In putting together a reading list of books on Austrian Economics I was advised to investigate a few comics. Before looking into Irwin Schiff’s How The Economy Works, And Why It Doesn’t, I was advised by a poster on the Mises.org forum to have a look at Lilburne’s Human Action Comics.
Lilburne tells the story of shipwrecked Robinson Crusoe, explaining a range of praxeological issues regarding economics on the island. The island analogy is often used by austrian economists (notably by Peter Schiff and Ron Paul). Key economists and theories are brought up with regard to the issues involved. Essential terminology is defined and explained and the crude but clear graphic illustrations serve well to help the reader quickly navigate the arguments presented. This is a fast track tutorial in how the Austrian value theory, with it’s consideration for human action, undermines some of the more recognized economic theories.
We are introduced to the example of Robinson Crusoe. Crusoe is cold, wet and hungry and has to deal with issues of scarcity and abundance (or lack thereof). This means he has to make choices in how he allocates resources (economizing, consuming…). We find Crusoe is not ultimately interested in the material goods (such as food and shelter, defined as the “means”) but in satisfying his wants (such as to be fed and to be warm and dry, defined as the “ends”). And this provides an introduction to the Austrian theory of how we value things.
Here the author separates the natural sciences (rocks, coconuts, botany, geology…) from human sciences (goods, wealth, conduct…). Crusoe reacts to the natural environment and ascribes subjective values to objects, based on the satisfaction they can provide, their subjective usefulness, and not the amount of labour required to achieve this ends. If Crusoe is more hungry than he is cold, he will choose to seek to satisfy his hunger first, even if it is easier to find a warm shelter.
Adam Smith’s diamond/water paradox, which lead directly to Ricardo’s value theory and ultimately Marxist economics, is then addressed by Menger, who reveals that Crusoe doesn’t deal only in classes of goods (a shelter or water for example) but in quantities of goods. While a good’s class is a factor, man must take into account quantities when deciding how useful the good might be. This is the marginal-utility theory.
3b. Diminishing Marginal Utility
There is a brief, intermittent section on diminishing marginal utility. Here the author focuses on a parody example involving Adam Smith and Lilburne. In the example Smith learns that the more of a good he has, the less he (subjectively) values it. It’s marginal utility value diminishes or increases depending on the quantity of the good he has.
4. Opportunity Cost and the Entrepreneur
Crusoe has to make a decision. In the example, if he opts for one good the other option is destroyed. He opts for shelter over food. He subjectively values the shelter over food feeling a greater need to be dry and warm. The opportunity cost is the loss of food. Crusoe is happy to suffer the opportunity cost because he has placed his options in order of preference, on a value scale derived from the marginal utility of the goods he can chose from.
Of course Crusoe may choose wrong. He may not be aware that there is a scarcity of available food on the island and he should have grabbed the food. But he cannot be certain which will best satisfy his wants. He will have to take risks, and factor in what he perceives to be less risky (or more certain). If he needs the food more than shelter, he may still opt for the shelter because he perceives the food is unlikely to satisfy his hunger (maybe the food is stale for example). When dealing with uncertainty and risk, Crusoe acts as an entrepreneur seeking profit (satisfaction of wants) and avoiding loss.
Here we are told Crusoe has two brothers who are stranded on separate islands. They each make decisions about how to invest their time and goods. If they spend more time on gathering coconuts they will have less time to invest in building tools and boats. They all have different subjective preferences with regard to the risks and certainties they face. Robinson has a low time preference for consuming coconuts, and is thus able to delay consumption (ie save resources) which allows him to invest in longer term capital goods (better tools for example). Economic growth entails and this gets defined as making a profit, saving, investing… One of the other brothers overestimates how many coconuts he has, takes some time off, over consumes, and ends up losing the marginal utility of his by now depreciated capital goods. Robinson sails away on his boat to a paradise island full of coconuts.
This final part deal with human interaction, specifically regarding exchange. Two of the Crusoe brothers find each other on the same island. They each possess an item the other desires. A point is made about self interest being the fundamental reason as to why they will or won’t swap goods. The brothers then set about producing. They produce different quantities of the same goods. But they perceive the same potential use for them (building a house, making some pottery…), thus they share the same value scale for the produced goods. Through a logical series of exchanges, the brothers each end up acquiring the quantities they need to satisfy their most valued individual wants. Though one is better off than the other as he had produced a larger quantity of a more valued good.
