Economics is considered to be the study of the use of scarce resources. In this beautiful Christmas special essay in the Economist, the author discusses why the famous 18th century novel, ‘Robinson Crusoe’ by Daniel Defoe continues to draw references from economists even today.

“Crusoe has appeared in Karl Marx’s “Das Kapital”, John Maynard Keynes’s “General Theory” and Milton Friedman’s Chicago lectures on “Price Theory”. He has an entry in the New Palgrave Dictionary of Economics. And he often washes up in economics textbooks.

Crusoe’s economic appeal is unsurprising. The sailor spends a few pages escaping pirates and shooting cannibals. But his real battle is against scarcity, which he defeats through careful deployment of the resources at his disposal, including his own labour.”

The essay notes that this reference is likely to do with the fact that the novel’s author Daniel Defoe experienced real world economic consequences.

“Scarcity also stalked Daniel Defoe, the novelist who created Crusoe in 1719. Over a chequered career he traded in bricks, wines, pickles, tobacco and the glands of civet cats. He dabbled in horse-trading. Literally. He defaulted on his debts. Twice. “No man has tasted differing fortunes more,” he wrote. “And thirteen times I have been rich and poor.”

He wrote allegories that turned dry economic variables into colourful characters like “Count Tariff”, an English nobleman dressed in domestically manufactured cloth, and “Lady Credit” (“if she be once Disoblig’d; no Entreaties will bring her back again). His publication “The Compleat English Tradesman” has been described as the first business textbook.”

Key economic principles that emanate from scarcity are demand-supply and the diminishing marginal utility, which get illustrated in the novel and referenced by economists.

“Textbook authors, for example, want to introduce the principles of supply and demand in the simplest possible case, and nothing is simpler than a one-person “Robinson Crusoe” economy.
Such an economy features in a textbook by Hal Varian, chief economist at Google. Crusoe must decide how to divide his day between gathering coconuts and working “on his tan”. In keeping with diminishing marginal utility, each extra coconut or hour of sunbathing is worth less than the last. Each hour of work also yields fewer coconuts than the last. Under these assumptions, Crusoe should stop working at the point when an extra coconut is worth no more to him than the additional leisure he must sacrifice to gather it.

A one-person economy has several things going for it. There is no waste. If an extra coconut is not wanted, it will not be collected—supply implies its own demand. There is no unemployment. If Crusoe wants the extra coconut more than the leisure, he will employ himself to gather it. Such an economy, Keynes pointed out, cannot suffer the kind of slump that cursed the 1930s—when people fail to spend enough of their income on the goods the economy could produce.”

The essay goes onto highlight other principles used in the novel such as dividends, credit-debit, etc including a reference to behavioural economics.

“Daniel Kahneman, a psychologist who won the Nobel prize in economics, and Amos Tversky have shown that when assessing their lives, people often evaluate not their level of well-being, but their gains or losses from some “neutral” reference point.

The choice of reference point is not always obvious. On each line of his balance sheet, Crusoe entertains alternatives. His shipwrecked isolation represents a grievous loss from where he was. But it counts as a gain from an alternative scenario—not hard to imagine—in which he drowned or washed up on a more perilous shore. Mr Kahneman and Tversky point out that in dreaming up these alternative scenarios, people follow certain rules. They reimagine the chain of events leading up to their predicament, removing any strange or surprising twists of fate.

After Crusoe abandons the wrecked ship, it drifts closer to shore, allowing him to return to it and strip it bare. That, Crusoe recognises, was unlikely (100,000 to one, he says). It is therefore easy for him to imagine an alternative reference point in which he rescued nothing from the wreck. That helps him psychologically.”

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