Paul Krugman

Perhaps a Babysitting Co-Op is Not the Best Model for a National Economy?

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Nobel Laureate (so screw you buddy!) Paul Krugman likes to talk a lot about how he got his mind blown by one experience of a babysitting co-op reported in an academic journal in 1978 and thus anyone (such as politician Ron Paul and his economics hero Ludwig von Mises) who thinks fiat money creation willynilly could ever be a bad idea is mentally ill, more or less, or doesn't deserve to be taken seriously in the New York Times, which is the same thing anyway, really.

A Misesian and pro-Paul econblogger, Robert Wenzel, take a detailed look askance at this belief. Let's walk through it and try to get to the heart of inflationists' belief system.

In 1998, Krugman wrote in Slate of an earth shattering experience:

Twenty years ago I read a story that changed my life. I think about that story often; it helps me to stay calm in the face of crisis, to remain hopeful in times of depression, and to resist the pull of fatalism and pessimism.

The story was the babysitting co-op story of which he writes:

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. As long as the people were reliable–and these young professionals certainly were–what could go wrong?

Krug goes on to marvel that the mere printing of more of these baby-sitting promises help solve the problem of, well, there not being as many of those baby sitting promises circulating as some people wanted. Back to Wenzel:

It is important to understand what is going on here. In a moment Krugman is going to liken this babysitter co-op to the economy. But this is far from the case of what the co-op is, on any scale. In actuality, what is going on here is barter. You watch my kids, I'll watch your kids, with scrip inserted to make sure there is a balance between watching and leaving off.

So the first important thing to understand is that in Krugman's little world there is no money! Money is a medium of exchange you use in nearly all daily transactions, not a piece of script that can only be used for babysitting purposes. So he is trying to justify the printing of money using a model where there is no money!…..

The scripts do not have an exchange ratio against all products the way money does, i.e. money is about prices. The scripts simply reflect a call on babysitting services. That's it. A recession is about changing prices. The stock market collapses in a recession, housing prices collapse, prices are too high for some products, causing fewer sales resulting in businesses laying off employees and sometimes failing. How is any of this action reflected in Krugman's babysitting story? The answer is that it is not.

Yet, Krugman plows along with his model and says that the issuing of more calls on babysitting services is like printing money. But, it is an entirely different thing. If the money supply somehow dropped, prices would adjust downward so that the economy could function. In Krugman's model with script, when the script declines….there is no mechanism to adjust the economy, because we are not talking about an economy or a medium of exchange, we are talking only about a script good for one hour of babysitting. Print more calls for babysitting services and, duh, you will get more demand for babysitting services. If you print more money, prices adjust through out the economy having only distorting impact on the economy that favors those who get the new money first. 

Bottom line: Krugman's babysitting model is so poorly constructed and has so little to do with the real economy that one has to think that it's easy to understate the depth of his incomprehension.

Monetary issues are complicated, to be sure; but sometimes I think they are made to seem more complicated than they are because the people talking about them don't say what they really mean in understandable terms.

In the most basic lay terms, reducing everything to the actual actions performed by human beings, what I think the inflationists like Krugman believe is this, though again they never put it this baldly: Yes, you nutcase Paulites and Misesians and anti-inflationists, of course money doesn't equal wealth; you can print fiat forever and not actually add to the actual usable human wealth on earth.

But, wealth is produced by human beings acting on the stuff of earth, whether making things with it or moving it to a more desired place or just getting people to do something for someone else that they want done. And we need to incentivize them to actually do these things, that is, to produce. And how we do that in this world is we give them money, that they know they can use to get other people to give them things/perform services for them, that is, "create demand."

Sure, people have an expectation that that money trades for goods and services at a certain ratio. We are screwing up that ratio by making more of the money, but we aren't going to worry about that. We are just going to give them these money tokens to trick them into getting to work. The tricking them into working part is more important than the disruption of the value of the tokens part.

It's not an utterly outrageous thing to believe, though certainly we have plenty of reason to fear the effects of that process both getting out of control (hyperinflation) or even kind of staying in control (Cantillon effects, the state helping its buddies out at others' expense via the specific ways-and-means of making the new money, bourgeois savers getting screwed as savings-qua-savings become progessively more worthless). But I don't think I often see the likes of the Krug saying baldly, "We want to trick people into working by giving them things that will be worth less than they expect, and damn the consequences."

As near as I can tell, that is the basic inflationist mindset/trick. 

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  1. Why, then, would anybody who has learned to tie his shoes then take anything that Krugman has to say about economics seriously?
    Unfuckingbelievable.

  2. Just what we fucking need. 350 million people exchanging scrip notes.
    Oh, wait …

    1. I’m heading over to the Apple store to offer a note for 1 hour of yard work in exchange for an Ipad.

      1. You must be one expensive manure slinger!

        1. He is a master poopsmith of the highest calibre.

  3. Baby sitters would receive the appropriate number of coupons directly from the baby sittees. This made the system self-enforcing:

    I wonder if Pauly Krugnuts would have been so excited about this if someone was just running the scripts off their printer whenever they wanted to go out to dinner, as in:

    “Meh. I haven’t done any babysitting in months, and so I haven’t got any of those scrips. Fuckit, I want OUT for an evening. I’ll print some off.”

