Friday, October 17, 2008

Keep Your Damn Monkeys

Stop me if you've heard this one:

Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10 and, as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy monkeys at $20 each. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so scarce it was an effort to even find a monkey, let alone catch it! The man now announced that he would buy monkeys at $50 each! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. “Look at all these monkeys in the big cage that the man has already collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each.” The villagers rounded up with all their savings and bought all the monkeys.

Then they never saw the man nor his assistant again, and had only a great deal of monkeys.

OK, interesting story, but it sounds fishy. Using my less-than-stellar grasp of economics, I plugged in some numbers. In period 1, let's say the villagers grab 100 monkeys, because there are a lot of monkeys and are habituated to humans. The villagers get 1000 bucks in period 1. Period 2, the monkeys are more canny, and the villagers only grab 50, but due to the constriction in supply, they still net 1000 big ones. Things start turning south in period 3, because the price increases are not keeping pace with the reduction in supply- the villagers only net 500 for 20 monkeys. So far the village has 2500 bucks, which means they need to supply 3450 of their own money to buy back 170 monkeys at 35 bucks each. That is a lot of savings, especially for this village. That's where the smell of fish was coming from.

If this village thought that it was worth dropping everything to grab monkeys at 10 dollars each, things weren't so hot to begin with. Given a weekly monkey catch, the ten dollar monkey brings 5200 income per year. To make people stop subsistence economic activity (low return but safe), I'd say you have to double their income, so they were probably making yearly somewhere around 2500 before the arrival of the monkey merchants. How in the world did they save enough to make the payment on the $35 monkeys?

There's two answers here. One is that they've been saving for years and years- decades, or even centuries. This means the monkey merchants will have to make a big circle of the world every time they do their thing, or else the villagers will simply not be able to pay for the $35 monkeys. So in this case the monkeys are sold from saved money, i.e., money from the past.

The alternative is that the villagers go into debt to buy these monkeys, or buy them with money from the future, which, given the low level of native economy in this village, is a lot of future. This can go badly in a lot of ways, but saved money can go badly in a lot of ways too, and those ways are called inflation. No need to bring that up right now.

In any case, both of these options are totally acceptable- spending from the past and spending from the future- if there were any use for the monkeys. Big capitalizations are great, and they don't happen without savings or debt. They got us to the moon, built the internet, split the atom. But a big capitalization for monkeys? The tragedy of the entire scenario could be cured if buyers and sellers both asked the question, "why am I buying monkeys?".