I am a fan of Bob Murphy’s setup for his ‘sushi’ story describing the potential for, and the ill effects of, capital destruction. Told in a sort of story-form, he sets up a closed economic system on an idyllic tropical island. On the island there is a simple economy consisting of fishermen, rice farmers, sushi chefs, and boat maintenance workers that has found a perfect equilibrium of production and consumption – 5 fresh sushi rolls per day for each islander.
Thereupon, unfortunately, as it turns out for the natives, Paul Krugman, the famous Keynesian economist, is shipwrecked on the island. Bob says, “ After being revived, he surveys the humble economy and starts advising the islanders on how to raise their standard of living to American levels.” But then he really doesn’t.
Instead he shows them the miracles of the outboard motor that came ashore with him. Then, from an economist’s perspective, things in the story start to go a little squirrelly – or maybe fishy.
For some reason, from an original 25 fishermen, Krugman convinces them to now employ 30 fishermen to catch fish. Why? It makes no sense. Shouldn’t they now be able to, at least until the gas runs out, use less labor to procure the same amount of fish? Not only that, but Krugman convinces the islanders to put more resources into rice and sushi production (from 25 to 30 in each case), drastically reduce the workers available for boat maintenance (from 25 to 5) and irrationally send 5 workers to scour the island for fuel for the motor. Perhaps I get the need for the increase in rice and sushi, to keep up with more fish; but the rest, I am not as sure.
Predictably, the boats and nets, the capital to be destroyed, begin to wear out forcing a reallocation of a small number of rice and sushi workers to prop up the fish haul. Eventually, the gas runs out and the boats break down, and the error of the Nobel winner’s advice becomes obvious, as now, desperately short of boats to catch fish, a large number of workers are tasked with replacing or repairing the fleet, causing a short period where the ‘economy’ suffers. However, it does not actually seem to suffer from unemployment though physical production does.
The story, while thought provoking to be sure, is implausible. Unless Krugman convinces them, via, basically, fraud, that if they try, they can find or make the fuel needed to keep the boat running, why would the islanders make major shifts in their methods of production? Sending islanders to search for gasoline on their island, which they know like the back of their hands, no doubt, would on its face be a total waste of effort.
Unless I’m missing something, the only logical response to Krugman washing ashore with a motorboat would be to use the boat to temporarily increase the amount of fish to be caught; perhaps shifting a few displaced fishermen to rice and sushi work to keep up with the abundant catch or some time off. Then shifting them back as soon as the gas runs out. Or alternatively, waiting for a break in the storm and sending their new island economist back from whence he and his noisy boat came.
And, while demonstrating the effects of capital destruction in potentially causing temporary unemployment (which this story does not actually do), the way it happens in the story does not really strike at the issue of why a Misesian bubble forms and why the mistakenly created higher order capital goods should eventually have this effect.
It is entirely possible that the story would have played out nearly the same minus the boat. Krugman could just as well have convinced them that boat maintenance was a waste of time and what they should do is put more fisherman out catching fish, then the capital would have been just as destroyed. In the story the capital goods are not abandoned because it turns out they were, mistakenly, not profitable via monetary illusion; they were straight up left to depreciate. The losses to the economy come mainly from the frivolous expedition to procure fuel for the boat and the uncalled for lack of maintenance. The increase in consumption is largely from technological advance – the new boat.
What if … instead of a motorboat, Krugman washed ashore with a barrel of money?
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