Welcome to the Chancy Islands
Welcome to the Chancy Islands, a chain of seven fictitious islands all populated wtih particularly capable and amazingly uniform people. Each island has a simple economy, differing from the others in just a few key ways.
Curiously, every one of the Chancy Islands has exactly 1,000 people. Each of these people are adults who live in 500 two-person households. Each of the residents of the Chancy Islands is equally talented, equally educated, works the exact same amount, produces an equal amount of value each year, and earns the same amount of money each year. Each of the 500 two-person households on each island (except Skewed Island) also begins with the same amount of wealth.
Below are the specific characteristics that define these unusual islands, first those attributes that they hold in common and then the differences. Most characteristics have been chosen to resemble the circumstances of the median household in the United States (as shown in the blue boxes), so the results might be (at least somewhat) relevant to a real society.
When we first begin to study them, each household on the Chancy Islands (except those on Skewed Island) owns a house outright (with no mortgage), and that house is worth $200,000. Each household also has cash savings of $5,000. So at the beginning, every household has a net worth of $205,000 — comfortably middle-class. The total monetary wealth of each island is 500 households x $205,000/household = $102.5 million, and the total wealth remains roughly the same throughout the study period.
Compare to United States Median Household Wealth.
Every year, each two-person household on the Chancy Islands engages in a socially-useful and money-producing activity by (1) growing food or fiber, (2) extracting resources from the land or waters (lumber, minerals, oil, fish, etc.), (3) manufacturing or constructing something, or (4) providing useful services to others (including transportation). What they produce in a year is worth the same as that produced by every other household, with a value of $60,000/year (= about $15/hour for each of the two people if they each work 40 hours/week). The Chancy Islands model adds this annual work income to their total household wealth at the end of each year.
Compare to United States Median Household Earnings.
Equal Consumption and Routine Expenses
Every year, each two-person household on the Chancy Islands spends the same amount for basic living expenses (food, energy, clothing, basic repairs for their home and other possessions, and travel). These basic, routine expenses total $54,000/year. In the model, these expenses are subtracted from their total household wealth at the end of each year.
Compare to United States Routine Expenses.
Each household on the Chancy Islands exchanges what they produce with others at a fair price so that each year they acquire everything they need to live well from others for exactly the same amount as they provide goods and services to others. In this free market paradise, there is a great deal of buying and selling, but everyone exchanges the same value of goods and services each year with each other so no one gets ahead (or falls behind) from these transactions. Every household has $0/year in gains or losses from sales, purchases, and trade.
Without any other expenses, each household on the Chancy Islands would have savings of $6,000 each year (their $60,000 income minus $54,000 from their routine expenses). So in 50 years, each household’s overall wealth would grow by $300,000 from $205,000 to $505,000.
However, on the Chancy Islands, each household is subject to two kinds of additional expenses that, on most of the islands, are quite variable: unexpected extra expenses and catastrophic losses.
Unexpected Extra Expenses
Unexpected Extra Expenses arise from two sources: (1) the cost to replace or repair valuable possessions (their home, vehicles, household appliances, boats, RVs, etc.) and (2) physical bodily injuries caused by accidents or illnesses that require costly treatment or interfere with working for a long period.
On the least interesting of the Chancy Islands, Flat Island, every household incurs the same amount of these extra expenses annually ($2,000). But on all of the other Islands, these expenses vary widely (and randomly) among households and across the years — some households are much luckier than others. Still, the average expense over time and for all 500 households is about the same as on Flat Island: $2,000 annually. For each household, the Chancy Islands model subtracts this expense from their total household wealth at the end of each year.
See details for Calculating Random Extra Expenses.
Though the amounts are quite variable, when averaged over all 500 households and over 50 years, the overall average extra expenses are very close to $2,000/year per household (varying slightly depending on which particular set of random numbers pop up), the same as on Flat Island. Over 50 years, this adds up to an average of about $100,000 spent on unexpected extra expenses for each household.
Compare to Unexpected Expenses in the United States.
Very large, but infrequent “catastrophic” losses are caused by (1) natural disasters such as tornadoes, hurricanes, floods, droughts, wildfires, lightening, ice storms, hail storms, landslides, sinkholes, avalanches, earthquakes, volcanic eruptions, etc. or (2) severe illness or accidents that lead to severe injury or death.
On Flat Island, every household incurs the same annual loss ($4,000) from these kinds of catastrophes. But on all of the other islands, losses vary widely (and randomly) among households and from year to year — some households are much luckier than others.
See details for Calculating Random Catastrophic Losses.
Though the amounts are quite variable, when averaged over all 500 households and over 50 years, the overall average catastrophic loss is very close to $4,000/year per household (varying slightly depending on which particular set of random numbers come up), the same as on Flat Island. Over 50 years, this adds up to an average of about $200,000 spent to recover from catastrophic losses for each household.
Compare to Catastrophic Losses in the United States.
Overall Wealth Gain
Subtracting these two additional household costs (which average $2,000 + $4,000 = $6,000/year), the average wealth gain each year is $0. Over 50 years, the average household experiencing an average amount of these unexpected extra expenses and catastrophic losses would gain $0 and end up with exactly the same wealth they began with: $205,000.
Note that throughout the Chancy Islands, every person is a capable, industrious, thrifty, responsible, and self-supporting adult — there are no immature infants, toddlers, children, or teenagers; no faltering or feeble elders; no wasteful, extravagant spendthrifts; no irresponsible gamblers; no drug addicts or alcoholics. Moreover, in this peculiar land, there are never any new residents — no babies or immigrants. There is also no robbery, burglary, or fraud that enables one person to gain at the expense of another. In addition, there is no racism, sexism, or any other kind of discrimination and no intimidation, oppression, or exploitation that helps or harms anyone. So no one ever loses any money as a result of the ill-intended actions of another person and no one gains at the expense of any other — Chancy Islanders gain wealth only through their own hard work and only lose wealth from spending to cover their ordinary expenses and to deal with unlucky occurrences. Quite an extraordinary place!
In this unusual society, there are also no stocks, bonds, dividends, insurance, pensions, nor any other messy details of a conventional world that might complicate this simple economic model.
Furthermore, in this mysterious place, there is no inflation, so every dollar has exactly the same value over the years and decades.
Life on the Chancy Islands is very straightforward with no expenses beyond basic consumption, wear and tear on possessions, expenses from diseases and accidents, and losses from natural disasters. It is an extremely rudimentary, free-market paradise of equally hard-working, responsible middle-class people with indistinguishable origins, talent, motivation, and effort.
For each island, the Chancy Islands model follows each of the 500 households for 50 years. At the end of every year, and for each household, the model adds their income for the year, subtracts their expenses and losses, and calculates their new total wealth. Each household grows wealthier during lucky times when their expenses are limited to the basics (a minimum of extra expenses or catastrophic losses), and loses wealth during unlucky times when they are randomly afflicted by injury, disease, natural disaster, or the loss (or serious deterioration) of their expensive possessions.
The results vary in every run of the model because the spreadsheet has 50,000 random numbers (two for each of the 500 households for each of the 50 years) and these random numbers change each time the spreadsheet is recalculated. So to get a good sense of what generally happens, we run the model 30 times, sort the households in each run by their final wealth in Year 50 from poorest to richest, average those results (poorest averaged with poorest, richest with richest, etc.), and plot the wealth for each household for Year 0 and for Year 50.
So what happens in this strange land of simple assumptions and capricious happenstance?
To get our bearings, let’s travel first to the rather simple Flat Island.