Many years ago, before earth's exploration had got underway, there was a thriving community in the South Seas. The climate was only temperate and the people were energetic. They had become strongly individualistic and great lovers and respecters of personal freedom under the law.
They lived on a series of islands, each island much independent; they had avoided the tribal paternalistic culture. From time to time they mounted explorations to see what was over the horizon. Their canoes were large and could span great distances.
On one such exploration, they failed to outrun a hurricane. The canoe was wrecked. All but three perished. The trio were washed up on an uninhabited island. They had to make a new life for themselves. The chances of rescue were remote and there was no suitable material to build a new craft. Timber was sparse.
The island was reasonably, but not overly fertile. Given hard work they could manage. They were lucky - Tom was a baker and knew about growing corn. Dick was good with animals and Harry was a cultivator of the vine. Without much effort they managed to draw sustenance from the island, respectively providing bread, chickens and eggs, and wine. There was little time to spare. This was so especially since periodically their cultivated area was over-run by goat-like creatures causing much damage. They could not catch them and had to spend a good deal of their time in making and building stockades, ditches and the like to keep the creatures out. Even then, occasionally the press of them overwhelmed such protection. Timber supply was limited and much work was needed.
But they thrived. A problem they found irritating, bearing in mind their individual independence, was how to exchange their produce. They used barter. But a chicken was not an easy unit to exchange for bread.
Moreover, bartering and haggling took time - especially if you were to enjoy it. But time could not be wasted. But they managed, in a crude kind of way.
Then, one day, another castaway was washed up from another exploration. John came from a different island. Somewhat more intellectual of mind. Strong, robust, but not a farmer. They all realised they had an extra mouth to feed. John thought the best thing he could do was take charge of their defences against the goats. So he got to work on the fences, ditches and the like. The others were content, it was a fair allocation of labour. But it made the problem of exchange more severe. John's work was 'public works'. Hard labour for days on end, slackness of other periods.
And then they had two strokes of luck. The first was when John found a colony of dog-like animals in another part of the island. He befriended a pair and brought them home. Soon he had some dogs he trained as if they were sheep dogs. They protected the cultivation from the roaming goats. Fencing and ditching were things of the past. Timber could be used for more preferable purposes. The second good fortune was when he discovered an old chest - left there by western explorers long before - containing many copper coins. Although their homes had been bereft of much metal, they knew enough to value them both intrinsically (for tools), but, more important, as a medium of exchange. They had a great feast, and with much haggling and giggling, eventually shared out the coins between the four of them. Thereafter, they used such coins - they called them dallors - to buy and sell each other their goods and services.
John periodically had some spare time and extended his services. More important, he built a warehouse and offered to buy everyone's product as produced, store it, and sell it on demand. This was most useful since weather and yield varied. He could also think things out and advise on problems. He became something of an administrator. Thus a mini-market community became established. The price of produce went up and down (depending on the harvests) but, there being only 1,000 coins originally, there was no inflation.
On average each of them worked sufficiently, had sufficient leisure and made sufficient money not to want for goods. They earned on average 20 dallors a day. Sometimes one or the other got more, sometimes less, depending on weather, anticipation and sheer good luck. After a few years all was in many centuries later would be called 'equilibrium'.
And then they had some bad luck. Another castaway was washed ashore. Peter came from a different island - he had no skills except one - he was a carpenter. He was an extra mouth to feed and yet had no direct productive capacity himself. As a farmer or such he was hopeless and he wasn't very energetic either. What was to be done?
The four met - John taking the lead. "Clearly, we can't let Peter die" all agreed (for their individualism, or libertarianism, in no way denied either goodwill or selflessness - they were rather nice people in fact). "We have two options", said John. "First, we could all work harder, produce more and keep him fed and looked after like ourselves." There was a silence. "Surely that isn't right", said Tom. "We work hard enough in all conscience, this island is not an easy one, we need such rest and leisure as we get." Dick took a more puritan line, "We would all be working our hands to the bone to keep him in sloth - that can't be right." Harry thought it out further, "That system can't be right - what happens if two more like Peter arrive?"
John was at his statesmanlike best: "Quite so; the second option is for us to work as we do know, but to consume less: say 10 per cent less each and give this to Peter. He won't live as well as we do, but he won't starve either. We all agree he can't be ignored, everyone should expect his fellows to have a minimum income. What do you say?" With some grumbling from Dick they all agreed. Each would give John two dallors a day for Peter, who would have eight to purchase produce to his preference. He would have time on his hands. Perhaps he might eventually hit upon a productive contribution he could make.
When they told their decision to Peter, he was aghast. (His island home had been tribal and collective in lifestyle.) "You can't do that", he stormed. "Why should I live in a lesser style than any of you?" They were taken aback. Said John, "Surely you see that because of no reason other than luck you cannot contribute." "But I can", said Peter, "I could build you proper stockades, that is my skill, and I could maintain them so I could earn my full day's pay".
"But Peter", they remonstrated gently, "just think a moment. We don't need stockades any more. We wouldn't want to buy this service from you since John provides it much more efficiently. It would not provide any incentive for us to work harder. Whilst we agree to forego 10 per cent of earnings for you (what much later became known as a 'transfer payment') this does not use up our resources. Your way would not only require us to use more resources of our own, it would also use up the island's resources of timber. To proceed in this way would be a heavy resource cost on our community without any material contribution from you.
"But you'd be saving the eight dallors you give me", said Peter, "and make a proper job for me. I wouldn't be idle."
"You don't need to be idle, even if you cannot yet produce what we wish to buy. You could assist in various ways to ease our life here. But there is no obligation, and we are content to provide you with the eight dallors. But to 'make' a job for you would cost us all much more - and to no avail. Your work would not contribute to our communities well being. There is no demand from any of us for it." Peter had the innate tolerance of his race. He realised he had to consider the matter in ways new to him. He eventually came to realise that there was no alternative, saving only coercion. Even that would not be practicable since the total produce of the five of them would reduce if any one of them became dominant and could dictate to the others.
He turned to John, "You have time on your hands occasionally. What do you do then?"
"I try to think of ways of easing our lives here," said John. "Why don't you try to do the same?"
During the ensuing months, Peter lived very modestly but realised that there was something he might learn to do. He explored the rivers and found that he could learn, and did learn, to fish. Using rudimentary spears and traps he eventually became sufficiently good at it not only to augment his limited food purchases, but to create a surplus. Thus a new trade was born. The others enjoyed the new-found delicacy. Peter charged prices accordingly. The 10 per cent donations soon became unnecessary and stopped. Peter got a nest-egg of dallors. He became a fully productive member of the community. A new equilibrium was reached. Five men's goods and services formed the market.
And interestingly, they found the value of each dallor had increased. Not surprisingly - since there were only 1,000 coins on the island, now representing five men's production. Everyone was better off. They lived in content and in peace.
Source: A. Goldstein, Royal Bank of Scotland Review, (156): 43—46 December 1987
Here is a quote from The General Theory of Employment, Money and Interest by John Maynard Keynes:
"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again . . . there need be no more unemployment. . . . It would indeed be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."
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