Dr. Murphy,
I am a newbie to Austrian economics, and I thought your sushi-economy example was really helpful. I need to go back and read it a few times for more understanding, but I already feel like I have a better grasp of what's going on.
Thanks!
 

Anon,

Thanks for the note. This is why we write Mises.org articles. (That, and the VIP passes to concerts.)
 

You article has been prefaced, halved, and sent to my "projects" with a link to the entire thing.

In order to stop future "economists" from messing with them they should have eaten Krugman and put his bones on display with a big sign. Then the next "helpful" central planner would be a bit more careful.

Jim O'Connor
 

'If a worker gets a job in a silver mine and gets paid in ounces of silver that he stores in his basement, he can have very high "real wages" even if his consumption is very low.'

I'm no economist, but it looks like the miner is consuming silver in your example, exactly as high as his wages.
 

I'm no economist, but it looks like the miner is consuming silver in your example, exactly as high as his wages.

If he were paid in dollar bills and put them in a piggy bank in his basement, would you say the same thing?

Or would he be saving?
 

"If he were paid in dollar bills and put them in a piggy bank in his basement, would you say the same thing?"

Er, keeping in mind my non-economist credentials, I'd say that as long as the dollars are being considered "wealth", I don't see a difference, here. If he's *loaning* the dollars or silver (or wood, for that matter), then that seems more like what "saving" is used to mean in the world I live in (you loan money to the bank, and they loan it out, and that's called "savings"). But putting money in a piggy bank or in your basement doesn't seem different from consuming in any other way that can be resold.

So, if he were fitting gems on his house to make the house look pretty, would that be saving or consuming, to you economist types?
 

But putting money in a piggy bank or in your basement doesn't seem different from consuming in any other way that can be resold.

Really? If your son spends his $10 allowance on candy bars, or if he puts in a piggy bank, you think those are both examples of consumption? What if he accumulates $100 in his piggy bank over ten weeks, and then goes and buys Christmas presents with it? If he says, "I saved up for 10 weeks to buy the presents!" you're going to correct his mistake?

So, if he were fitting gems on his house to make the house look pretty, would that be saving or consuming, to you economist types?

Consuming, because you did it to make the house look pretty. In my article I was assuming the guy was storing the silver in his basement the same way I am currently storing some silver coins in my secret spot. It is a form of savings.

The criterion is your subjective intention. If you are buying something with the intention of using it down the road to get something else, then it is saving. (E.g. the guy is holding the silver in his basement, planning to sell it later on and buy cars or whatever.)

But if I fear roving looting bands, and turn my cash into gems, and then strategically hide the gems in the walls etc. around my house, then that is savings. It's not the physical act per se, it is the intention behind it. If you are deriving direct pleasure from it, is consumption. But if you are doing it as a means to consumption in the future, then it is saving.
 

'If he says, "I saved up for 10 weeks to buy the presents!" you're going to correct his mistake?'

Hm. No...

"Consuming, because you did it to make the house look pretty. [...] The criterion is your subjective intention."

See, this is what I don't understand. How can my subjective intention (assuming exactly the same outward actions) make any difference to the economy? If it's the inner life of the actor that makes the difference between consuming and saving, then how can they be different in terms of their effects (given the same action)?
 

See, this is what I don't understand. How can my subjective intention (assuming exactly the same outward actions) make any difference to the economy?

This is a good question and I will address it as a stand-alone blog post. It's kind of like someone trying to find flaws with special relativity and then the answer shows how it holds up, but it's admittedly a contradiction at first.

So it's a very good question and I'll try to answer it tomorrow on the main page of the blog.

In the meantime, if you want to refine the question, feel free. E.g. if you can relate it to our current crisis, then I can answer it in that context. Otherwise, I'll explain away the apparent paradox using the example of the guy getting paid in silver.
 

'In the meantime, if you want to refine the question, feel free. E.g. if you can relate it to our current crisis, then I can answer it in that context.'

Nah, I don't feel I understand the current crisis well enough to ask hypothetical questions based on it; even whether there *is* a crisis to speak of -- I certainly haven't noticed any effects, yet.
 

Just a wonderful article Dr. Murphy - the boom bust analogy I have been searching for! (both for my own understanding and also to help explain what's going on to my friends who are all of a sudden very interested in the subject). I really believe we have an opportunity here and for all the great academic foundations of the subject, it is analogies like this which will educate and induct people to the Austrian School. More please!!!
 

"Finally, we predict that during the period of transition, some islanders will have nothing to do."



Seeing as the "mystical unemployment" criticism is a large part of Krugman refutation, I'm not sure why Murphy's article only leaves this bare assertion as the attempted rebuttal.
 

I fail to see how this "sushi" story is supposed to be representative of the Austrian Business Cycle theory (much less any realistic business activity). The entire story is predicated on a downfall brought on solely due to a company's blatant internal mismanagement of resources.

The sushi-story presumes that businesses will choose to employ a "higher order" means of production when it is evident that the business lacks the capability to maintain the new equipment.

NOWHERE in Murphy's analogy is it required for a "bubble to burst" ... or for any external factors to come into play. The damage to the company's ability to produce is completely due to internal decisions, and in the sushi example, the boating sector would fail even if demand for their product steadily *increased* --- in other words, the sushi-boating entrepreneurs could easily fail DURING even the strongest boom. This is possible for the simple fact that their failure in the sushi story did not stem from discovering a mis-judgement of demand, but instead stems from an incompetent decision to neglect their production equipment.

If Murphy's theory here is correct, then it seems entrepreneurs are assumed to be stupid people who dump money into advanced plants and equipment (such as the "sushi motorboat") knowing full-well that they lack the ability to keep them in working order for long.