    1. Yes, he would be.

      MNG would be too.

      Look at the increase in utility!

      One couple gets to go out to dinner.

      Another couple feels like they’ve earned something (because to them the scrip they earned by babysitting for the freeloader still has some value, even though the counterfeiting has reduced the value of all scrip).

      WIN!

      It’s all a big win if you never stop to ask questions about little things like “earning” and “deserving”.

    2. “running the scripts off their printer whenever they wanted”

      It worked for me with five dollar bills and keg parties. I imagine it would work for strip clubs, too. For a few times, anyway.

      (Cotton resume paper!)

      1. Dude, that was running a hell of a risk to get a beer.

        There’s a reason counterfeiters counterfeit 50’s and 100’s.

        It’s because going to the pokey for photocopying $20 in 5’s gives you kind of a bad risk/reward ratio.

        1. I don’t think you’re very likely to go to jail for using a fake 5 at a kegger. Get beat up by a group of frat guys on the other hand…

          1. Your problem would be, say, getting busted for public urination after the kegger, with a couple of those fake 5’s in your pocket.

      2. I think The Wire says it all. “Money be green!”

        1. If I was actually doing it, I had all the basics taken care of.

    3. Yes, it only really makes sense if you assume that whenever more script is printed, it is distributed evenly amoung the entire co-op.

      And even then it doesn’t work if there is one couple who never goes out and always does all the babysitting, if you just keep printing script whenever everyone else runs out.

      1. It’s also not a very flexible system. All babysitting is not equal.

        My daughters had a basic charge (steady clients by check, new clients in cash, thankyouverymuch) but charged extra for infants and late nights. They also commanded a higher base than average because they had passed a babysitting course and Red Cross first aid, and had built up a reputation of being dependable.

        On the other hand, there was the couple who couldn’t find anyone to babysit the little monster they were raising.

      2. Inflation would be less of a problem if new dollars were distributed to dollar holders in proportion to their holdings — it would just be sort of a stock split.

  4. But I don’t think I often see the likes of the Krug saying baldly, “We want to trick people into working by giving them things that will be worth less than they expect, and damn the consequences.”

    I do.

    The thing that you have to remember is that the inflation created benefits debtors, and the fake demand created benefits workers.

    If creditors and savers are hurt, there are fewer of them then there are debtors and workers, and they’re mostly nasty rich people who have enough anyway, so fuck them.

  5. In the inflationists defense, I think their response would be that the increased demand will cause people to produce more stuff thus increasing the supply and thus counteracting some of the inflationary pressures. Prices will find their equilibrium.

    The other response is that interest rates are dependent on expected inflation. Savers and creditors shouldn’t be fucked by inflation because their interest rates should go up as inflation goes up.

    The moneterist position is that you have a gradually expanding money supply to always keep demand up. Sure you get inflation with that. But as long as you keep the inflation small and predictable, debtors and creditors alike can adjust for it.

    Now, it may be that that is impossible and that you can’t constantly increase the money supply without eventually created asset bubbles and losing control of inflation. But that is a different question. I don’t think it is fair to state the position as just one that tries to trick people into working harder.

    1. Keynesians get their aggregates confused. You should always ask demand for what? And is that demand on balance beneficial. Keynesians always miscalculate what their macro policy recommendations will have on the behavior at the micro level which, of course, effect macro in unintended ways. Krugman will argue that the Obama stimulus wasn’t a true Keynesian stimulus; however, the only substantial difference between Keynesian policy in its purest form, and Obama policy is that personal savings coming into the recession were much lower than expected if Keynesian policy was followed to the letter in the pre-recession economy. However, it doesn’t change the fact that Keynesian policy undermines growth by increasing uncertainty. People don’t spend on big ticket items when faced with uncertainty. They begin to save to increase their personal certainty. Keynesian policy is designed to undermine savings. This increases uncertainty, undermines consumer spending, so the economic boost due to Keynesian spending is only temporary and ill spent because consumer spending does not gain traction due to the value of personal savings being undermined by both loose monetary policy and product price inflation from the misallocation of resources that occur with public spending.

      1. Keynsians are not monetarists. Keynesians think in terms of spending. Monetarists talk about printing money or lowering the reserve ratios of banks and ways to actually increase the money supply. Monetarists are a bit more advanced that Keynsians, especially the crude ones we have today.

        1. I really didn’t emphasize monetary policy there, but note, Krugman the Keynesian is talking about monetary policy above. This is a rewrite of a previous post (on an old post no one read) where I described Cash for Clunkers as a perfect example of Keynesian policy where a self described Keynesian objected to the stimulus being described as Keynesian.

          1. It is hard to talk about these things in the context of Krugman because he is just nuts. Friedman is the father of the monetarists. But no honest monetarist would say you can print money indefinitely with no cost. And that seems to be Krugman’s position.

            And even Keynes finally came to agree with your above position about the ineffeciency of public spending. He finally admitted towards the end of his life we are better off just cutting taxes or giving people money for a Keynesian stimulus.

