Here is the link to the original article I am adapting using Microsoft Excel.

It is about how savings and consumption work in a Robinson Crusoe Model. Robert P. Murphy also uses the Robinson Crusoe model, a man alone on an island, to explain economics.

I want to visualize Mahoney’s process using Excel to explain the Austrian Business Cycle theory and how the Federal Reserve affects this situation.

The Market Island

Yellow x’s are the ones immediately consumed while green x’s are the ones saved in a reserve for a later date, the reserve is used after a week

A man is on an island saving and consuming resources called x’s (which are an imaginary resource that you can visualize as anything you want it to be!). The man wants to collect x’s faster than before to consume more in the future. The man knows that he, in a single workday, can collect 12 x’s but can consume ten x’s or more. So, he decides to save two x’s a day for a week.

Blue x’s are x’s saved in the reserve after a week and represent the amount of time the man will invest in a new way to collect x’s

The man now has enough in his reserve to build his new tool to collect more x’s in a workday. He hopes this tool will work so he can consume more x’s in the future. The man believes that if he spends 75% of the workday consuming (using x’s immediately) and 25% of the day investing (building his tool), he will have used the 14 days represented in the reserve wisely, and the tool will be made.

The split here represents his typical workday where he will use his old method to take and consume x’s (yellow) and work on the side to develop a new method to collect x’s (red)

So, the man will invest and sacrifice the three x’s he could have collected if he had spent the whole day using his old method, which leaves him immediately consuming nine x’s in a workday. Without a reserve, he has no other way to satisfy his wants for x’s without spending less time investing. But, using the x’s in his reserve, he can patch that hole and keep working.

The yellow x’s are those that are collected and used immediately and the blue x is the reserve x that the man also uses immediately parallel to working on his side project to make a new tool to collect x’s

So, the last two tables represent a typical workday. The man spends less time than before using his old method to collect x’s and more time than before developing a new tool to collect x’s. Not wanting to curb the time the man is spending investing, the man satisfies his wants with the x’s in his reserve.

On day 15, the man could run out of blue x’s, which means he needs to collect more x’s in his reserve

If the man miscalculates the time it takes to develop the new method, he needs to stop all investing and go back to his old method of collecting x’s and probably save more in his reserve.

More x’s can be consumed and saved with the new tool

Now, assume the man is successful and that the tool is built. A typical workday consists of him collecting 15 x’s a day, consuming 12 immediately, and saving three a day (which is one possible split that could emerge after this new tool is built).

A change in time preference can change my consuming-saving split of x’s

The man’s time preference can change to use nine x’s immediately and save three after collecting them. This way, after a week, the man’s reserve can be 21 x’s big or 14 x’s in less time.

The Fed Island

https://preview.redd.it/4vs9tzrmzl0e1.png?width=849&format=png&auto=webp&s=d7b3043ffb72c919a09f4123d027606127f107e4

Assume the man were to start from scratch again and have a split of consuming 10/12 x’s a day and saving 2/12 every workday. Suddenly, the man finds himself on the island with a trickster who informs the man after three workdays and a half of a new injection of 7 more x’s in his reserve as a gift.

Purple x’s are the trickster x’s and the blue one’s are the “real” x’s

The man immediately begins the new project to collect more x’s, assured that he will be able to use the x’s in his reserve to satisfy his wants while this tool is constructed.

Same workday as before

However, on day 8 of investing, the man realizes that he was tricked into thinking there were more x’s than available because their composition is different than the one he likes from the blue x’s. All of the remaining x’s are like this.

The trickster used “fake” x’s that the man thought he could consume as part of his reserve

The man discards these purple x’s, returns to his old routine of consuming and saving REAL x’s, and never listens to the trickster again.

Making the Connection

A few key points to connect this fictitious example to the real world.

1. When the man is mid-project and runs out of savings to consume immediately, he must stop investing and return to his consuming-saving split from before. This process is similar to businesses realizing they cannot pay interest payments and must lay off workers and capital.
2. The trickster, in this case, is the Federal Reserve, which injects money into the banking system, driving down the cost of funds to build your business, which makes inefficient businesses in a market economy think they can efficiently do their projects. However, the bust starts when those businesses experience increasing interest costs that cause them to halt their projects and return to their old production routines.
3. The reserve on the island is the loanable funds market that businesses can use to develop projects. Consuming and saving in a workday can be the consumption and saving that happens in society overall. For instance, in a workday, workers can save 25% of their wages and use 75% of them to consume goods and services, and 25% of those wages go into society’s “reserve” for someone else to use to build a long-term project.
4. The x’s in the reserve are loans with a price like interest. The more x’s in the reserve the lower the x’s price and vice versa. Same thing happens with the Fed-injected funds which reduces the price of borrowing.