The foolish economist takes on power and poverty

The Foolish Economist
Takes On Power and Poverty
A. Arkay (not an economics major)

7/14/2012 The Foolish Economist 2

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.


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 Phew! Thought you’d never ask!
grapefruit, in exchange for a mango 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 Bill works the usual 2 hours/day
grapefruit 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 Buy? What’s that?
grapefruit. Why don’t you buy half a
grapefruit from me?
You give me half a mango for my half Huh? I don’t have ½ a mango!
grapefruit
That’s alright – you’ll just owe me ½ a Owe? What’s that?
mango and give it to me next year
Next year, you give me ½ a mango for OK. I will only have ½ mango left --
nothing. 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 Huh? No way. I need 1G!
you give me ½ M


At the end of Year 2 cont’d…
John Bill
But it’s so easy! All you have to do is I don’t want to do that!
work 3 hours a day like I did!
OK. So, how will you pay back the I can’t gee I guess I don’t want to
half-grapefruit you bought from me? “buy” that half-grapefruit.
That is SO UNFAIR! You must buy it You want me to buy something I don’t
from me! need?
Yes! It doesn’t make sense! I don’t need it.
Why should I do it?

Because, I should be rewarded for Why don’t you just give it to me as a
working harder. gift!

I didn’t work harder just to give you a OK, so why DID you work harder?
gift!
Oh, god! You are hopeless and lazy to Huh?
boot! You aren’t going to amount to
anything!


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 It’s called the law of supply and demand!
do for me? They must balance. That can be slow and
difficult (my god Milt says so).
That’s no good and you know it! I worked You are right. But that’s how economics
harder and got nothing for it. Instead we works!
have inflation – the price of my grapefruits
has fallen.
JOHN HAS AN IDEA. BILL IS WORRIED. HE HASN’T SEEN
(I can’t sell the grapefruit even on credit! JOHN SO DEPRESSED!
Let me at least get some respect.)


John Bill
John to Bill: I’m throwing a grapefruit (Whoa! Maybe John isn’t depressed
party after all. A party sounds like a good
idea.)
To John: That’s a great idea!

JOHN: ( My reputation grows – I am a
BIG MAN! Even Bill says so).
All because of my hard work, if I say
so.
JOHN AND BILL HAVE A PARTY burp! Great job Steve, you really
burp!... 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 Bill to John: What do we do? How do I
else we’ll die! Our civilization will come to work harder? You’ve done that before –
an end! 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 And I would have produced 4 mangoes.
hours a day. That way I would have
produced 4 grapefruit.
But we lose half of that to the bugs. I will And I will have 2 mangoes left! Just like
have 2 grapefruit left. 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 (squirming)
agree? 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
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?

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!


Before the start of Y5, contd…
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.

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


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 Half the crop is gone. What shall we
used to, and look. It’s pathetic. do? Luckily we have enough.
Hold on, Bill. You forget that you owe How can I pay it? We only grew
me tax. enough food for the next year, not to
cover taxes.
So, I should sacrifice and not you? What ½ M?
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.
And call me Sir, please. I’m your What ½ M, Sir?
leader.


Year 5 contd…
John Bill
It is a problem. And don’t forget, How can I pay for grapefruit?
grapefruit are now worth 2 mangoes.
Bill, you should have thought about I can’t starve sir.
this before you ate like you used to.
We knew this was going to be a bad
year!
You’re right. We cannot let you starve! But,
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.
I get to rest and enjoy my wealth, you You are right, sir.
get to work and become free of debt,
as you were in the good old days.
This is not a year for a party – sorry!


Year 5 Accounts
Action John Bill
Initial State (before 3G + 2M 1G + 1M
party)
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
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

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!


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


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 Yes, sir.
poor! All because of my hard work
and intelligence.
Aren’t I a great leader or what?! That You certainly do, sir.
sounds nice. I think I deserve a
reward.
I am to be awarded the title of “Great Yes, Great Leader
Leader”. That’s what you should call
me.
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 But
I have done for you.


After Year 6 (A), cont’d…
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.

John Bill
OK, Bill! You’ve made me do this. I What, Great Leader?
hate it, but have no options.
I will hire a policemen and he will But that will cost 1G+1M! How will you
make sure that you do the work I have pay that?
ordered you to do!
We’ll share the cost – after all you You can’t be serious!
benefit from the security a policeman
provides! You will have to work extra
hours on my land.
Oh, yes! I am. And its all your fault! !!!!


Year 7: The New Kingdom
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
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!


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

The foolish economist takes on power and poverty

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