Thoughts on the Crusoe Model

Recently, I was involved in an economic discussion with a few coworkers, primarily dealing with where the source of economic prosperity lies (they think that spending is the key). Granted, none of them has studied economics, so it was very difficult for me to explain my position without straying from standard economic parlance. For instance, when I was speaking of capital and investment, they thought that spending (which is usually associated with consumption) accounted for all of this. Even harder was to explain how savings and investment are really the same thing (ex ante), and that additions to cash balances are not necessarily defined as savings (it ultimately depends on what those cash balances are used for). Basically, I had to bring out the ‘ol Crusoe Model in order to illustrate the differences between what consumption is and what savings/investment is, and how capital comes about through savings (deferred consumption) and investment (speculative action), not by way of consumption (spending).

Unfortunately, much of this was lost on my fellow coworkers, because while these concepts are relatively easy to understand, it can be hard to get one’s head around the idea if you are in a certain frame of mine. However, disregarding these questions of definitions, one of my coworkers brought up a good point. He essentially called me out on the fallacy of composition, even though I am certain that he is not aware of this particular logical fallacy. He said that the Crusoe Model is not representative of the current economic reality, and that due to this, it is unrealistic. He didn’t say it in quite this way, but that is the conclusion that can be drawn from his words, and it got me to thinking: Does the Crusoe Model fall victim to the fallacy of composition?

After giving it a little thought, I conclude that, “no, it does not fall victim to the fallacy of composition”. Why? Well, because the Crusoe Model is first and foremost a regression model. So, while it may use as an example a “smaller” economy to elaborate upon the truths of a “larger” or more integrated economy, at root its purpose is to regress to the source of economic phenomena. Its purpose is to identify from whence things came.

It goes without saying that everything has a root source, and that while things may change slightly due to increased complexity, that one cannot discount the ultimate source of the thing itself. The purpose of the Crusoe Model is to regress back in time to find the ultimate source of particular economic phenomena, and if we accept this as true, then there lies therein no logical fallacy, especially that of the fallacy of composition.

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