A plan for economic recovery
International economics is a mystery to me, but the following approach to resolving the global economic slump strikes me as very promising:
It is August. In a small town on the South Coast of France, holiday season is in full swing, but it is the rainy season not much business is taking place. Everyone is heavily in debt. Luckily, a rich Russian tourist arrives in the foyer of the small local hotel. He asks for a room, puts a 100 Euro note on the reception counter, takes a key, and goes upstairs to inspect the room.
The hotel owner takes the banknote and rushes to his meat supplier, to whom he owes E100.
The butcher takes the money and races to his wholesale supplier to pay his debt.
The wholesaler rushes to the farmer to pay E100 for pigs he purchased some time ago.
The farmer triumphantly gives the E100 note to a local prostitute who gave him her services on credit.
The prostitute goes quickly to the hotel, as she owed the hotel for her hourly room use to entertain clients.
At that moment, the rich Russian comes back down to reception, informs the hotel owner that the proposed room is unsatisfactory, takes his E100 back, and departs.
There was no profit or income. But now no one has any debt and the residents of the small town look optimistically towards their future.
[Hat tip to Bob Goldfarb]
Comments
Nice history. When I was an economist, I studied austrian economic theory of Bohm-Bawerk and Knut Wicksell.
And there were one thing they stressed that was lost in all equilibria theories developed later: there is a time strutucture in the economy that should be taken in account. Many important things can happen when we are going from a equilibrium to another one…
Posted by: Manoel Galdino | May 14, 2009 05:55 PM
You’re assuming that the problem is the credit crunch. Fine. All you need to do is tweak your analogy slightly so that nobody can agree how much their various debts are worth.
When you’ve done that, you can look beyond the credit crunch, and confront the real-world problem that economic activity - and with it employment - has fallen off a cliff.
Your butcher is selling no meat. Neither is your prostitute. They’re still in deep trouble, and so is everyone else in your town.
Posted by: bert | May 15, 2009 08:48 AM
bert:
Well, this is all tongue in cheek, but the point of the parable is in the last few words: “…and the residents of the small town look optimistically towards their future.” Presumably their optimism will lead them to engage in behaviors — e.g., buying stuff — they wouldn’t have seriously considered if they had remained pessimistic. Call it irrational exuberance if you like.
Posted by: Lee Sigelman | May 15, 2009 09:30 AM
Animal spirits.
Got your drift.
I for one am thrilled by all the green shoots happy talk. In fact I’m off to buy something frivolous right now. While I’m gone don’t answer the door to any bailiffs.
;)
Posted by: bert | May 15, 2009 10:52 AM
Your example doesn’t work — the Russian isn’t getting his E100 back, the hotel is giving him a “new” E100 from somewhere else.
Posted by: Andrei | May 15, 2009 12:00 PM
Andrei:
But isn’t the E100 that the hotel manager gave to the Russian the very same E100 that the prostitute just gave to the hotel manager in a chain of transactions, all involving that very same E100 note that originated with the Russian tourist? The hotel manager isn’t coming out on the short end — he’s paid his debt to the butcher and been repaid by the prostitute, which balance out, as do his exchanges with the Russian tourist.
Posted by: Lee Sigelman | May 15, 2009 12:21 PM
why didn’t they all get together and realize that each had a debt and a credit of the same amount and that therefore, everything was balanced, regardless of the mystical Russian tourist?
Posted by: BillCinSD | May 15, 2009 07:33 PM
Because doing it the way they did it made a better story.
Posted by: Lee Sigelman | May 15, 2009 11:37 PM
Is this story (potentially) an argument for local currency?
Posted by: Doug Hess | May 17, 2009 11:27 AM