            There are no “Keynesians” anymore. It is just a brand name given to big government liberalism.

            1. Friedman was pretty much right when describing fiat monetary systems. Depreciating value of the physical stock of monies inhibits volatility means it is necessary to keep the money supply growing at a small but steady rate. But even he emphasized he was describing a specific type of system.

              1. volatility not the exact word I’m looking for, but it will only come to me after another drink.

    2. the increased demand will cause people to produce more stuff thus increasing the supply and thus counteracting some of the inflationary pressures. Prices will find their equilibrium.

      OF course, this is internally contradictory. If what is driving demand is inflation, then prices can’t be allowed to find an equilibrium.

      Really, of course, demand driven by inflationary printing of fiat money is no different than demand driven by debt. Both merely pull demand forward from the future. “Buy now before the price goes up!”.

      interest rates are dependent on expected inflation. Savers and creditors shouldn’t be fucked by inflation because their interest rates should go up as inflation goes up.

      Savers are always screwed by inflation. By definition. Investors in debt instruments (like bonds) may or may not be able to keep even, but they are not savers, they are investors, and they are taking risk. Creditors are investors in debt, and see their principal eroded, regardless. That $10,000 you invested in a bond is going to be worth less when that bond matures, after all.

      And the interest rate on that bond may or may not keep up with inflation.

      No, inflation is inherently the friend of the debtor, and therefor the enemy of the saver and the creditor.

      1. “Savers are always screwed by inflation”

        That is just not true. Savers are screwed by unanticipated inflation. If the inflation rate is constant or predictable, the interest rates account for it. The natural rate of interest is always expected inflation plus the natural rate of return on money.

        “OF course, this is internally contradictory. If what is driving demand is inflation, then prices can’t be allowed to find an equilibrium.”

        There is nothing internally contradictory about it at all. An increase in the money supply is not the same as an increase in inflation. Lets say you incease the money supply by lowering the reserve requirements on banks or by the fed buying up bonds. That money goes into the economy and increases the demand for goods. The increase in demand creates an increase in supply. That is different than prices going up on their own via inflation. Sure, it cause an inflationary spiral. But it doesn’t have to and it doesn’t immediately.

        Think of a gold rush economy. Someone discovers gold in an area and now everyone is flush with cash and prices go through the roof. That spurs producers in other places to produce more good to take advantage of the bump in demand created by the gold rush.

        “And the interest rate on that bond may or may not keep up with inflation.”

        It depends on the bond you buy and the risk you are willing to take. Once again it goes back to expected inflation. If the inflation is expected and can be accounted for, savers are not screwed.

        Now whether you can really keep inflation constat like the monetarists think you can, is a different story. But there is nothing internally contradictory about the monetarist position.

        1. If the inflation rate is constant or predictable, the interest rates account for it.

          Interest is paid by debt instruments. If you are collecting interest, you are not a saver, you are an investor. Taking risk.

          But, you say, what about interest paid on savings accounts? First, if that interest has ever kept up with inflation, I’d be surprised. Second, those savings accounts would be risk assets if it weren’t for the FDIC guarantee.

          There is nothing internally contradictory about it at all. An increase in the money supply is not the same as an increase in inflation.

          Which is an odd thing for you to say in defense of a post which begins “in the inflationist’s defense”.

          An increase in the money supply is not the same as an increase in inflation.

          Only if the increase in the money supply is equal to or less than the increase in the value of goods or services in the economy as a whole. Otherwise, you have more dollars chasing the same value, which is inflation.

          That money goes into the economy and increases the demand for goods. The increase in demand creates an increase in supply.

          Only if the input costs for the goods don’t also go up (which they will, since you also have more money chasing those input costs as well as more money chasing the finished goods). So what you get is goods that cost more, and people with more money, but that money will only buy what it could before.

        2. The moneterist position is that you have a gradually expanding money supply to always keep demand up.

          And this works, as long as the money supply increases at the same rate as the economy as a whole.

          Once it starts increasing faster, you have inflation.

          I think they are right, theoretically. The problems are practical: who knows what the right rate of increase is? And, once you start printing money, you will inevitably print too much. Because it happens that way with every fiat currency. Ever.

    3. In the inflationists defense, I think their response would be that the increased demand will cause people to produce more stuff thus increasing the supply and thus counteracting some of the inflationary pressures. Prices will find their equilibrium.

      Unfortunately inflation also increases the cost of producing the stuff, which forces prices to rise, which increases the sales-based taxes on the stuff, which means that when prices find their new equilibrium producers lose, buyers lose, and only the government wins.

  6. Here’s another reason to hate Krugman.

    Let’s look at some quotes from his original article:

    Now what happened in the Sweeneys’ co-op was that, for 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.

    You fucking dick, Krugman. How can you just gloss this over? How can we evaluate this situation without an exact description of the “complicated reasons”?

    Because it sounds to me like the administrators of the plan (i.e. its government) were siphoning off resources via taxation (“dues”) and this is why the actual producers and consumers didn’t have enough scrip.

