Why economists love “Robinson Crusoe”

After spending 28 years, two months and 19 days marooned on an island, Robinson Crusoe does not lose his nose for adventure or his “native propensity to rambling”. He crosses the Pyrenees, stalked by “hellish wolves”, witnesses the “pomp and poverty” of China and battles Tartars on the Russian steppe.

The character’s strangest adventure, however, is none of these. It is surely his centuries-long ramble through the literature of economics. 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.

After being shipwrecked, Crusoe makes his island prison habitable, even hospitable. Salvaging what he can from the wreck, he fortifies a cave (his “castle”), erects a tent (“my country house”), plants crops, tames goats (and a parrot) and fills his improvised shelves with pigeon, turtle and other foodstuffs.

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.

But it is his island fable that has most resonated, as Michael White of Monash University has documented. Economists are eager to find behavioural laws that apply anywhere. Crusoe’s isolation thus provides a useful thought experiment. Principles that hold true on his island must be elemental, not socially incidental.

William Forster Lloyd, for example, was keen to show that economics had something to say about value even in the absence of markets and exchange. In a publication in 1834, he pointed out that Crusoe prizes his goods more dearly as they become more scarce (“my ink beginning to fail me”, Crusoe says, “I contented myself to use it more sparingly”). He took that as evidence for the principle of diminishing marginal utility: a second bottle of ink is worth less than the first.

Most economists have turned to the tale not to corroborate a theory but merely to illustrate it. 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.

Textbooks present Crusoe’s one-man economy as a kind of benchmark, against which more sophisticated economies can be judged. Can its harmony be replicated, even when decision-making is divided up and dispersed—even when consumers and producers do not share the same mind?

The answer is yes, through the magic of flexible prices and wages. In his own more elaborate version of the parable, Daniel McFadden, a Nobel prize-winning economist who was also Mr Varian’s thesis adviser, introduces a second character (“Friday”). In this version, Crusoe gathers yams not coconuts. Friday acts as a manager, hiring Crusoe’s labour, paying him in yams, and giving him leftover yams as a “dividend”.

Mr McFadden shows that there is an hourly wage that will reconcile the demand and supply of labour, and also, miraculously, the demand and supply of yams. But things can go wrong if wages get misaligned or expectations sink too low. If the wage gets stuck at too high a level, for example, Crusoe might find himself unable to work as long as he wants. The yams he could collect in an extra hour may be worth more to him than the leisure he would lose. But if the wage he must receive is higher still, Friday will deny him the extra employment. The island would suffer a recession, combining unmet needs (for yams) with unused resources (Crusoe’s spare labour).

If Friday worries that he will not be able to sell as many yams as he can produce, he may limit his demand for labour. That will curb his customer’s purchasing power, thereby seeming to bear out his pessimistic sales forecast. Crusoe will lack work, because Friday lacks sales. And Friday will lack sales, because Crusoe lacks work.

An obvious objection to these parables is their cartoonishness. The concept of a Crusoe economy has become “another cuss-word to people who crave realism and are contemptuous of theory” noted Frank Knight, a Chicago economist, in 1960. But simplification can often aid understanding. Mr McFadden’s parable, for example, illustrates that recessions are not necessary or salutary, but absurd and inefficient.

Never too late to be wise

For Crusoe-lovers, however, what is most striking about these exercises is not their distance from reality, but their distance from Defoe’s original tale. Neither coconuts nor yams appear in the book. And far from working on his tan, Crusoe took a “world of pains” to hide from the sun, making a “clumsy, ugly, goat’s-skin umbrella” to ward off its rays. His island is not in the South Seas, as Mr McFadden maintains, but near Trinidad. And Friday and Crusoe do not bargain over labour or anything else. After Crusoe saves him from the cannibals who have carried him to the island by canoe, Friday in effect indentures himself to the sailor. One of the first English words he is taught is “Master”.

Obliviousness to Defoe’s tale does not invalidate the textbook parables. Little of importance hangs on whether Crusoe gathers coconuts, yams or grapes, in the South Seas or anywhere else. But the neglect is nonetheless a missed opportunity. There is a lot of economic incident and insight in the original story. Economists might enjoy rediscovering it.

