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A Fable Of Economic Crisis- II

Now assume that the story took a slightly different turn in the middle. The prosperity of three fishermen and the weaver continued. Then a fourth person came to the village. He was good at teaching kids. So he told the fishermen, why don’t you give me some fish and I will teach your kids. They agree. Soon another person comes who has a freezer so fish stay good for longer time.

All wanted to help each other and get help in return, but it became difficult to do the transactions using fish. So the weaver came out with a different idea. He showed all of them one particular rare to get sea shells which only he knew where to get. He said “You guys just give each other these shells. If you ever need fish, just come to me with shells and I will give you fish in return for shells. I will give you two fish for each shell.”

Now all happy again, on their way. Soon more people come and more businesses take off. People needed more shells. Initially the weaver was hesitant to just give out shells for transaction. Because if everybody one day turned up for claiming their fish in return of shell, he would not have enough fish. But people losing business opportunities for the lack of shells. So he came up with an idea. He sent everyone a letter with a bunch of nice words but at the bottom, in small letters he wrote “Now on you will get only one fish for one shell instead of two.”

But people were using shells mostly for schools, medicine, etc. (i.e. the service industry). So they did not notice that they are getting less fish for their shells. In fact now more shells were in circulation and people were able to do more stuff. So they did not complain.

Even then the demand for shells outstripped the supply. So the weaver issues another notice saying that no fish will be issued if you go to him with shells. Also because he could not find shells, he started issuing picture of the shells.

People came up with lots of things they could sell. People came up with lots of things they could buy. People came up with all kinds of games to put in some shells and get more shells. Two things they never doubted. One – if they have enough shells, somehow they can always convert them to the things they want. Two – if they loaned shells to someone, somehow they will always get back more shells in future.

One fine day, one person did not return the shells , or pictures of shells, he/she borrowed. So the person from whom they were borrowed got scared and stopped loaning his shells. These two persons were big enough for everyone to notice. When people saw them failing, everyone got scared.

And people just stopped trusting each other and doing stuff that was in common mutual interest. Everyone tried to cover their own ass first even if it meant paying heavy premium. Going back to the fishermen, they noticed that the man they rented nets from did not really have nets to cater everyone if everyone showed at the same time. So each fisherman kept the net for longer and longer even if it was idle and even if it meant paying more rent for the net.

Thus resources were being used extremely poor way and wealth was being destroyed in paying risk premium on each person’s part. Eventually all that was built on assumption that others can be easily trusted, failed and all that was left was three fishermen with two nets.

Every business transaction is banking transaction. Every party in the transaction plays two person prisoner dilemma game. Sometimes the prisoners agree together not to confess and walk out of jail early. Sometimes the prisoners screw each other,  assuming the other person will not co-operate.

So when people trust each other blindly, they come together to loot nature, as the amount of natural resources becomes the constraint to grow. When people lose that trust, the trust itself becomes costly commodity and increases prices of everything else.

2 Responses

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