“Hotel Economics”? There’s No Such Thing

Recently, the so-called “hotel economics” theory of presidential candidate Lee Jae-myung has been drawing attention. Originally, the hotel economics theory first appeared several years ago when candidate Lee Jae-myung discussed the usefulness of local currency, and it has now resurfaced on the presidential campaign trail. Critics call it “crackpot economics” or an “irresponsible hit-and-run economic theory,” while supporters counter that it is simply “an example showing that the economy improves when money circulates,” and that “fools” who fail to understand it are distorting the point.

The content of this so-called “hotel economics,” which has sparked such controversy, is as follows. A person makes a reservation at a hotel and pays a deposit of 100,000 won. The hotel uses that money to buy furniture from a furniture store; the furniture store uses that money to order chicken from a chicken restaurant; the chicken restaurant uses that money to buy stationery from a stationery store; and the stationery store uses that money to repay the 100,000 won it had previously borrowed from the hotel. Then, when the person who originally made the hotel reservation cancels it, the hotel returns to that person the money it had lent to the stationery store and then received back.

Looking at the outcome, not a single won actually entered the village, yet furniture was made and sold, chicken was made and sold, and the stationery store did business and repaid its debt. The claim is that although the hotel deposit from a person outside the village is later canceled, in the meantime that money makes one full round through the neighborhood, thereby stimulating the economy.

It sounds plausible. Yet it is also clearly odd in some way. The reason it appears both odd and plausible is that the above story hides various tricks and acts of “concealing the facts” that make it seem convincing.

First, the story creates the illusion of flawless logic by cutting out and hiding some of the events that occur over time. Such statistical manipulation and distortion are typical tactics used by state interventionists. Although not explicitly mentioned in the story above, it assumes that before the outsider made the hotel reservation, the stationery store had already borrowed 100,000 won from the hotel. This point is never mentioned at all in “hotel economics” and then suddenly appears at the very end.

But what if the stationery store had not already borrowed 100,000 won from the hotel? Then the hotel deposit would flow only from the hotel to the furniture store to the chicken restaurant to the stationery store, and stop there. If the hotel reservation were then canceled in this situation, the hotel would no longer be able to return the customer’s deposit, having already spent it on furniture. The hotel would default and go bankrupt. This is like the situation of “malinvestment,” which causes the boom-bust cycle in which the economy surges and then the bubble suddenly bursts, triggering a wave of bankruptcies. In that case, the “hotel economics” story would not end beautifully, but tragically. Therefore, for the “hotel economics” theory to end “beautifully,” the stationery store’s prior debt of 100,000 won must first be assumed. Otherwise, the “hotel economics” story itself cannot stand. The problem, however, is that even assuming this does not make the story end “beautifully.”

Now let us trace the 100,000 won that the stationery store borrowed from the hotel before the hotel reservation was ever made. The stationery store would not have used this 100,000 won as kindling; it must have spent it somewhere. For example, suppose it brought in 100,000 won worth of stationery goods from outside the neighborhood and sold them to the chicken restaurant. It then uses the payment it received to repay the 100,000 won it borrowed from the hotel. The hotel, having been repaid the 100,000 won, uses that money to buy furniture, and the furniture store uses that money to buy chicken. Looking at the outcome now, the stationery store did business and cleared its debt, the furniture store made and sold furniture, and the chicken restaurant made and sold chicken.

The sequence is slightly different, but the result is identical to what the earlier “hotel economics” theory describes. This means that the “hotel guest” from outside the neighborhood, whom “hotel economics” talks about, is unnecessary.

More precisely, the hotel guest in “hotel economics” is not merely unnecessary; he must be absent. That is because if he appears, a serious side effect arises. The side effect occurs as follows. The stationery store, which borrowed 100,000 won from the hotel, brings in stationery goods from outside and sells them to the chicken restaurant, then gives the proceeds to the hotel to clear its debt. At that point, the hotel guest appears and a 100,000 won hotel deposit comes in. Now the hotel is holding 200,000 won and tries to buy furniture. Since production does not increase overnight, supply remains unchanged while demand alone doubles. The result is a surge in furniture prices, followed by a surge in chicken prices.

This is exactly the same as a situation in which the government expands the money supply and prices soar. Here too, the “hotel economics” theory does not end in a “beautiful” conclusion, but in the tragedy of an across-the-board spike in prices.

In conclusion, presidential candidate Lee Jae-myung’s so-called “hotel economics” theory is a deception and sophistry dressed up with various tricks and concealment of the truth. Far from stimulating the economy, it would either cause “malinvestment,” leading to economic downturn and corporate bankruptcies, or else, as in the case of monetary expansion, lead to soaring prices. Therefore, there is no such thing as “hotel economics.” It is merely another deception and sophistry by state interventionists about the economy.

Hyukchul Kwon (Director, Free Market Institute; Representative, Korea Liberty Forum; Economics)

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Original title: ‘호텔경제학’? 그런 것은 없다

Author: Hyeok-cheol Kwon

Date: 2025-05-29

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=1&idx=27763