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  • Imagine a world in which suddenly all the tools disappear.

  • All buildings, cars and machinery, or even basic tools such as knives, hammers and shovels vanish.

  • What would the economy look like if we had to do all the work with our bare hands?

  • This is the situation in which the hero of this story used to live

  • On the remote island there was a fisherman.

  • Maybe fisherman is too generous, because in a world without tools his fight for survival was to jump into the sea

  • and make desperate attempts to catch fish with his bare hands.

  • It was not an easy life.

  • All this effort resulted in catching just one fish per day, which is just as much as he needed to survive.

  • One night, totally wet with his eyes sore from the saltwater, he was lying on the beach staring at the stars,

  • thinking about how he could improve his life.

  • Then he came up with a brilliant idea.

  • If I could just extend the reach of my hand I might be able to watch the fish from above the water and

  • probably catch more.

  • He decided that in the morning he was not going to catch fish.

  • Instead he would devote this day to implement his plan.

  • He searched the woods looking for a strong, straight branch, which with great effort he managed to break off.

  • Then with a sharp shell found on the beach he tried to sharpen the tip of the stick which took him many hours.

  • Finally that evening he fell on the sand exhausted from hunger.

  • He didn't eat that day, so he could build his invention, but he was happy because in his imagination

  • he was already sitting on a heap of fish caught with the help of it.

  • Falling asleep he decided to call his invention spear.

  • In the morning, motivated, he grabbed the spear and began to work.

  • Because the salty water did not flood his eyes and a pointed end of the spear was more effective than his hands,

  • he was able to catch two fish that day!

  • Well, it was not a heap of fish yet, but the economy of the island did grow by 100%.

  • More importantly it opened up for him many more possibilities.

  • You can now fish every second day consuming his catch from the previous day.

  • He could also go fishing every day as before and dry the excess fish and store it for worse times.

  • Another option was to use free time to implement new ideas, to increase his productive capacity.

  • This would result in increasing his wealth and expanding the size of the islands economy.

  • In this story we come to a simple economic principle. Wealth is created through self-sacrifice and taking risks.

  • The fisherman underconsumed and took the risk that his plan might not work.

  • That he would go hungry all day producing the spear needlessly. The fisherman's underconsumption can be simply called saving.

  • In this case the saving was a fish, which he would surely have caught, if he had gone fishing.

  • He used his saving to make a spear. The spear is a capital good

  • because it is part of his saving which is no value in itself for the fisherman

  • but it serves him to get what he really wants.

  • After all the fisherman does not want to have a spear he wants to have the fish!

  • Capital is therefore a part of his saving which he spent on increasing his own productivity.

  • Let's fast forward to our world to illustrate this example in real life.

  • Two friends got a very well-paying job in a company called Corporation X. The employer offered each of them $10,000 a month.

  • Not believing his luck, one of them, let's call him Prodigal Pete,

  • immediately bought a big house with a garden, on credit.

  • The monthly rent amounted to $3,000.

  • He bought a luxury car - also on credit - for which he paid $2,000 a month.

  • Bills for the apartment, the cost of the car use, hiring a gardener and a cleaning lady amounted to another $2,000.

  • Prodigal Pete spent the rest when eating in fancy restaurants and hanging out with friends,

  • who - surprisingly - became more numerous after he got the new work.

  • At the end of the month he had no money in his account left over.

  • Meanwhile his colleague Thrifty Tom knew the story of the fisherman, that was told in his family for generations.

  • After getting a job he rented a medium sized apartment, for which he paid $1,500,

  • because he thought that currently the apartments were too expensive to buy, so he decided to wait for a better opportunity.

  • His monthly ticket for the Subway cost $100. The other bills for the apartment amounted to $400.

  • Thrifty Tom also liked to dine in restaurants and meet his friends, but he decided that for his entertainment

  • he would spend no more than $500 a month.

  • Most days he ate meals at home trying not to waste food which cost him another $500.

  • This way Thrifty Tom could save $7,000 dollars every month.

  • Years passed and Pete was laughing at Tom. He used to say to him: "Get a life man. Stop being a scrooge" or

  • "How's your car? Oh, sorry. I forgot you're still using the subway".

  • Tom felt upset because he dreamed of a big house with the garden and a luxurious car.

  • The common sense took precedence over whims.

  • He invested his savings in various projects. He opened a small shop in the area where he hired one employee.

  • After paying for all the costs his profit amounted to $1,000.

  • Still however, he did not increase his spending.

  • After some time, he opened a restaurant from which he drew profit of $2,000.

  • Later he bought a bit of real estate,

  • partly on loan, and he rented it to various companies as office space.

  • His gains after his loan payments amounted to $4,000.

  • Tom kept acting after a while gains from all of his projects were already $15,000.

  • Suddenly hard times fell upon Corporation X.

  • Because of some bad choices and a global recession it had to fire 2,000 employees.

  • Among them were Pete and Tom.

  • Tom suffered a slight scratch on his honor, because no one likes to be fired,

  • but other than that he didn't care too much about the situation. He had an income of the amount of

  • $15,000 per month from his investments and a large amounts of savings

  • Pete, in turn, panicked.

  • The bank demanded payments on a loan which Pete managed to pay only half.

  • Friends invited him out for the first week, but when they saw that Pete had financial problems the invites began to fade quickly.

  • Pete borrowed money from family to survive, but during the economic crisis no one wanted to accept him.

  • And certainly not for the high salary he earned before.

  • Finally Pete decided to sell the house and car because he was not able to make the minimum payments

  • The value of the car, although it was in perfect condition,

  • fell dramatically, because it was a few years old and no one wanted to buy it because people kept their money, uncertain of their future.

  • The house lost its value because Pete bought it at a time of great prosperity

  • and high availability of cheap credit, which pumped up the prices of the property.

  • As a result it turned out that the market price of his home and the car were as much as the value of the loans,

  • which Pete still had to pay.

  • He was really hurt by the fact that for so many years he was paying the loans and now he was left with nothing.

  • He still had to sell because he needed the cash right away.

  • After a few days Tom called him so that he would buy both the car and the house.

  • During the transaction they talked for a while as old friends.

  • Pete told him about his situation, and Tom as man full of empathy said: "Listen my friend,

  • I was just going for an early retirement. I need someone capable to take care of my business

  • I know you were a good specialist. How about I hire you for $3,000 a month?"

  • Pete felt relieved.

  • Finally someone wanted to hire him. He was no longer burdened with loans.

  • He accepted the job from Tom rented a small apartment and began to save.

  • The story of the fisherman was based on the excellent book by Peter and Andrew Schiff

  • "How an economy grows and why it crashes?"

  • We encourage you to read it. If you are interested in the conclusions of the second story you can read them on our website

  • Econclips.com

  • I Encourage you to subscribe to our YouTube channel and like our Facebook page. You can find the links in the description below.

Imagine a world in which suddenly all the tools disappear.

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