Two-person economy with money and even "broken window" stimulus!

A fellow Doper has asked me to explain how IOU’s can be money. I answered him before, using an economy with only TWO people as example, but that was unacceptable to him.

I’ll post the scenario again, hoping the board’s economists will comment. As a bonus, a “broken window” leads to an economic boom! :cool:

Crusoe and Friday are the sole inhabitants of Paradise Island; Crusoe owns all the land, Friday does all the labor. Their words are their bonds and they treat each other quite fairly. Never mind how Crusoe became the sole land-owner. Maybe he won it in a poker game with Friday, or maybe he presented a quitclaim deed from the Emperor of All the Indies (though neither man can read Amharic).

Most of the economy runs on simple barter: Friday gets all the water he needs in return for housecleaning; they have a protocol to share the jackfruit and pomegranates Friday gathers, and so on. But for some trades they use delicious oysters as a money unit. It used to cost Friday fifteen oysters for a big log, but the easy oyster pickings have been picked out and now he gets a big log for just ten oysters. Crusoe often eats the oysters as soon as he gets them, so when Crusoe wanted Friday to do some major repairs on his house, he offered an ‘IOU 75 oysters, signed Crusoe’ and Friday accepted it. For the next few weeks, when Friday shopped at Crusoe’s store he didn’t need to pay oysters; they just scrawled over the debt amount.

To get oysters now, Friday has to take his boat into dangerous water far from shore. The boat is falling apart and some days Friday has to spend all day jury-rigging the crummy boat and can’t even take it out. Friday tells Crusoe “Lend me 1000 oysters for supplies and I’ll build a magnificent new boat. Starting next month we’ll have more oysters than ever. I can pay you back with interest.” But Crusoe doesn’t like to think far ahead and just says, “Do you think I’m a bank? No way.”

One night, drunk on jackfruit whiskey, Crusoe accidentally sets Friday’s boat on fire. Being fair-minded he realizes he must pay Friday the boat’s replacement cost, including labor. He writes Friday a marker for 750 oysters; Friday scrimps and gets his new boat built. The [del]broken window[/del] burnt boat leads directly to a more productive economy!

What do you think? Is there a flaw in this scenario? Do the ‘IOU oysters’ notes qualify as “money”?

Any medium of exchange can be money. An IOU is one medium of exchange as per your example, ergo, it is money.

The burnt boat didn’t lead to a more productive economy; the construction of a new boat did. If the old boat had any value (as a backup, as material for a building, as firewood), the island economy was poorer after it burned.

The burnt boat didn’t stimulate the economy. Crusoe could have lent Friday the 750 oysters and then they would have two boats instead of just one.

But yes, the IOUs count as money. They are a fiat currency - oysters aren’t.

Regards,
Shodan

In effect, isn’t all currency IOUs? Money has to “mean something” in order to be worth anything. What $100,000 bills may still exist say they are worth “one hundred thousand dollars in gold.”

What is the difference between an IOU for 750 oysters and a “750-oyster bill”?

There’s something basically wrong with the hypothetical. The old boat was deemed worth 750 [del]clams[/del] oysters. But the boat built to replace it with that “money” is clearly a better boat.

The value of the old boat should be worth exactly what it takes to obtain an equally crappy boat.

And I hate the “broken window” thing. This assumes that people won’t spend their money on something else if the window isn’t broken. It is incredibly stupid to the point of not worthy of being an example of anything other than a terrible example.

Money isn’t exactly an IOU. It doesn’t constitute a promise that I will give you something in the future, it is a mutual agreement that I have given you something right now.

Money is a social fiction. We all agree to exchange things of value thru a medium instead of directly. We all pretend that the pieces of paper or numbers in a bank record or whatever will be exchangeable for other things. This is hugely more efficient than trying to trade fifty bushels of wheat for one cow or ten years of labor for a house or whatever, and it speeds up trade enormously. But it all rests on the fact that we agree that it will.

You are correct that money has to “mean something” to be worth anything. But it isn’t worth anything, in and of itself (for a fiat currency - you can’t eat money, but you can eat oysters). What money “means” is an agreed-to social relationship with everyone else in your economy.

Regards,
Shodan

There’s a lot wrong with the hypothetical. Why is Friday taking the boat out and gathering all the oysters and then handing them over to Crusoe? Friday should go into business for himself, gather the same oysters, and keep them.

The scenario would make a lot more sense if Crusoe was providing some service beyond a vague ownership. Let’s suppose that Crusoe knows where the oyster beds are and Friday doesn’t. (These are rare migratory oysters so Friday needs to receive updates of their location on an ongoing basis.) This means Friday needs Crusoe’s knowledge in order to gather oysters. So Crusoe is essentially fulfilling the role of management while Friday is fulfilling the role of labor.

I think this is a good statement. I would go one step further: money means that Somebody Owes You. In theory, at least, either you earned the value of the money or are borrowing it from someone who did. So, if you have 10$, then you can purchase something that’s worth 10$ - the other person owes you that much value (provided they are willing to trade, plus six million other minor economics caveats).

Money is a statement that the world collectively owes you that much.

I think you’re saying the opposite of what Shodan said. And I agree with Shodan.

Money isn’t an indication that somebody owes you something, anymore than a gold nugget is an indication that somebody owes you something. Money is a thing of value all in itself. You can trade money for goods just like you can trade gold for goods.

You don’t have to earn money or borrow it in order for it to have value. You can find a ten dollar bill on the street and it has the same value as any other ten dollar bill.

And I agree with Smiling Bandit.

Money has no value on its own. And that’s by design. If it did, people would be eating it, or building houses with it, or making clothes out of it, negating its use as currency.

Money represents value I can claim in the future. When I do work for somebody, they give me these coupons that are good for anything I want in the future. A massage, a hot meal, a house. But the coupons are useless on their own. They don’t feel good, fill my belly or keep the rain off my head.

The important thing is everyone accepts these coupons. They aren’t “IOUs” they’re “Everyone OUs”. I don’t have to go back to my boss to have him redeem those coupons for stuff I want. My boss gave me the money but I can go to a town across the country and exchange it with a stranger for stuff I want. In the same way as an IOU, money is a marker that represents things I can have in the future that I haven’t claimed yet.

Money can have value on its own and for most of history it has had value. Most societies have used gold or silver for money, but other currencies have been shells, furs, tobacco leafs, or salt. In prisons they have used cigarettes or cans of fish for currency. As long as the currency can store value and function as a medium of exchange it will work.