Old but interesting

Last night I found an old Robert Murphy article defending ABCT against Paul Krugman et al. As I read it, something immediately leapt out at me. See if you can guess what it was from this passage describing the model he'll use to describe and defend ABCT:

Without further ado, let's examine a hypothetical island economy composed of 100 people, where the only consumption good is rolls of sushi.


The island starts in an initial equilibrium that is indefinitely sustainable. Every day, 25 people row boats out into the water and use nets to catch fish. Another 25 of the islanders go into the paddies to gather rice. Yet another 25 people take rice and fish (collected during the previous day, of course) and make tantalizing sushi rolls. Finally, the remaining 25 of the islanders devote their days to upkeep of the boats and nets. In this way, every day there are a total of (let us say) 500 sushi rolls produced, allowing each islander to eat 5 sushi rolls per day, day in and day out. Not a bad life, really, especially when you consider the ocean view and the absence of Jim Cramer.

But alas, one day Paul Krugman washes onto the beach. After being revived, he surveys the humble economy and starts advising the islanders on how to raise their standard of living to American levels. He shows them the outboard motor (still full of gas) from his shipwreck, and they are intrigued. Being untrained in economics, they find his arguments irresistible and agree to follow his recommendations.

Therefore, the original, sustainable deployment of island workers is altered. Under Krugman's plan for prosperity, 30 islanders take the boats (one with a motor) and nets out to catch fish. Another 30 gather rice from the paddies. A third 30 use the fish and rice to make sushi rolls. In a new twist, 5 of the islanders scour the island for materials necessary to maintain the motor; after all, every day it burns gasoline, and its oil gets dirtier. But of course, all of this only leaves 5 islanders remaining to maintain the boats and nets, which they continue to do every day. (If the reader is curious, Krugman doesn't work in sushi production. He spends his days in a hammock, penning essays that blame the islanders' poverty on the stinginess of the coconut trees.)

What's the problem? Murphy assumes full employment. No one, not even the most inveterate, die-hard Kansas City school Post-Keynesian who reads to his children from the General Theory argues for stimulative policies when we are at full employment. Here's a better model incorporating Keynesian uncertainty:

An island of one hundred people has an economy devoted to the manufacture of sushi. They are apportioned as Murphy wrote, but then one day a hellacious tropical storm rolls through. No one is harmed and no capital is destroyed, but the fishermen are now fearful. What if they'd been out in that? They still fish, but they stick close by shore, in the lagoon, and the catch is paltry. Furthermore, since they are catching fewer fish, they are consuming less of their capital. Soon the people who make and repair fishing gear are in a bind, since they can't trade their goods for the fish they need. The price of fish is rising (fewer fish over the same population), so the sushi rollers are hurting, too. Everyone is hurting, so they can't buy as much rice either, and so now the rice-growers join our slump.

There. Now the economy is in recession. Now is when Dr. Krugman would prescribe stimulus. He tells the village chief to have five each of the net makers and sushi rollers become fishermen until the original twenty-five regained their confidence and started fishing the deeper waters again. The supply of fish returns to normal, and the remaining net makers and sushi rollers are doing better, while the rice makers have regained their market. Once the fishermen are willing to sail into deep waters, the village chief ends his policy, and all is right with the world.

That's what the Keynesians are actually talking about: suboptimal equilibria and radical uncertainty, as opposed to quantifiable risk. Can anyone direct me to anywhere where the Austro-libertarians address this point head on? Every time I think I may have found it, I just get more silly fables that don't address the point. Mike Barnett, if you're still reading this, I demand an answer.