Wednesday, March 11, 2009

Trying to understand the current world financial crisis:
Part 1.

Especially since the effects of the current meltdown of the global financial system filled the news and began to pinch at our own modest lives, I’ve been reflecting on how the whole pack of cards is actually meant to function. As a (mature) student at university, some ten years ago I learnt about the époques of feudalism, mercantilism and capitalism and, although the passage of time might have clouded my memory, I’m not so sure I really understood the fundamentals even then. What would be useful is some sort of illustrative story, or allegory, to explain quite what happened. (I was sent this in an email and have since seen it reproduced in various forms on the Internet, so wouldn’t know who to credit anyone in particular but it’s certainly not mine.)

Once upon a time in a village, perhaps in India, a man announced to the locals that he would buy monkeys for €10. The villagers seeing there were many monkeys around, went out to the forest and started catching them. The man bought thousands at €10 but, as the supply started to diminish, the villagers stopped their efforts.

The man then announced that he would now pay €20 each. The villagers renewed their efforts and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms. The offer rate was increased again to €25 but the supply of monkeys became so little that monkeys were rarely seen, let alone caught.

Now pay attention, for this is where is gets interesting: the man now announced that he would buy monkeys at €50, however, since he had to go to the city on some business, his assistant would now act as buyer, on his behalf. In the absence of the big man, the assistant told the villagers: “Look at all these monkeys in the big cage that the man has collected. I will sell them to you at €35 and, when he returns from the city, you can sell them back to him for €50.” The villagers gathered together all their savings and bought all the monkeys for €35 each.

They never saw the man, his assistant or their money ever again ... only monkeys, everywhere. Welcome to capitalism!