by das monde
Mon Nov 16th, 2009 at 05:47:25 AM EST
I intended to write this diary not long after the publication of famed Paul Krugman's article "How Did Economists Get It So Wrong?", and my review of Nial Ferguson's book "The Ascent of Money". But my schedule drifted away to excitements of job related projects. So here it is at last...
There is this passage in Krugman's article:
I like to explain the essence of Keynesian economics with a true story that also serves as a parable, a small-scale version of the messes that can afflict entire economies. Consider the travails of the Capitol Hill Baby-Sitting Co-op.
This co-op, whose problems were recounted in a 1977 article in The Journal of Money, Credit and Banking, was an association of about 150 young couples who agreed to help one another by baby-sitting for one another's children when parents wanted a night out. To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons made out of heavy pieces of paper, each entitling the bearer to one half-hour of sitting time. Initially, members received 20 coupons on joining and were required to return the same amount on departing the group.
Unfortunately, it turned out that the co-op's members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer...
In short, the co-op fell into a recession.
Krugman is very fond of this example, as he recounts in a much earlier article:
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
If you think this is a silly story, a waste of your time, shame on you. What the Capitol Hill Baby-Sitting Co-op experienced was a real recession. Its story tells you more about what economic slumps are and why they happen than you will get from reading 500 pages of William Greider and a year's worth of Wall Street Journal editorials.
The original 1977 article of Joan and Richard Sweeney (who participated in the Coop) can be found here. They actually focus more on the later period of inflation rather than Krugman's favorite recession.
If the Coop story indeed illustrates the the essence of Keynesian economics, there is a good deal to commend. Money is usually defined by all those beautiful functions it presumably plays: as a medium of exchange, as measure of value, as an accounting unit, or wealth storage. Elementary economic theories just assume that money evaluates faithfully (or almost faithfully) the merits of all goods, services, producers and traders. What makes money so omnipotently good? Or does it fulfills these wonderful roles only most of the time, or "merely" to a large degree and only in normal circumstances?
It was indeed Keynes who observed that a great economic nightmare might come even if resources of nature and men's devices are just as fertile and productive as ever. The money medium can have a power and will of its own.
The Coop story is probably a well-accepted example for university undergraduate courses as an illustration of monetary economics. The simplest kind of economy without much distinction between labour and capital, with a single "natural" commodity as an exchange medium, was well described by Marx. He observed already that hoarding money may lead to a crisis. In other words, it is enough for money to play the roles of exchange medium, accounting unit and wealth storage, and recessions may occur.
Keynes added the distinctions between saving and investment, and between industrial and financial circulations of money. From here rational motivations for money hoarding become evident: market expectations and all other "sentiments".
But sure, if Keynesians think that they saw all the light about economic crises, they could be delusional. By now their preferred policy of issuing more money scrips to counter depressions of monetary thrift is banalized and vulgarized. Libertarians say that all coop problems can be solved by letting the relative value of baby sitting and coupons vary. Let the money play the value measurement role as well (or let the market decide as they say)! But does that really change a lot?
As Krugman himself suggests (in that much earlier article), the coop could allow borrowing of scripts. Then baby sitting scarcities or inflations could positively be influenced by the interest rate of the "central bank". But he admits that even then Japanese-type "liquidity traps" are possible. Ouch, those zero-rate dead ends are not just Japanese by now...
When it comes to introducing debt at interest, deepness of crises could be as unlimited as human foolishness. (Youtube)
By the way, debt accounts and other credit papers are exactly the most convenient media of exchange, accounting and value measuring units, or wealth storage logs that "physically" define the money. This was noted in my previous diary.
Here is a thing that the basic Capitol Hill Baby-Sitting Co-op story tells us. Money itself is not wealth, it is just coupons or vouchers for wealth. The world is crazy about collecting wealth vouchers...