Economics on Gilligan’s Island
Henry Hazlitt wrote the economics classic, Economics in One Lesson: The Shortest and Surest Way
to Understand Basic Economics. The book is quite
popular and has sold well over one million copies. While the content is
brilliant, what makes it distinctive is the simple clarity he uses to explain
complex economic concepts.
We try our
best to follow in Hazlitt’s footsteps and explain economics without the
complexity and jargon so often used by trained economists. One of our
techniques is to bring an economic concept to its most basic level so that it’s
easily understood by all readers. While at
720Global, we produced an animated video, The Animated Virtuous Cycle, which allows a ten-year-old to understand the complex economic topic of
In this paper, we lead with a few instances where we
have taken Hazlitt’s approach to better explain
economic concepts. Following those excerpts, we use Gilligan’s Island as
a means of illustrating productivity and its importance for the health of an
economy and the prosperity of its people.
refinement of our recent article, Productivity: What it is and Why it Matters,
we hope this approach allows more readers to grasp the importance of
productivity growth. Falling productivity growth helps to explain the link
between many of the mounting economic and
social troubles we face. Equally important, from an investor’s perspective,
productivity growth is the driver of current and future cash flows for almost
every investment imaginable.
If you want
to skip to our simple primer on productivity, go to the section entitled “Gilligan’s
Greetings From Stiltsville
excerpt came from our article, Greetings From Stiltsville: Deficit Spending is not a
Free Lunch. We created the fictitious island of
Stiltsville to demonstrate why GDP is a poor measure of economic growth.
island called Stiltsville, where a person’s value is based solely on their
height. In order to increase their value,
people living on the island used to wear platform shoes. A person wearing
six-inch platform shoes would suddenly be more valuable than a person of
similar height who wore normal footwear. Eventually, platform shoes were replaced by stilts, three-foot stilts were
be replaced by six-foot stilts, and so
on. People eventually rose to be the height of giraffes. The main point is
that, on an island where height is valued
above all else, people will try to game the situation to their advantage by
increasing their height by any means available.
other lands would look at the people of Stiltsville and recognize their
obsession with height greatly distorts their perception of value. They
would also likely conclude that distorted perceptions result in actual
distortions in productivity, because:
- People waste time and money thinking about how to increase their height, and
- Walking around in platform shoes or stilts does not necessarily increase a person’s productivity, and instead most likely impairs it
Now imagine a
world in which the health of an economy is perceived to be based on one metric; Gross Domestic Product (GDP).
GDP is simply the total amount of spending in an economy. GDP, as currently
measured, does not distinguish between “good” spending and “bad” spending. GDP
does not distinguish between consumption spending and investment spending. GDP
also does not distinguish whether spending is generated by existing wealth, by
going into debt temporarily, or by going into debt permanently. In this
world, every dollar spent on education or new means of production, is counted the same as every dollar spent on epic
bachelor parties and video games.
the world of GDP accounting, is the world we live in. More spending today than
occurred yesterday is considered economic growth. Growth, regardless of how it
happens or at what cost, is highly sought after by politicians, economists and central bankers.
The Fallacy of Macroeconomics
In our RIA
Pro article, The Fallacy of Macroeconomics,
we show why the current mindset governing what constitutes economic growth is
deeply flawed. In this article, we swapped
Stiltsville for Glenn Villeneuve, a real person living off the grid in a remote
part of Alaska.
To help you
appreciate the benefit of creating value through production, we elicit the
National Geographic Channel’s Life Below Zero. The documentary tracks
the lives of several people that live largely independent, “off-the-grid”, in the wilds of Alaska. Of particular
interest is Glenn Villeneuve, who does not appear to rely on help from the
outside world, nor many of the innovations of modern society, including
electricity and power tools. Assessing Glenn’s daily activities, we better
illustrate the measurement of a personal economy. While this example does not
represent the norm, it does provide a microcosm of a simple economy to allow us
to contrast the circumstances of Villeneuve with the fallacy of an economic
perspective focused on consumption.
A typical day for
Glenn involves some of the following activities in which he produces goods:
hunting, trapping, fishing, sourcing water, and chopping lumber. Other parts of
his day are spent consuming prior production such as eating, drinking,
sleeping, and warming up by a fire. The first set of activities involves
productive endeavors that add economic value. The second set of activities
involves consuming the value he created. Note that there is also an
intermediate stage in which the value he created is stored (saved) for future
show, Glenn consistently extols efficiency or the benefits of using the least
amount of energy and the most amount of ingenuity to add value to his camp.
After watching an episode or two, a viewer quickly realizes that without this supply side mindset Glenn would quickly exhaust
his resources and become a victim of the harsh Alaskan climate.
Most of our days
are quite different than Glenn’s, but
nevertheless they are filled with similar pursuits. We sit at a desk
providing legal services, picking grapes from a vine, building houses and
millions of others jobs in which we create value. While most of us do not “eat
what we kill” and consume the value we create directly, we earn the value in the form of currency. As a store of that
value, currency then affords us a medium of exchange for something we need or
want when it suits us.
