`Hotel Economics`? There Is No Such Thing

Recently, what is known as Lee Jae-myung’s so-called “hotel economics” has become a topic of widespread discussion. This idea originally surfaced several years ago when Lee, now a presidential candidate, promoted the effectiveness of local currency programs, and it has resurfaced during the current presidential campaign. Critics describe it as “bizarre economics” or an “irresponsible hit-and-run economic theory,” while supporters argue that it is merely an illustration of how the economy improves when money circulates—and that only “fools who don’t understand economics” are distorting it.

The content of this so-called “hotel economics” is as follows. A person makes a hotel reservation and pays a deposit of 100,000 won. The hotel uses that money to buy furniture from a furniture store; the furniture store uses the money to buy fried chicken from a chicken restaurant; the chicken restaurant uses the money to purchase stationery from a stationery shop; and the stationery shop uses the money to repay a 100,000 won loan it previously borrowed from the hotel. Later, the original guest cancels the reservation, and the hotel refunds the deposit using the money it got back from the stationery shop.

Looking at the outcome, not a single won of new money has actually entered the village. Yet furniture was produced and sold, chicken was cooked and sold, and the stationery shop did business and repaid its debt. Even though the hotel deposit from an outsider ultimately leaves the village, the argument goes, the fact that the money circulated once through the local economy stimulated economic activity.

At first glance, the story sounds plausible. But it is also clearly strange. What makes it seem plausible despite its strangeness is the presence of several tricks and deliberate omissions embedded in the narrative.

First, the story selectively cuts out and conceals certain events along the timeline, making the logic appear flawless. This kind of manipulation—through selective presentation or distortion of facts—is a classic tactic used by proponents of government intervention. Although it is not explicitly stated at the beginning, the story assumes that before the hotel reservation was made, the stationery shop had already borrowed 100,000 won from the hotel. This crucial detail is completely omitted until it suddenly appears at the very end.

But what if the stationery shop had not previously borrowed 100,000 won from the hotel? In that case, the hotel deposit would flow only from the hotel to the furniture store and then to the chicken restaurant, where the process would stop. If the reservation were then canceled, the hotel would be unable to refund the deposit it had already spent on furniture. The hotel would go bankrupt. This is exactly the kind of malinvestment that causes boom–bust cycles, where an artificial boom suddenly collapses, triggering widespread bankruptcies. In such a case, “hotel economics” does not end in a happy story but in a tragedy. Therefore, for the story to end “beautifully,” the existence of the stationery shop’s prior debt of 100,000 won must be assumed. Without that assumption, the story itself collapses. However, the problem is that even with this assumption, the story still does not end happily.

Let us now trace the 100,000 won that the stationery shop borrowed from the hotel before the reservation ever took place. The stationery shop would not have burned that money; it must have spent it somewhere. Suppose it used the money to purchase stationery from outside the village and sold it to the chicken restaurant. Using the proceeds, it repaid the 100,000 won loan to the hotel. The hotel then used that money to buy furniture, and the furniture store used it to buy chicken. The outcome is that the stationery shop repaid its debt through normal business activity, the furniture store produced and sold furniture, and the chicken restaurant produced and sold chicken.

The sequence is slightly different, but the end result is identical to that described in the original “hotel economics” story. This means that the so-called external “hotel guest” is entirely unnecessary.

More precisely, the hotel guest is not merely unnecessary—he must not exist. If he does appear, serious side effects arise. Here is how they occur. The stationery shop imports stationery from outside the village, sells it, and repays its debt to the hotel. At that point, the hotel guest appears and brings in an additional 100,000 won as a deposit. Now the hotel holds 200,000 won and attempts to purchase furniture. Since production cannot increase overnight, supply remains unchanged while demand suddenly doubles. The result is a sharp spike in furniture prices, followed by soaring chicken prices as well.

This is exactly the same as what happens when a government expands the money supply and triggers inflation. Once again, “hotel economics” does not end in a beautiful outcome but in widespread price inflation.

In conclusion, Lee Jae-myung’s so-called “hotel economics” is nothing more than a sleight of hand—a sophistry constructed through various tricks and deliberate concealment of key facts. Rather than stimulating economic activity, it would either induce malinvestment leading to economic stagnation and corporate bankruptcies, or—much like monetary expansion—result in runaway inflation. Therefore, there is no such thing as “hotel economics.” It is merely another deceptive argument and fallacy employed by advocates of state intervention in the economy.

Kwon Hyuk-cheol
Director, Free Market Research Institute
President, Korea Liberty Forum
Economist

Korean version: https://www.cfe.org/20250529_27763