I have nothing against mathematical models and econometrics. But my experience is that many misunderstandings in economics come about because people don’t have in their minds any intuitive notion of what it is they’re supposed to be modeling. The whole notion of an economy-wide shortfall in demand is just hard to grasp — by famous economists as well as the lay public; quite a lot of our hopeless public debate reflects the fact that many people, some of them imagining themselves to be sophisticated about the issue, just can’t visualize what Keynesian ideas are about. But the baby-sitting coop offers a human-scale example, and makes the whole thing clear.
I think he’s right, actually. Many people can’t visualize an economy-wide shortfall in demand. The other half can’t visualize how supply is the engine of economic growth. Notice how he doesn’t say that his way of visualizing it is the right way. He’s just saying that some people don’t get it.
It’s a nice story, but it does not apply to the economy. Because when the new coupons are issued, they do not water down the value of the old ones. The old coupons can buy an hours worth of sitting, just like before. But when new dollars are printed, the old and the new dollars lose some of their purchasing power.
Another flaw is that the new coupons were issued to everyone at the same time. But new dollars are issued to Obama and his pals, not to you and me. Imagine if the head of the co-op said “Guys, there are not enough coupons in circulation, so I am giving myself a thousand more. You fellows of course get no new coupons.”
Yet another flaw is that the coupons and money do not work the same way. The coupon only allows one hours worth of baby sitting. That’s it. It can never be worth two hours of baby sitting, or half an hour. But money can change in value. When there is less money, by the law of supply and demand, its purchasing power goes up.
Let’s think again about those coupons. They are a promise made by every member to work [=babysit] on demand. If the community did not agree to honor those newly printed coupons, but they were imposed by force, it would of course be slavery. So that printing more coupons is not the same as printing more money. It simply represents a promise by the community to work more. Since there was a shortage of labor, promises to work more solved the problem.
But what does printing more money represent? It is not a promise by anybody to do anything. Newly printed money does not fill any holes that existed in the economy. It is simply couterfeiting.
Amazing the sophistry of this guy. Coupons are paper, money is paper, so what is true of one is true of the other.
That pretty much defeats the babysitting co-op story, right? The premise is that recessions can be caused by there not being enough money in the economy, requiring a centrally planned money supply. But the babysitting coupons had a fixed value. In a real economy the purchasing power of money simply adjusts, so there is no need for issuing money to cure a slump. To the contrary, when the central planners tinker with the economy that causes the kinds of distortions Austrians are talking about.
“That pretty much defeats the babysitting co-op story, right? The premise is that recessions can be caused by there not being enough money in the economy, requiring a centrally planned money supply. But the babysitting coupons had a fixed value.”
Then it’s obvious. The Fed needs to devise a way to correct this obvious failure of the market. Our models have clearly spoken. Our money is still too unstable. All economists, stop what you’re doing and come up with a way to make the dollar like a fixed value coupon, and think of a way to get people to adhere to it. Winner gets a nobel prize. aaaaaaaaaaand go!
Seriously though, do Nobel prize winning economists not see how purchasing power would simply adjust when there is more demand for money? Am I missing something?
But when supply of money does not change and demand is growing then “price” of money (interest) will skyrocket. Because interest is then high we ought to stimulate for whatever reason (e.g. “poor people must be able to afford basic necessities”, "so business can borrow new money and continue to invest "). There is no objective ought that can be derived from is, but that is what all political philosophy is about and thats why in my opinion is important to not force everyone to one decision making body. Some of them are arrogant pricks that cannot see that maybe not all people want to live their lives according to their wishes. It is one of the basic reasons we live under statism - when you think you are so right that your vision is the only one that will work and then you cannot accept the fact that there are some deniers of your truth, which you call stupid, immoral or whatever, then you just want to impose your solution upon ignorant mases for their own good using government.