    Since most of the co-op’s members were lawyers, it was difficult to convince them the problem was monetary. 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.

    More coupons “were issued”? To whom? Which participants? How were they chosen?

    It would be nice to have the answer to those questions. Ya think?

    Because without the answer to those questions, that means they basically DID what RC Dean lamented as too outrageous to consider in his 3:56 post.

    Eventually, of course, the co-op issued too much scrip, leading to different problems…

    Ummmm…isn’t this the most important part of the story? How can we evaluate this experiment without hearing that part of the story? How can he just STOP THERE?

    Holy shit Krugman is an asshole.

    1. The problem was no one wanted to go out because they knew doing so would mean keeping some other kid’s brat one night. Thus, no one made any coupons. And no one had any coupons to spend.

      It was not a monetary problem. It was a supply and demand problem. The price of getting a coupon, taking care of some other couple’s brat, wasn’t enough to justify the reward, sticking your brat with someone else for the evening. Thus, no one bought.

      1. Right.

        And what is really happening in that situation is that the economy is becoming more efficient.

        People were limiting their trips out to times when they really wanted to go out.

        So the high price of a night out (a night babysitting someone else’s kids) made people innovate and become more efficient (restrict their times going out).

        1. yeah. The only people who get ahead under such a system are people who have really horrible children.

          1. really horrible children.

            “PRESENT!!!”

          2. Well, the script counterfeiters made out, too.

      2. John, it wasn’t the participants in the coop making the coupons, it was whoever was running the thing, who was also apparently getting free baby-sitting for doing so. So the people running the thing actually would’ve benefited by the situation in which everyone wanted to babysit but no one else had the scrips to give. Sounds like a familiar system, and I am no longer surprised that Krugman is so enamored of it.

    2. Now what happened in the Sweeneys’ co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low.

      I can’t get over how stupid and dishonest that statement is. There is nothing complicated about it at all. People didn’t consider a one for one babysitting deal to be a good deal. So they didn’t do it. If people were willing to trade babysitting hours equally, they wouldn’t have needed the script. They just could have put up a bulletin board and made side deals with each other.

      The only way to make it work would be to have people pay into a kitty and then make the scripts redeamable for something like green stamps. Then people would be willing to put in more hours and the supply of sitters would have increased.

      1. I think that the issue in the story was that the scripts were only good for an hour, (not an evening), so everyone was trying to save them up so they would have enough to cover an evening. Introducing more scripts over time makes it easier to save them up, so people starting using them more.

        This is the true inflationist argument: if you folks aren’t willing to consume now, we will penalize you for trying save until you start consuming and this should boost demand. I’m not saying its right, and it certainly sucks for the govt to tell you start spending your savings today, but there is not trickery involved: its all quite explicit.

        1. Of course, the problem with the analogy is that money is a medium of exchange and these scrips represent only one service: a single hour of babysitting time. In the economy, people would be willing to consume now if their income were higher or the price of the good lower (greater supply); one way or another, output has to increase. The coop fixed their problem by increasing output (the supply of babysitting hours). Krugman’s argument is basically reduced to, “Increase output by increasing output!”

    3. The most amazing thing sounds like Krugman went through all of that without using the word “hording”.

    4. The more I read, the more I wonder whether this co?p ever even existed.

  7. And Krugman’s analogy is nuts. The author is right. It is a barter economy. You can’t, or at least are not supposed to, just print up vouchers. The only way to get vouchers is to babysit more. And yeah, if we all worked harder and made more stuff, we would be better off. No kidding.

    1. I’d be better off if you worked harder and paid more taxes, does that count?

  8. In actuality, what is going on here is barter.

    Thanks to the likes of Krugman, our economy may soon in actuality be barter.

  9. I’m sure it exists, but is there some kind of game where normal folks can understand the role of money? Something like an Android|iPhone app where little village dwellers extract resources, add value, create a medium of exchange, tax, inflate, etc.? I know you could get complicated, but if you kept it simple you might teach a few people something.

    1. Are you talking about zombie farm?

    2. Second Life, if you can call it a game.

  10. The real lesson of the babysitting story is “hippie lefty co-ops are stupid”.

    There’s a reason people with incomes and children pay young people without job prospects to babysit.

    It’s because their time is more valuable than the babysitter’s time.

    If these people were Capitol Hill attorneys, they were surrendering their own leisure time to avoid a really modest expense: paying some teenager to babysit. If these attorneys were making, say, $100 an hour at the time, using three of their own hours as babysitters to earn scrip to get another co-op member to babysit meant they were effectively paying $300 for a babysitter to go out to dinner.

    What was stupid wasn’t that they refused to inflate their fake economy until “the economists” helped them out. What was stupid was their insistence on believing that a co-op system employing themselves as labor would be superior to hiring someone who would work cheap.

    1. If they would have had any brains and understood the value of their time, they would have purchased the vouchers for a set fee. And then put that money into a kitty. And then let the co-op hire babysitters. The baby sitters then work for the coupons and redeem them from the co-op. The co-op then becomes a place where they can collectively purchase baby sitting services. The advantage would be I wouldn’t have to look for a sitter, I just call the co-op and they send one over that I pay with one of the vouchers I purchased.

