John Maynard Keynes, Milton Friedman, and the Robinson Crusoe Economy

Many writings have led most people to believe that, in essence, Milton Friedman (1912–2006) ideologically antagonized with John Maynard Keynes (1883–1946). This simplistic –and inaccurate– perception would lead us to believe that to solve most economic challenges, Keynes would recommend changes in government expenditures, while Friedman would go with monetary way –modifying the money supply, and interest rates levels– both of them almost exclusively recommending the mentioned changes, in the corresponding direction, up or down. While it is true that those two outstanding economist of the 20th century were mostly known for their research and findings in the mentioned areas, the scope of their vision was well beyond their major area of expertise. Both were very bright economists and, as such, very well versed on the complexities of any economic system. In the final analysis, Keynes’s and Friedman’s way of focusing the economy are actually two different –and indispensable– sides of the same pyramid, and so, are not necessarily antagonistic by definition. Furthermore, in most cases, they complement each other. To avoid sterile debates and confusions, a return to basics is an extremely useful thought pattern for all science and humanities disciplines; economics is no exception.

Simplicity is not incompatible with depth and truth. It is rather unnecessarily complex approaches, that can easily throw us into confusion and error. Unnecessary complexity is often quite harmful; its added value is very questionable. Since many centuries ago, remarkable and famous thinkers have unequivocally leaned on the direction of simplicity. The lofty Leonardo Da Vinci would say, “Simplicity is the ultimate sophistication.” And the great Albert Einstein commented, “Everything should be as simple as possible but no simpler.”

Comparing and analyzing any confusing situation with the basic premises often leads us to the right track, clarifying the picture –going back to basics.

The monetary system, unquestionably represents a useful and pragmatic sophistication of thought evolution and social practice. However, analyzing the pre-monetary economy, that is, the barter system, is a very useful exercise because it helps tremendously to clear up doubts and confusion. This type of economy is referred to as the Robinson Crusoe economy: the most basic kind, in its simplest form.

Let us visualize this character’s environment, once his idyllic island was inhabited and several hundred families ended up living there in peaceful, harmonious coexistence. It was a primitive subsistence, yet an organized society and economy. In essence, everything worked similarly to today’s economy regarding the items they produced and the activities they developed. Of course, this kind of economy produced and developed only very basic items and activities: drinking water, food, clothing, housing, harvesting and herb storage, and very elementary  entertainment (such as swimming, running, and having lots of time to enjoy nature). Of utmost importance, they already had specialized labor.

It was, however, an unpretentious, subsistence economy without money. In such society, the economic cycle was closely associated with three key variables:

  1. Demographic variables, the composition of the workforce in particular: the proportion of young people to seniors and children, as well as the proportion of men to women. In the end, too many children and elderly people relative to working adults would cause severe production and service disruptions, because of the imbalance between the work force and its dependents.
  2.  Health risks: for example, epidemics (in both humans and their animals) or pests in their crops.
  3. Natural disasters: hurricanes, floods, earthquakes, volcanic eruptions, droughts, fires, and so on.

The economic cycle would be virtually nonexistent while none of the above three sets of variables underwent substantial, unfavorable changes. This was a subsistence economy (essentially, an agricultural economy) to the extent that all people of working age (men and women) could work every day (probably including Saturdays and Sundays). Some would fish, hunt, or milk the cows and goats, while others (probably women) would collect or plant fruit and vegetables, make clothes, and so on. Unemployment and contraction of the economy would be unknown in such an economy, as long as none of the adverse factors contained in any of the three groups of variables materialized.

On the island, everyone would understand the need to individually fulfill specific functions, according to the community’s solidarity spirit, needs, and possibilities. It would be an economy that Karl Marx would envy, since everyone would have more or less the same, sharing the resources and products of their labor with the others. In summary, it would be a primitive life in itself but reasonably harmonious, with all the basic necessities covered.

This would be a very stable economy, with close to full, permanent employment. The only possibility of a contraction of economic activity would be due to an adverse development in any of the three previously mentioned groups of variables (or combination thereof).

It stands to reason that, if the contemporary monetary system were managed in a highly efficient and effective manner, in essence, there should not be any other valid reason for contractionary cycles (recessions and depressions), unless any of the 3 previously mentioned groups and variables  (or combination thereof) experienced a sizeable setback. The evidence, however, clearly points we still have a lot to learn before fiscal and monetary management of any economy gets near that the level and excellence required. That is, if and when both fiscal and monetary policies are managed with a high level of effectiveness (around 85 or 90% rate of success) the economic cycle will continue to behave as we have known it for the past centuries.

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About Martin Marmolejo

Global Investment Manager | Founder & Managing Director at MMA Global Investment Management | Proud husband and father | Follow me @globalmarmolejo.

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