They could start not with coconut-gathering but with bread-making. “Few people have thought much upon...the strange multitude of little things necessary in the providing, producing, curing, dressing, making, and finishing [of] this one article of bread,” Crusoe says, as he struggles to make some for himself. In trying to start from near-scratch, Crusoe discovers that even the simplest product is a minor miracle of economic choreography. His thoughts resemble the classic essay, “I, Pencil”, written by Leonard Read in 1958, which details the “genealogy” of the humble pencil, with its wood from Oregon, graphite from Sri Lanka and rubber from Indonesia, all collected, transported and refined by machines that have their own even more complex genealogy.

After bread-making, economists could turn to Crusoe’s pottery. It takes him about two months to make a pair of jars—“two large, earthen ugly things”—in which to store his grain. Preserving resources is no easy matter: pests threaten his crops and decay unravels his clothes. In his 1916 book “The Natural Economic Order”, Silvio Gesell imagines how grateful Crusoe would be to lend his spare provisions to another islander, like Friday, in return for similar provisions a few years hence. He would accept the deal even if Friday pays no interest, because merely keeping wealth intact represents a victory against the relentless forces of decay. It is a useful thought experiment for anyone who resents today’s financial system, which for all its flaws, allows people to preserve their wealth in convenient savings accounts, not misshapen jars.

The Crusoe in the textbooks is a rational man, always equating marginal this with marginal that. He is the stock character of economics 101. The Crusoe in Defoe’s story is more mercurial and conflicted. As such, he lends himself to more recent, psychologically informed theories of decision-making. He could become an icon of “behavioural economics”.

The want of thankfulness for what we have

At one point, Crusoe uses his scarce ink to take stock of his predicament, drawing up a kind of balance-sheet of comforts and miseries, credits and debits. He is a lone castaway (a debit), but he is alive (a credit). The island is uninhabited, but it is not barren. He has no defences, but the island has no obvious predators. No companion survived the wreck, but provisions could be salvaged from it.

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.

Indeed, Crusoe later concludes that he can be happier within the tight compass of his island than he would be in the outside world, where he had once lived a “wicked, cursed, abominable life”. He also immediately admits to himself that if offered the chance to escape, he would nonetheless take it.

Behavioural economists stress that more choice is not always better. People may be unable to resist choices they know will hurt them in the long run. Choice also invites regret. It obliges us to compare our fate with the alternative we could have chosen. Forced to stay on his island, Crusoe can be happy. But if he were to choose his isolation, he would be haunted by the alternative life he could have chosen elsewhere.

As these examples show, economists might profit from greater familiarity with the Crusoe story. And the trade could be two-way. Defoe scholarship could and has benefited from a closer acquaintance with economics. There are several corners of Defoe’s works that require some economic knowledge to appreciate.

When Crusoe embarks on his ill-fated voyage to Guinea to buy slaves, he leaves behind a growing tobacco plantation in Brazil that would soon be worth “three or four thousand pounds”. It is hard for a reader today to make sense of such a figure. Drawing on the work of economic historians, David Spielman, formerly of Penn State University, calculates that the income on such a sum would have put Crusoe in the top 5% of English families at the time. With so much wealth in prospect, Crusoe has no reason to take risks. His voyage was as “preposterous” as he himself admits.

Economists might also resolve some other mysteries. After his return from the island, Crusoe reclaims his plantation and sells it. In the first six editions of the book, he receives 328,000 pieces of eight, worth about £72,000. But in later ones, a zero is deleted. That matters for the interpretation of the story. Does Crusoe finish the novel a rich man or a very rich one?

Literary scholars pride themselves on their sensitivity to every nuance of a text. But the decimation of Crusoe’s wealth has barely registered. “Despite the careful attention that the textual history of Robinson Crusoe has received, no one has even noticed a problem,” Mr Spielman has pointed out. Economists may have lost sight of Robinson Crusoe’s richness. But literary scholars have overlooked most of his riches. ■