Babysitting, blatant marxism, and Paul Krugman

Monetary policy is so freaking obtuse almost no-one really understands it. I mean, do you understand what the Fed actually does? Of course you don’t. Neither do I, half the time, and I’m a freakin’ business writer.

Which is why I’ve really been enjoying reading Paul Krugman’s book of last year, The Return of Depression Economics. In it, he uses a metaphor he often uses to explain monetary policy: The Washington Babysitting Co-op.

A few years ago, 150 families in Washington decided to start a babysitting co-op that would work kind of like those “green money” barter systems. If a couple babysat for another couple, they’d get a coupon. They could later use that coupon to pay another couple to babysit, in turn, for them. The coupons were, in effect, a type of currency: Upon joining the co-op, a couple would be issued 10 coupons or so to start them off, and would pay them back if they ever left. Since there were 150 couples, one could reasonably assume there’d always be someone willing to pay you coupons for work (i.e. by babysitting for them), or a way to work for your coupons (i.e. to babysit for you.) It was a perfect model of an economy.

Except — one season, everyone decided they want to save coupons. They all decided, for some reason, that they wanted a nest egg of coupons in case of emergencies. As a result, the supply of people willing to hire babysitters slowly dried up. Nobody could get work. “The economy,” Krugman writes, “fell into recession.”

In one way, it’s a beautifully simple metaphor — it neatly explains why an otherwise healthy economy, equipped with a nice stable currency and a prosperous people, can suddenly start to slow down. And, more importantly, it explains how to fix that problem. The co-op eventually decided to print more money and put it in circulation: To create a bunch of new coupons and hand them out freely. Thus, everyone suddenly had a little nest egg and wasn’t so worried about saving anymore, and began to spend, hiring other couples to babysit. Soon, the economy was rolling again — which neatly illustrates how monetary policy (printing dough, or, in the more modern parlance, adjusting the interest rates) can help start, or stop, an economy. (There’s a longer discussion of this online at Krugman’s old site at MIT.)

But here’s the fun thing. While surfing online for the original academic paper that outlined this co-op fable (it actually, really existed), I ran across a rather searing review of Krugman’s book at the Socialist Viewpoint magazine. In a way, it cracked me up. It’s such an ossified, cookie-cutter marxist analysis that the language alone is a total hoot. Hell, I’m a card-carrying union member and reasonably hard-left economic freak, it’s incredibly clear that this sort of calcified writing — and thinking — ain’t gonna convince anyone anymore.

Butl, still … the writer did raise one extremely perceptive critique of Krugman’s metaphor.

To wit: The problem with almost all economics is that, in explaining the marketplace, it uses models that not only simplify the world — but oversimplify it. Krugman’s model assumes that everyone in the market is pretty much equal in social power, education, and starting point (i.e. everyone enters the system with the same amount of coupons).

Of course, this does not bear even a glancing resemblance to reality. Or, as the Socialist Viewpoint critic put it:

If the co-op analogy is really going to help illuminate capitalist economic relations, it will have to undergo a few changes in order to provide a more accurate model for the system it purports to reflect. For example, we would have to stipulate that a small minority of the co-op members, through some accident of history, controls almost all the coupons. And because of their vast fortune, the members of this minority actually rule the “co-op” and operate it in their own interests. Other members of the co-op are transformed into mere means to enhance the status of the minority, but they are assured that this system is operating equally in everyone’s interests. Members of the wealthy minority never baby-sit, of course, but enjoy watching the other couples, the vast majority, who are in desperate need of coupons, compete against one another for babysitting positions for the minority. Finally, members of the wealthy minority offer weekly lectures to the other members of the co-op in which they explain in pompous and ponderous tones that the disparity of wealth in the co-op community is entirely a function of each individual’s personal intelligence, industry, and moral fiber.

You know, despite those hoary left-wing cliches, I couldn’t have said it better myself.

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I'm Clive Thompson, the author of Smarter Than You Think: How Technology is Changing Our Minds for the Better (Penguin Press). You can order the book now at Amazon, Barnes and Noble, Powells, Indiebound, or through your local bookstore! I'm also a contributing writer for the New York Times Magazine and a columnist for Wired magazine. Email is here or ping me via the antiquated form of AOL IM (pomeranian99).

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