      1. That sounds like a legit business model. A pool of prescreened babysitters, on call. You buy a membership, pay in as services are used.

        Everybody wins!

        1. Also works with prostitutes. Just in case you were wondering.

        2. It is until the insurance bill comes due. If you could create such a business and get everyone to sign a waiver relieving the CO-OP of liability and get that waiver to stick in court, it would be great. The problem is if you joing the Coop and some brat gets beat by a babysitter and the parent sues the co-op you could be on the hook. To hell with that.

          1. Feckin’ lawyers ruin everything.

            1. Yep. Except the ones that challenge the constitutionality of judicially imposed, non-concsensual alimony and things like that.

    2. you people are all wrong. The problem with the co-op was that it had this godawful “an hour of time is an hour of time” lefty equality bullshit. Fact of the matter is, an hour of time for one person may not be an hour of time for another person; an hour of time in the winter may not be worth an hour of time in the summer. Rothbard (whom I think is kind of a hard headed gasbag a lot of the time) got it right when he claimed that so many generations of people make the mistake of thinking that trade represents “equivalence”, when it actually only occurs when there is disequivalence.

      1. even wikipedia gets this one right:

        http://en.wikipedia.org/wiki/C…..olutions_2

        (paragraph 2)

  11. We are just going to give them these money tokens to trick them into getting to work.

    The best part is that you get to trick ’em coming and going.

    If the rubes don’t realize that you’ve printed a bunch of fiat money, they’ll be tricked into producing more goods/services when strangers offer them more nominal dollars for those goods and services.

    If they do figure out that their cash is losing its value, they unload it as quickly as possible by spending it on things that have more stable value and accelerating other purchases. That’s stimulative, or something.

  12. Paul Krugman likes to talk a lot about how he got his mind blown by one experience of a babysitting co-op

    Krugman’s mind could be just as easily be “blown” by an afternoon in front of the tube, watching Cartoon Network.

    1. Scooby Do is a great example of how people can live and work together.

      1. “It’s got, like, a multiplier of like three, man!”

        1. I for one support our new scooby snack based economy.

        2. Zoiks!!!

      2. Had we heeded the most important lesson of Scooby-Doo, we might not have found ourselves with a housing bubble. And of course that lesson is:

        “Don’t be afraid of ghosts. Be afraid of real estate developers.”

        1. Epic win!

    2. Krugman couldn’t handle Adult Swim; I’m glad you made the distinction.

      1. Krugman would end up using Master Shake as his model of how to save money, and it would just be a total disaster. Everyone knows Meatwad is the model of fiscal sanity.

        Master Shake: Frylock, get away from the money. The genetic structure is breaking down. It needs to be analyzed…at the Camaro dealership.

        Meatwad: Hey, I want some of that! I provided the seed money.

        Master Shake: [drops three dollars in front of Meatwad] Here. You tripled your investment. Now take a dirt nap.

        1. I love Shake. He is just a grown up lactate based Cartman.

          1. Shake is possibly my most favorite character of all time.

            “I am responsible for the paradigm shift in birthdays and how they will be viewed in following centuries.”

            1. Plaque is a figment of the liberal media and the dental industry to scare you into buying useless appliances and pastes. Now, I’ve heard the arguments on both sides, and there is nothing to convince me of the need to brush your teeth.

              I got rid of my teeth at a young age because… I’m straight. Teeth are for gay people. That’s why fairies come and get them.

      2. As the proud owner of complete series box sets of Sealab 2021, Harvey Birdman and Venture Brothers, I absolutely recognize the vital importance of such a distinction! 😉

        1. Monarch Henchman #4: What’d you get him?
          Monarch Henchman #3: I made him coupons for one free washing of the Monarch Mobile and one free backrub.
          Monarch Henchman #4: Aren’t those your jobs anyway?
          Monarch Henchman #3: Yeah, but… these are coupons

  13. So how did this new script get entered into the system?

  14. Money is a medium of exchange you use in nearly all daily transactions, not a piece of script that can only be used for babysitting purposes.

    Not true. The scrip can be traded for any item of value, even by people who will never have any use for babysitting, provided the payee believes the scrip can be passed along at face value.

    Der Krugger should note that the babysitting scrip here is functioning as an asset-backed currency ? you can turn it in for a given amount of babysitting ? rather than as a fiat currency. You’re not relying on the full faith and credit of the co-op but on the redeemability at face value of the paper.

    There’s nothing wrong with the experiment. Presumably Krug will be ok with it when banks and counties and department stores and militias start issuing their own currencies and letting them compete with the dollar, the euro, and all the drachmas and lira that will soon be making their return to the world currency markets?

    1. There’s nothing wrong with the experiment.

      Indeed not. The deflationary and inflationary cycles that Krugnuts hurries past (see Supreme Generalissimo at 4:14 pm) seem to be excellent examples of the inherent problems of fiat money.

    2. Not true. The scrip can be traded for any item of value, even by people who will never have any use for babysitting, provided the payee believes the scrip can be passed along at face value.

      Yeah, I got hung up on that for a couple minutes, too.

