what you should call

me.

Yes, Great Leader

Isn’t this a great system? mumble

What did you say? You don’t agree? I guess. But now that I am free of debt,

I will only work on my land next year.

What? You ungrateful wretch! After all

I have done for you.

But<

After Year 6 (A), cont’d…


John Bill

OK, Bill! You’ve made me do this. I

hate it, but have no options.

What, Great Leader?

I will hire a policemen and he will

make sure that you do the work I have

ordered you to do!

But that will cost 1G+1M! How will you

pay that?

We’ll share the cost – after all you

benefit from the security a policeman

provides! You will have to work extra

hours on my land.

You can’t be serious!

Oh, yes! I am. And its all your fault! !!!!

John is upset. Bill working for him meant he had leisure. He could spend that time watching Bill work – a pleasure Bill would never experience!

He comes up with a plan.

Year 7: The New Kingdom


Bill works 8 hours/day while John does not work. He supervises the policeman and Bill.

Bill needs to eat more – the old diet cannot support the new work schedule – he now needs 1.5G + 1.5M.

Bill needs 0.5G more for the next year, and has 1M to buy it with. If the price stays at 1G = 2M, he has just enough for the next year!


Initial State 5G + 3.5M 1G + 1.5M

Grew +4G +4M

Tax +1M -1M

Rent +2G -2G

Security -0.5G -0.5M -0.5G -0.5M

Consumed -1G -1M -1.5G -1.5M

Sub-Total 5.5G + 3M 2G -1G + 2.5M

Transfer -2G +2G

Final Status 6.5G + 3M 1G + 2.5M

Delta 1.5G -0.5M +1M

Summary

• The system has worked for King John the Great, who established

the first Kingdom in Year 7 of Our John.

• It hasn’t been so great for Bill, who now works 8 hours a day and

can just barely support himself. Any crisis affects Bill and drives

him further into debt.

• Looking at Year 7, it appears that if there is no crisis, Bill will be

able to save approximately 0.5M every year and be able to build

up a nest egg for his retirement.

• Meanwhile, John is saving 1.5G a year.

• A policeman has entered the picture – he is costing a lot.

• King John realizes – if I can buy Bill’s land, I can do be better.

That comes later in Bill’s march towards serfdom.


The End of the Foolish Economist

That’s the end of this simulation.

What does it tell us?

1. There are lots of assumptions and these assumptions can

affect the result in many ways

2. There are many parameters that this simulation is sensitive to.

And key events or decisions could have gone either way. In

an obvious sense, this is a chaotic system.

3. But the evolution of Big Man => Chief => Great Leader =>

King reprises the development of the modern State. So there

is historical validity (not that it means anything).


Credit/Blame assignment

• A key transition took place when the Big Man took credit for

organizing the response to the first crisis. This allowed for the

development of an oppressive authority.

• The second crisis etched the social structures in stone!

a) Assigning credit/blame in society for an individual’s actions is central

to social organization

b) One could even argue that this is the way we humans learn and think

c) Could Bill have done anything different?

• Maybe not. But the explanations in terms of “hard work”,

“lazy”, “more intelligent” don’t explain anything!


Classical Economics stumbles

• Is the Foolish Economist taking a simulation with a thousand

assumptions too seriously?

• The classical economist (CE) would have classified the initial state as a

case of equilibrium

• Then some mumble about absolute and comparative advantage explaining

the later developments.

• But CE would be unable to explain why Bill working 8 hours

under the supervision of a policeman and an employer is better

than Bill and John working 2 hours each.

• Maybe somebody is taking economists too seriously in expecting

explanations.


Conclusion

• There is nothing “natural” about pricing, leadership, and so

on…

• These are cultural artifacts based on intimidation & oppression

• Emotionally (“It’s not fair – I should be rewarded for working hard.”)

• Socially (“I am smarter than you and you should call me sir”)

• Physically (“I will hire a policeman”)

• BUT, That doesn’t sound like what I learned in Economics 101!

• Something is wrong! I must be…

The Foolish Economist


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The foolish economist takes on power and poverty