One of Paul Krugman’s favorite stories is about the baby-sitting co-op that almost collapsed when members started hoarding scrip; similarly, he says, a lot of economic activity can dry up when people start hoarding money. Last Tuesday, in a post called Nursery Tales, I observed that money-hoarding can’t retard economic activity (at least in anything like Krugman’s sense) unless something prevents prices from adjusting. So absent an auxiliary story about what that “something” is, I don’t find the baby-sitting story terribly helpful.
Several commenters responded that in the real world, prices and/or wages are “known” to be sticky (that is, slow to adjust), and thought that this rescues Krugman’s metaphor. I don’t agree. Here’s why:
- The stickiness of wages and/or prices is an empirical question. It certainly can’t be dismissed out of hand, and I didn’t intend to imply that it could be. Color me agnostic (though instinctively skeptical) about the importance of these phenomena.
- My point was not that stickiness does not exist. It was that if your entire story rests on stickiness, then it ought to include some sub-story about where the stickiness comes from. Different sub-stories will have different macroeconomic implications.
- In the baby-sitting case, it’s pretty clear where the stickiness came from — the scrip was denominated in terms of baby-sitting hours and there were strong social strictures against trading at non-official rates. But none of that applies to money, which is not denominated in terms of labor hours or any other kinds of goods. Nowhere is it written on a dollar bill that this piece of paper is good for exactly 1/800 of a laptop computer. So if recessions are caused by stickiness, it’s not at all the kind of stickiness we see in the baby-sitting co-op — and therefore the co-op story cannot illuminate the root causes of a recession.
- On a side note, the baby-sitting story is not a story about wage stickiness; it’s a story about price stickiness. The baby-sitters in question were not each others’ employees; they did not have set hours or fixed duties. Keynesian economists tell stories about price stickiness and they tell stories about wage stickiness, but those are two different stories, with different implications for how recessions are likely to play out. So if you are the “sticky wage” brand of Keynesian — which Krugman often seems to be — then the baby-sitting story is not the story you want to tell.
Of course the members had hours and fixed duties – the scrip was denominated in hours of babysitting service for cripes sake.
By coincidence I was reading this post on Volokh Conspiracy this AM: http://volokh.com/2011/01/30/the-resurgence-of-the-theory-of-moral-sentiments
It’s a post by Kenneth Anderson discussing a recent resurgence in popularity of Adam Smith’s book “The Theory of Moral Sentiments.” I confess I haven’t read this book, but apparently the gist is that Smith believed you couldn’t “see in action, the market operations and effects of The Wealth of Nations without a concomitant “moral psychology” of human beings” (Anderson’s words).
I would argue that this bears directly on your discussion of Krugman’s example and in particular we know that the moral psychology of small groups of people (such as a babysitting cooperative) can be highly mutually influencing in ways that may not apply to nations of strangers or worlds of such nations – or even to small yet anonymous groups such as the random customers of a particular neighborhood corner store.
If that is so, then questions of stickiness may either derive from an underlying moral psychological explanation or (I would tend to argue) that the psychological explanation is sufficient without any need to invoke stickiness or other additional principle.
Ted: If I understand things correctly, nobody was forced to accept the script and babysit if they didn’t want to. That is, they weren’t “fired” for choosing when they would accept an evening home with someone elses kids….I think the description of them not
being employees is probably right, though often it is a gray area.
If you are looking for “The Theory of Moral Sentiments,” you might want to try this: http://files.libertyfund.org/files/192/0141-01_Bk.pdf. It is a tad more than 26MB on a download and is 474 pages. This is listed as a facsimile of the original.
TToMS is also available for 89 cents on Kindle. What a bargain–one of the great books in moral philosophy for less than price of a cup of drip coffee.