    3. I still can’t get my mind around the fact that Krugman could just plain old MISS the fact that these people had dramatically raised the real price of babysitting when they joined the co-op.

      They were able to buy babysitting before they joined the co-op. That babysitting had a price. In 1978, I bet that price was 10 to 20 bucks. In real American currency.

      They then joined this stupid co-op, and the new price of babysitting was 3 hours of their labor (assuming that going out to dinner takes 3 hours for all couples). If they were attorneys, that means that the new price of babysitting was at least 150 bucks. (I’m trying to estimate the hourly wage for a Washington DC attorney in 1978 dollars.)

      So when the real price of a babysitter went from 20 bucks to 150 bucks, people…used less babysitters.

      WTF is the mystery here, guys?

      1. The fact that Krugman completely glossed over “what is seen and not seen”, and somehow that “blew his mind”, tells us all we need to know.

      2. Some good thoughts from Wenzel’s blog also noted that not all hours of babysitting are worth the same, but the scrip system says they are. In other words, what if Couple A uses their scrip on some random Friday night in October, and Couple B uses their scrip on New Year’s Eve or the Fourth of July? The co-op says that those are of equal value, but they probably are not.

        This is why timeshares and airline miles have blackout dates and other periods on the calendar where the utilization thereof costs much more than a random Friday in October.

        1. Functionally there are blackout dates within this system. No one is forced to baby-sit when another parent shows up with a fistful of scrip.

    4. Slightly off topic. The lira wasn’t worth diddly, but they did have some very attractive coinage. It always struck me that the least valuable currency in Europe was the most aesthetically pleasing.

    5. I don’t think it’s an asset-backed currency.

      The co-op board doesn’t have robots it can send to you to babysit. It’s not holding any asset you can redeem at all.

      All you have is the expectation that someone will take your scrip in the future.

      If every other member of the co-op walks out, what have you got? Nothing. There’s no asset there at all.

      1. I don’t think it’s an asset-backed currency.

        Me neither. It is a non-enforceable call on the future services of other people.

        1. It would depend on what someone believes about the enforceability, RC. If they had opened up the system where you could trade the scrip, members of the co-op who defaulted on their obligations would be thrown out of the system because they made the currency worthless.

          I think that the thought process as to the enforceability IS the “belief” that Tim is talking about.

        2. Which is an asset. Just not a very valuable one

      2. It’s not holding any asset you can redeem at all.

        Well… as with any redeemable asset, the person holding the asset could tell you to go fuck yourself when you showed up trying to redeem your scrip. Then he’d fire a shotgun into the air and you’d run off like a pussy.

        The point is that the scrip has a value that’s fixed to a tangible thing: an hour of babysitting. No matter how valuable an hour of babysitting is relative to other goods and services in the market, that scrip is still equal to one hour of babysitting.

        1. Right, but the administrators of the co-op (the “bank” that ultimately printed currency here) isn’t holding this supposed “asset”.

          The other system participants are. It’s their labor, which they will only exchange for scrip if they feel like it.

          To be asset-backed, to me, the issuing entity has to have a big pile of the asset sitting somewhere, and I have to be able to walk in and exchange my scrip for that asset independently of what any other system participant chooses to do or how those other system participants choose to value the scrip.

  15. What is going on with Nobel anyway.
    I mean an Obama Peace prize and Krugman one for economics. Gees
    Well I guess the old adage of genius skipping generations is true at Nobel as well. Or maybe they should wait till people actually do something significant like they used to.
    Dynamite Job Nobel.

    1. dynamite. I saw what you did there.

  16. Co-operatives are morally superior to corporations as they are not guided by the profit motive.

  17. As near as I can tell, that is the basic inflationist mindset/trick.

    Is there a word for consumer side economics and producer side economics?

    What I don’t understand is if inflation encourages poeple with money to spend why does it have no effect on sellers of goods and services?

    If i have goods and services and i know i will get more money in the future then i will get now isn’t in my interest to keep my goods and services until those good and services have a higher monetary value?

    Why produce today when in the future i can get more for what I produce in the future.

    If there is an economy destroying deflationary spiral why isn’t there an economy destroying inflationary spiral?

    I think this would explain much of why we had stagflation in the late 70s and early 80s and would also explain what we are experiencing now.

    If the trick is to make people think money is “real” then it should trick both consumers and producers. And there is no reason to think it would effect one group following their own self interest more then the other group following their own self interest.

    1. Why produce today when in the future i can get more for what I produce in the future.

      Well, I don’t know about you, but my mortgage payment is due today. So I’ve got to produce things TODAY to get paid money TODAY so that I can pay the bank TODAY so that I don’t get thrown out on my ASS tomorrow. I also have to eat. So I really can’t delay much of my production.

      1. So I really can’t delay much of my production.

        You would be a consumer in the above equation. There are plenty of people with the means to produce and are simply not doing it right now.

        Their motives in not producing are transparent in an inflationary market.

    2. It happens with inelastic commodities. Hoarding.

  18. This is a great blog note. Bravo

  19. Checked out Wenzel’s links on this even further, and what it reveals about Krugman’s ignorance is breathtaking. If Krugman knew anything about his own field, he would have not came within a hundred yards of praising Delong.