Just as portrayed
in Glenn’s example, the harder we work and the more innovative and productive
we are, the more value we create. It is in this straightforward incentive that
the prosperity of a populace grows and scarcity is
The Fed’s Mandate to Pick your Pocket
In a recent article entitled, The Fed’s Mandate to Pick your Pocket,
we used the analogy of three people stranded on a deserted island to explain
everywhere and always a monetary phenomenon.” – Milton Friedman
oft-cited quote from the renowned American economist Milton Friedman suggests
something important about inflation. What he implies is that inflation is a
function of money, but what exactly does that mean?
appreciate this thought, let’s use a simple example of three people stranded on
a deserted island. One person has two bottles of water, and she is willing to
sell one of the bottles to the highest bidder. Of the two desperate bidders,
one finds a lonely one-dollar bill in his pocket and is the highest bidder. But
just before the transaction is completed,
the other person finds a twenty-dollar bill buried in his backpack. Suddenly,
the bottle of water that was about to sell for one-dollar now sells for twenty
dollars. Nothing about the bottle of water changed. What changed was the money
available among the people on the island.
discussed in What Turkey Can Teach Us About Gold,
most people think inflation is caused by rising
prices, but rising prices are only a symptom of inflation. As the
deserted island example illustrates, inflation is
caused by too much money sloshing around the economy in relation to goods and services. What we
experience is goods and services going up in price, but inflation is actually the value of our money going down.
traveled to Stiltsville, The Brooks Range of Alaska and a deserted island, we now
bring you to Gilligan’s Island. This widely popular 1960’s television sitcom
portrayed the island home of seven castaways. Despite the comic ventures of the half-witted
first mate, Gilligan, and the rest of the castaways, the setting provides a
nice canvas to illustrate how a nation’s prosperity can only permanently grow with
the help of productivity.
As we stated
in, Productivity: What it is and Why it Matters, “Economic
growth is a direct function of productivity which measures the amount of
leverage an economy can generate from its two primary inputs, labor and capital. Without productivity, an economy
is solely reliant on the two inputs. Due to the limited nature of both labor
and capital, they cannot be depended upon to produce durable economic growth
over long periods of time.”
three factors that create prosperity – labor, capital, and productivity – we discuss how the three elements of economic
growth can be employed on Gilligan’s
Island and the benefits and drawbacks of each. We greatly simplify this
analysis by assuming that the only product the castaways produce are coconuts.
Further, the coconuts can be sold to Robinson
Crusoe Island (RC Island), and as a result
the castaways on Gilligan’s Island can buy whatever goods they desire.
are many facets to labor such as education, training, work ethic and
incentives, the biggest factor is demographics. Demographics describe the composition
of a population. On Gilligan’s Island, all seven inhabitants, even the
socialite Mrs. Howell, are capable of picking coconuts for long hours each day.
Given this construct, there are two ways the island can increase its economic
production; work more hours and/or have
person were to increase their daily workload
by two more hours, they would pick more
coconuts and exchange them for more money and other goods. This would certainly make them more prosperous.
However, picking hours are limited by what
is physically possible and the number of hours of daylight. At some point, their ability to work more reaches a
way to increase the island’s economic activity is to have babies that will
eventually work. If, for instance, the population were to double to 14, then we
might assume the coconut production would also eventually double and therefore economic activity would double.
That is true, but the level of activity
and prosperity per person would remain the same.
examples, there is a limit to the number of people that can fit on the island
and the number of hours that can be worked.
While additional hours and babies can increase economic activity and prosperity,
both have a definitive maximum.
“Capital includes natural, man-made and
financial resources.” The capital in our example is coconut trees and coconuts. In our most basic example, the only
other potential source of capital is borrowing money from RC island.
Howell III, the once prominent millionaire, has devised a way to buy more stuff
than is possible through daily coconut picking activities. He approaches RC
island and asks to borrow money. RC island agrees and lends the Islanders money which is then spent.
addition to what they can buy from their coconut sales, they have the
additional purchasing power of debt. This method makes Gilligan’s Island seemingly
more prosperous, but only temporarily. In the future,
they will not be able to borrow any more money and must use their income from
coconut sales to pay back the debt. The buying power gained from the debt will be paid back in the future plus interest. Credit
can raise the level of consumption, but
it is temporary and limited.
Gilligan’s Island has the Professor. The resident genius realized the ultimate bounds
of borrowing, working more hours and having babies. All three tactics could
certainly provide more but were limited and flawed. He knew that capital,
either saved or borrowed, and a little ingenuity could be used to permanently increase
the number of coconuts they pick without requiring more hours of work or more
Professor suggested they cut one month’s intake of caviar to buy ladders. The
ladders allow them to get up and down the trees quicker and produce more
coconuts in less time. Also, he suggested
they borrow money to buy genetically modified coconut trees that produce five
times as many coconuts as the trees currently on the island. By doing so, each trip up the tree would yield five more
coconuts than before. The debt would have to be paid back with interest, but the extra revenue would more than offset the
extra expense. They could also use their savings or debt to buy tools that
could be used to make many different products from the coconuts. These products
would generate more revenue per coconut.
illustration demonstrates how productivity acts as leverage to get more out of
labor and capital and expand the prosperity of an island and, for that matter,
presented here are grossly simplified, but
they apply to our modern, multifaceted economy every bit as much as they do to
Gilligan’s Island. As a nation, we can
keeping gaming GDP growth with largely unproductive debt or we can save and
invest more. It is easier to borrow and spend, but
it offers only a short-term means of raising consumption. It is not a permanent,
long-term solution. Saving and investing comes with a temporary, short-term
cost but the long -term benefits more than outweigh that sacrifice.
applies to the economy and the generation of demand for the products and
services that drive the revenue and profits available to investors. It also
applies to the value of individual investments themselves. With this precious
of understanding of productivity and its value we should be asking if the
companies we invest in are using capital
to wisely invest in their future or are they using it for other less-productive
purposes? This is not a binary question
in most cases as most companies do both, however we all but guarantee that,
over the long run, companies focused on investments where productivity growth
trumps short-term profits will benefit at the expense of companies focused
For related research on this important concept we recommend reading The Death of the Virtuous Cycle and watching our short video The Animated Virtuous Cycle.