A Sushi Model of Capital Consumption

Robert Murphy is an economist of the Austrian school who writes for the Ludwig von Mises Institute as well as authoring the blog Free Advice. He wrote this story, a simplified model of the economy, to explain how consumption can increase even during times of malinvestment. It is because of time considerations.

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.

He then introduces a bubble that leads to increased consumption despite several of the islanders becoming involved in fruitless work. But while the bubble may appeal, it will and must burst.

That's why the boom is unsustainable, but it also explains why consumption increases at the same time. It's true that this is impossible in the long run, but in the short run it is possible to increase investment in new projects, and to increase consumption at the same time.