    Delong accuses Mises accepting the labor theory of value!

    The point of view underlying von Mises’s–and von Hayek, and Marx, and Ron Paul–complaint against fiat money in general and monetary management of the business cycle in particular is this: that value comes from human sweat and toil, not from being clever. Thus it is fine for money to have value if it is 100% backed by gold dug from the earth by sweat and machines and muscles (even if there is no state of the possible future world in which people actually want to exchange their pieces of paper for the gold that supposedly backs it). But it is not fine for money to have value simply because it is useful for buying things.

    Holy shit! Are these morons not familiar with Menger? Much less, how Von Mises created a macro theory consistent with Menger’s subjective theory of value?

    To top that off, he conjures the fear of Nazi populism:

    … its scarier moments this train of thought slides over to: “good German engineers (and workers); bad Jewish financiers

    To describe Von Mises, a Jewish banker who fled the Nazis. Holy fucking shit.

  20. Oh man, the sweetest thing was when I had an argument about economics with this assistant professor in bioinformatics, he mentioned the word “babysitting co-op”. I immediately preempted him, telling him, that, yes I was aware of the babysitter’s co-op, and that the problem with the anaolgy was that there was price fixing relative to the value of an hour of babysitting time, whereas, scrip should have been able to be bartered at different values during the winter and the summer. He lost the argument before he even made it; the look on his face was precious and he never argued with me about economics again.

  21. Of course the real reason the babysitting coop failed was the fact that all the underemployed teenagers occupied the local park and beat drums and sung songs and otherwise kept the children awake forcing (I mean SHAMING) the parents into hiring them back.

  22. Hi Everyone,

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  23. The problem with the babysitting analogy is that there is only one commodity, babysitting, and everyone’s labor is worth exactly the same amount. One hour of babysitting from an awesome babysitter just isn’t something you’re going to exchange for two hours of lame babysitting. Babysitting strictly a per-hour commodity. Especially in baby sitting coop land.

    The problem with extending this to a larger economy is what happens when you introduce something else into the co-op. What would happen if instead of babysitting, you dexchange the scrip for auto-repair assistance?

    Suddenly, you have to pick and choose who you want to “hire” with your script, because one-hour of auto-repair service from person A is not going to be worth shit if person A knows nothing about cars.

    What if there’s only one guy in the co-op who can fix cars? Suddenly, he’s collecting all the scrip and nobody has any to pay him with. His time is getting consumed, and he can’t exchange it for anything except babysitting, because he can fix his own car.

    Now, her’es a second reason that it’s not analgous. In the babysitting standard, one scrip is worth *excatly* and forever on hour of babysitting. But what if you issued more scrip than there were hours available in the community. Too many people too much scrip chasing too few hours. Pretty soon someone would start offering two scrips for an hour, and how could you enforce that? Immediate inflation.

    See Krugman’s analogy only works when all commodities and all labor are uniformly interchangable (individual skills are irrelevant, and everyone is exchanging the same stuff) and when you know there are both people available to work AND people who want to hire them, but neither side has any currency.

    Even in the latter case, supposing you had that baby-sitting auto-repair economy, what would happen if you were in a situation where there was too little currency available for babysitting purposes, say because the auto-repair guy had collected it all? If you just print more, you thereby devalue that savings of the repair guy, since it will not become harder for his to use his scrip to hire babysitter in exchange for his past work. Before he would have had his pick of the lot, not he’s got competition.

    Moreover, by screwing the economy to keep the babysitters hired, that would decrease the incentive to learn some auto-repair skills. The auto-repair guy will keep accumulating excess babysitting scrip, the co-op will keep printing more, and eventually you get to a point where it’s pretty much impossible for the repair guy to ever use it all.

    But if you let the baby-sitting crowd completely run out of scrip, eventually one or two of them might be forced to learn how to fix a couple cars, just so they would have enough scrip to hire a baby sitter once in a while.

    1. s/not/now

  24. Wenzel doesn’t understand what money is. Under his paradigm, our entire economy is composed of barter. After all, when you go to work, all you do is exchange one service (labor) for another good or service (food, energy, a massage, etc.). All money is is a liquid medium of exchange that lubricates markets by creating a currency that doesn’t require suppliers of valuable goods to match supply and demand on their own. The price adjustment argument works in theory in the babysitting coop model, but collapses in a real economy, for several reasons. First, in practice, people are OK with seeing prices rise so long as wages do, but cutting wages is much more difficult. Second, falls in wages and prices discourage borrowing, investing and consuming, ince the value of a dollar in a year is greater than the value of a dollar today. Consequently, people are loath to make long-term investments (if you earn $30 a year, but a typical house costs $100, you’re not going to take out a loan if there’s a good chance that your wages will fall to $20 in a year, while the price of the house will fall to $60). This unnecessarily constrains economic activity and prevents economic growth.

    1. The problem with the “deflation panic” argument is that deflation is bound on the downside.

      System wide wages can’t fall to zero. System wide prices can’t fall to zero.

