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.