Finding babysitters can be a problem. One way to solve this is to find a bunch of other people with kids and trade services: I babysit for you when you go out, you babysit for me when I want to go out. Create an economy of babysitting. Get enough people involved and there will always be a baby sitter. Sounds like a great idea, right?
It could be. If it’s set up the right way.
The Capitol Hill Babysitting Cooperative decided to introduce a form of money called “scrip” to keep track of babysitting and make sure the system is fair. One scrip equaled 30 minutes of babysitting. Scrip was a form of self-regulating bookkeeping, a way to keep track of who had baby-sat and who hadn’t. Every hour of babysitting would require a transfer of two pieces of scrip from a couple to the babysitter.
Enough scrip had to be put into circulation so that couples could keep a reserve when events came up suddenly. Each new couple that joined was initially given 40 pieces of scrip (20 hours worth), and was required to pay back 40 upon leaving the co-op.
After the co-op had been in existence for a little while, here’s what happened: On average, couples had fewer coupons than they felt they needed in their reserve, so they tried to increase their reserves by going out less. This reduced the number of babysitting opportunities. At the same time, it increased the anxiety of couples wanting to increase their reserves (No opportunities were available!) and led to further reductions in going out (a nice visual of this is here).
This created a recession for the co-op. Everyone doing what they thought was in their best interests acted against the best interests of all.
The co-op failed to recognize at first that the problem was created by poor monetary policy. They felt that some members were shirking their duty and resentment built. They even tried to pass rules to force people to go out more.
How did they solve the crisis?
They increased the money supply in circulation. New members were given more scrip. Instead of receiving 40 and having to pay back 40, they now received 60 and had to pay back 40. This created a Golden Age of money in circulation where there was a balance between those who wanted to go out and those who wanted to babysit.
What did they learn? Here’s Paul Krugman:
The first, and most obvious, thing to do is to make it possible for people to satisfy their demand for more cash without cutting their spending, preventing the downward spiral of shrinking spending and shrinking income. (That’s the solution that worked for the baby-sitting co-op.) The way to do this is simply to print more money, and somehow get it into circulation. Keynes whimsically suggested hiding bottles full of cash where enterprising boys might find them.
Basically, Keynes suggested that recessions could be cured by expansionary monetary policy.
It works, too. When the stock market crashed in 1987, Greenspan lowered the Federal Funds rate, essentially injecting liquidity into the market. This was also the same policy followed to rescue the economy when the stock market crashed again in 2008. Injecting liquidity into the market avoided a depression. (Note: Avoiding stock market crashes to begin with is a topic for another day.)
Takeaways
- Few people see problems like this as systemic and monetary.
- Everyone acts in their own self interest. The system still breaks down.
- Economic slumps are not moral failings or punishments for our sins. The system still breaks down when everyone is doing what they see as morally right.
- Passing laws to try and change behavior doesn’t work.
- The way to fix this was to increase liquidity of scrip—add more scrip to the system, but not too much.
Why does this bother people?
- Because there is a morality that money should be “earned,” even if everyone has to suffer when we could easily fix the problem. People don’t get that it’s a systemic problem and tend to see “injecting liquidity” as immoral. Similar to Keynes, Milton Friedman joked that we should just drop money from helicopters. Many people do not find this funny.
Expanding these lessons to politics and the economy:
- When consumer confidence declines, it’s similar to when couples won’t leave the house to save scrip.
- This tends to create a feedback loop that further depresses consumer confidence.
- This liquidity trap can be fixed by injecting additional money into the economy.
- Austerity policies depress consumer spending and confidence.
- Inflation isn’t a problem unless the money supply expands drastically.
- Don’t underestimate morality.
David Akadjian is the author of The Little Book of Revolution: A Distributive Strategy for Democracy (now available on Kindle).