      People may hesitate when considering long-term investments if they anticipate inflation, but in the real economy these asset price declines don’t happen on a smooth curve. They happen in steep crashes as leveraged players collapse – if they’re allowed to. In the wake of a steep enough crash, all over leveraged participants get raped, and the holders of cash acquire assets at over-discounted prices, and get to enjoy windfall profits.

      That’s where the “animal spirits” of recovery that so mystify some economists come from – the opportunity of speculators to achieve windfall profits at the expense of the over-leveraged.

      When you talk about fighting “deflation”, what you really mean is taking measures to prop up leveraged players who deserve to collapse. When you do that, don’t be surprised when recoveries are anemic or you lose the occasional decade or two.

    2. Congratulations, Alex. You made more mistakes in this one post than Wenzel has made in seven years of posting at his blog. Incredible.

  25. The comments that complain that the model is “too simple” don’t understand the concept of a model– it’s to boil the world down to a workable model that roughly approximates how the world works. The “THE ECONOMY HAS MORE THAN ONE GOOD” claim is true, but completely irrelevant for the purposes of the argument. Comments like these (and Wentzel’s entire argument) mistake their own confusion for some kind of profound insight.

    1. That’s all well and good, but it doesn’t change the fact that Krugman removes literally ALL the critical information needed to evaluate the model from his narrative, and it doesn’t change the fact that the conclusions he draws from the model are hopelessly corrupted and skewed by the fact that the co-op setup was grossly overpricing babysitting services in real terms.

    2. It’s more likely that they understand that it is IMPOSSIBLE to boil a complex world down to a “workable model” without resorting to an absurd level of reduction (not to be confused with reductio absurdum).

  26. Doherty:

    If the demand to hold money rises, and the quantity is fixed, then the long run equilibrium is a lower price level. if prices immediately and instantly adjust the appropriate amount, then there would be no point to increasing the quantity of money. If, however, prices adjust slowly and sluggishly, then an increase in the demand to hold money results in reduced sales and production. The price level is “too high,” but not higher than it was before. It has not fallen enough. If the quantity of money is increased in this situation, then spending and production rise. What happens to prices? They don’t fall.

    So, the increase in the quantity of money causes prices to be higher compared to where they would eventually have been, but not compared to where they were before.

    A relatively small increase in the quantity of money would just reduce how much prices need to decrease. And so, while output expands some, prices still fall a bit more.

    We can conceive of the quantity of money rising just enough so that whatever decrease in prices that has already happened is enough. The price level never rises at all, it just doesn’t fall further.

    And finally, it is possible to raise the quantity of money enough to meet the initial demand to hold money at the initial price level. Then the modest decrease in the price level is reversed.

    I don’t see any of this as “fooling” people to work harder.

    I suspect your problem is that you are assuming that prices adjust instantly and wages don’t. And so the entire problem is wages adjust only sluggishly. But even there is is nothing about being “fooled.” While prices fall smoothly, the sluggish adjustment in wages keeps prices from fully adjusting to what would be their new equilibrium level. By expanding the quantity of money, prices rise (instantly and smoothly by assumption.) And so, wages stop their gradual decent, and employment and output rise with prices. As above, we can imagine small increases in the quantity of money that just reduce how much wages finally need to fall, modest ones that whatever decrease in wages that occured are enough, and finally an increase in the quantity of money that results in prices and wages both rising to their initial level.

    No one is fooled, it is just there is no longer a need to reduce wages. The gradual process of adjusting them downward is preempted.

  27. Well, if we assume that all babysitting services are roughly equal and fairly finite (limited number of babysitters and hours in the day), isn’t this situation less like a fiat currency, and more like a commodity-backed currency?

    The basis of any commodity-backed currency is debt. The currency is an IOU for something fairly clearly defined, and you can legally call it in. Same goes for babysitters, though if any babysitter was allowed to issue more debt than they could conceivably repay, the whole system would fall apart due to freeloading, which means that someone would have to be tracking “accounts” of debt-issuers.

    If we did have something like this (say, after a total collapse of the dollar), I think it would be energy credits — probably there would be two currencies for any issuer (a “Gold” currency that could buy power at any time, and a “Silver” currency that could buy power at off-peak hours only).

  28. What I don’t get is why, if more stimulus equals more wealth and more currency equals more wealth, we don’t have quadrillion-dollar stimulus plans and quintillion-dollar inflation plans.

  29. NL:

    It is because increasing the quantity of currency only helps when the demand to hold quanity is, or has, increased. Increasing the quantity of currency when there has been no increase in the demand to hold it results in a surplus, and nothing but higher prices.

    Increasing the quantity of currency when there is an increase in demand prevents a decrease in prices.

  30. NL:

    It is because increasing the quantity of currency only helps when the demand to hold quanity is, or has, increased. Increasing the quantity of currency when there has been no increase in the demand to hold it results in a surplus, and nothing but higher prices.

    Increasing the quantity of currency when there is an increase in demand prevents a decrease in prices.

  31. President Obama’s economic mastery is even more evident in Washington, DC, where house prices have been climbing ever since he took office.

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