The famous Keynesian economist Paul Krugman says a story about a
baby-sitting co-op “changed my life”, and he argues that it’s a “story
that could save the world”. From his
1998 Slate article:
The Capitol Hill co-op adopted one
fairly natural solution. It issued scrip--pieces of paper equivalent to one
hour of baby-sitting time. Baby sitters would receive the appropriate number of
coupons directly from the baby sittees. This made the system self-enforcing:
Over time, each couple would automatically do as much baby-sitting as it
received in return.
Okay, so an economy with “money” that can only be used for
one thing. This is not really money, more like barter. Couples trade
baby-sitting services for promises to babysit in the future. Note also, prices
are fixed to one hour of babysitting per coupon.
The story continues:
[F]or complicated reasons involving
the collection and use of dues (paid in scrip), the number of coupons in
circulation became quite low. As a result, most couples were anxious to add to
their reserves by baby-sitting, reluctant to run them down by going out. But
one couple's decision to go out was another's chance to baby-sit; so it became
difficult to earn coupons. Knowing this, couples became even more reluctant to
use their reserves except on special occasions, reducing baby-sitting
opportunities still further.
In short, the co-op had fallen into a recession.
In other words, the supply of coupons was reduced, increasing demand for the remaining coupons. Evidently, unlike the real economy, prices were not
allowed to adjust. One coupon was officially worth one hour, even though the market clearing price was higher. Naturally couples preferred hoarding/saving the more valuable coupon instead of getting one hour of babysitting.
This is where the model completely fails to resemble the market economy.
Prices are apparently not free to adjust, and the coupons- good for only one product- don’t even resemble
money in the first place. Yet this doesn't stop Krugman, he equates the coupons
with money:
Since most of the co-op's members were lawyers, it
was difficult to convince them the
problem was monetary.
Now in his model, he is correct to say, with prices not allowed to adjust,
that increasing the number of coupons to the original ratio would reduce their value to a market clearing price, ending the “recession”. Of course, failure to return the supply of coupons to the
original ratio will result in continued supply or demand problems. This is because prices are fixed one coupon
equals one hour of baby-sitting, so mismatching obviously leads to trouble.
Thus the story ends:
They tried to legislate recovery—passing a rule
requiring each couple to go out at least twice a month. But eventually the
economists prevailed. More coupons were issued, couples became more willing to
go out, opportunities to baby-sit multiplied, and everyone was happy.
Eventually, of course, the co-op issued too much scrip, leading to
different problems ...
Once again, this model has nothing to do with the real market economy, but
Krugman continues as if it does:
For example, suppose that the U.S. stock market was
to crash, threatening to undermine consumer confidence. Would this inevitably
mean a disastrous recession? Think of it this way: When consumer confidence
declines, it is as if, for some reason, the typical member of the co-op had
become less willing to go out, more anxious to accumulate coupons for a rainy
day. This could indeed lead to a slump—but need not if the management were
alert and responded by simply issuing more coupons. That is exactly what our
head coupon issuer Alan Greenspan did in 1987—and what I believe he would do
again. So as I said at the beginning, the story of the baby-sitting co-op helps
me to remain calm in the face of crisis.
Money printing in the real economy has entirely different effects. Prices
adjust so there is no lack of "aggregate demand" and the only impact is distortion, with those getting the money first effectively
taking purchasing power from those who get it last. The distortions temporarily
result in false prices, which cause malinvestment, creating an unsustainable
boom in some areas that must result in a bust (a.k.a. the
business cycle).
Additionally money printing is plain theft and leads to a more powerful
government, the latter of which is certainly consistent with Krugman’s
ideology.
* * * * *
In January a
video was post of economist Hans Herman Hoppe explaining how to deal with Keynesians like Paul Krugman. He strips it down to the fundamental question, does printing more paper money make society as a whole richer?
Well, it may be ridiculous, but it’s
also true, under certain conditions — namely, when the economy is suffering
from inadequate demand. And you don’t have to use highly abstruse reasoning to
see this, either; all you need to do is think in terms of some kind of model,
not necessarily of the mathematical kind. The whole point of the true story of
the
baby-sitting coop, which brings it down to a human scale, is that it’s
quite possible for economies to get into a snarl that can be solved by printing
more money, or having the government spend more.
So Krugman's answer is yes, in certain conditions. What's the next step in the conversation? Robert Wenzel
nails it:
The way to counter this is to continue as Hoppe
suggests, keep asking the baby questions of Krugman. By him writing that an
economy can suffer "from inadequate demand," he is suffering from the
delusion that supply and demand doesn't work. We should ask him if he accepts
the proposition, that in a free market economy, market clearing prices will
result because of supply and demand. If so, then how can he say that there is
such a thing as "inadequate demand?" Prices will simply clear and
wages and capital goods will be priced based on the prices of consumer goods.
Where's the problem?
Krugman and his babysitting co-op model can’t answer this, without denying that supply and demand works. There is no such
thing as inadequate demand, and printing money is never the solution.
Free Markets FTW!
To do that, the large middle portion of the book is devoted to
addressing a myriad of issues ranging from recent items like health
care, stimulus, the housing bubble, to major but oft-overlooked things
such as the monetary system, military spending, and the war on drugs. He
also wisely spends some time on relatively inexpensive programs and
regulations that “form a significant part of the mythological edifice
that gives rise to the public’s naïve confidence in government”. Woods
rolls back the propaganda and makes some of the best cases for less
government that I have read.
