There is an idea concerning scarcity in economics called “Crusoe Economics,” in which the limited resources of time, labor, and money are discussed in meeting an unlimited amount of needs for an individual or a family. For those of you who aren’t aware of Crusoe Economics, a brief but detailed explanation will follow this paragraph. For those of you who are aware of what it is and want to get to the point, you can skip ahead.
Crusoe Economics, as explained by Henry Hazlitt in his book “Economics in One Lesson,” is the story of a single person named Robinson Crusoe, who is secluded on an island and has many needs and very limited resources to fulfill them. For example, as Hazlitt explains, Crusoe thirsts, he is hungry, he needs shelter, he needs a means to protect himself, and so on. However, Crusoe cannot fulfill all of these needs at once. Therefore, he needs to make a decision based what need of his is the most urgent, and then work down from there. He may choose to quench his thirst first, and later go find some food, and after he finds food, maybe build a hut or some kind of shelter. Next, he may sharpen a stick to protect himself and find other food. You can make the distinction between high priority items and low priority items based on what Crusoe chooses to do first. You will also never see Crusoe do the same thing for longer than it is beneficial for him. Crusoe will not fetch excess water during one day if he could be building a shelter or if he’s dying of hunger. Marginal utility is very important here.
There is another story of Crusoe Economics, and that is the extension to the nuclear family. Let’s say there is a mother, a father, a son, and a daughter. This family works towards their own needs and strives to be self-sufficient. First, the mother cooks the food. The father fetches the food by hunting or fishing or what have you. The kids fetch firewood for the mother to cook with. However, the kids will not continue to get firewood for the mother if there is a large pile already accumulated and the family has some other need that needs to be fulfilled. There is no benefit for the family if they keep stacking excess firewood rather than doing other things to better the health and happiness of the family. This is the same concept of the original Crusoe story, but on a family scale.
What is important in Crusoe economics is marginal utility; that is, the things that Crusoe chooses to do first has the highest impact on his overall happiness and health. Crusoe is bettering himself by doing the most important things first and least important things last. The same goes for the family; productivity is based on the utility of the things that each member does, and if there is a job that yields higher utility than another job, then the former will be done.
On a much larger, societal scale, Crusoe Economics still holds true. Companies, managers, and employees will do what is most beneficial to them first, and then go down the list from there. An employee will buy food and shelter with their paycheck before they buy less important items, like fast food on the way to work or decorations for their house or apartment. A manager will tell their employees to take care of customers before they mop the floor or change inventory. But most importantly (and what confuses and bewilders some economists for some reason), companies will produce products that yield the greatest returns rather than products that yield smaller returns. Companies will produce shirts to the point where supply meets demand, but will stop when it exceeds demand. This is the main kernel of truth that Crusoe Economics offers, and you would think that economists would accept this principle of marginal returns; however, there are a lot of people who have an issue with it.
These are the people who see shortages in the world and blame the free markets and Crusoe Economics. These “economists,” if we can call them that, argue that businessmen are only concerned with profit, and if the world was run by the employee, who could supply goods at the fullest extent that technology can allow, the world would be better off. If only there were no profits to pursue, if only there were “good” people in charge who were corrupt by money, the world would see no shortage of any good. Poverty would cease to exist, and we would all live in a well-supplied utopia.
There are too many things wrong with this argument to discuss everything in a single blog post. However, some things cannot go unchallenged. First, the idea that if we supplied the world with as many goods as we could, then everything would be better.
Let’s say that we have product X that some bureaucrat or elected official somewhere said we should supply more of. Product X is already meeting demand with as much supply as it can without becoming a profit-less operation; in other words, without supply exceeding market demand. If the business was to produce as much X as they could, they would begin to lose money, and therefore eventually being thrown out of business. The consumer is not helped either, as even though there is more of product X on the market, it is simply a sacrifice for the lack of products A and B. The consumer is worse off because they are met with a new scarcity for A and B in the market, leading to higher prices.
So who does the politician speak for? Clearly not the businessman, for their actions will undoubtedly lead to many bankruptcies among that class. Clearly not the consumer, for their actions bring higher prices in the market for other products that consumers need. This is the real question that should be asked, and the answer would lead us off the path of this post.
The lesson of Crusoe Economics actually proves the goodness of the price system, which is determined by supply and demand. If businesses produced more than demand could consume, they would not only be making less money than they could make had they limited supply to meet demand, but they are also taking resources from other businesses and industries, like labor, that could be doing a more pressing job elsewhere.
Crusoe Economics is a sound policy that works for the individual just as much as it works for the community or the society. It highlights the flaw in politicians making arguments for price floors, price ceilings, or any other price fixtures that mess with natural supply and demand prices. Maybe people should stop criticizing Crusoe Economics and other economic principles that they do not understand simply because they advocate for laissez-faire capitalism.