How an Economy Grows and Why It Crashes

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S H A R I N G   T H E   W E A L T H
In the end, Able decides to make the loan.
A
s a result of Able’s willingness, and ability, to make loans, 
Baker and Charlie now have nets that they didn’t own 
before. With nets available to all, the island’s collective fi shing 
capacity has been raised from three fi sh per day to six. The 
economy has doubled in size, and the future looks brighter. 
But this didn’t happen just because the three guys were 
unsatisfi ed with their limited lifestyle. Their hunger, which is 
labeled “demand” in economic terms, was necessary to spur 
economic growth but not suffi cient to achieve it.
Demand for more is natural to all humans. No matter 
what we have, we always want more. Maybe not more 
stuff, but certainly more time, more fun, and more 
choices, all of which requires more capital. Able, Baker, 
and Charlie likely had the same fi sh gripes for years. 
The difference is that they were fi nally able to expand 
productivity to meet those demands.
With their extra fi sh, the islanders can fi nally eat more than 
one fi sh per day. But the economy didn’t grow because 
they consumed more. They consumed more because the 
economy grew.
 This is a simple concept, but it’s amazing 
what modern economists can do with a simple concept. 
Most economists think that demand can be increased 
by giving people more money to spend. But that doesn’t 
change real demand, just how much people can spend on 
items that have been produced. Only by increasing supply 
can people actually get more of what they demand.
REALITY CHECK

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