Tuesday, November 15, 2011

Now Krugman on Mises Monetary Mental Disorder

Paul Krugman is now referencing Brad DeLong's idiotic piece calling the Mises monetary theory a mental disorder.  How does Krugman backup DeLong's view? This way:
I’m glad he’s doing this. There’s a tendency on the part of economists, both liberals and Tory Keynesians like Greg Mankiw and John Taylor (because that’s what they are, except when they’re playing for Team Republican), to understate the depth of incomprehension on much of the right.

The best cure I know for the notion that a money-led expansion can’t be real is still the story of the baby-sitting coop. You don’t want to get bogged down in the details, which is what some of my usual harassers have been doing. Instead, you want to absorb the key lesson: when the coop was depressed, it was depressed because of inadequate demand, and this inadequacy could be cured by issuing more scrip — money that was created by fiat.
So Misesians have an incomprehension problem, according to Krugman. Let's take a look at Krugman's baby sitting story and see who really looks like Rick Perry trying to think of the government agencies he would like to close down.

In 1998, Krugman wrote in Slate of an earth shattering experience:
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.
The story was the babysitting co-op story of which he writes:
The Capitol Hill co-op adopted one fairly natural solution. It issued scrip--pieces of paper equivalent to one hour of baby-sitting time. Baby sitters would receive the appropriate number of coupons directly from the baby sittees. This made the system self-enforcing: Over time, each couple would automatically do as much baby-sitting as it received in return. As long as the people were reliable--and these young professionals certainly were--what could go wrong?
It is important to understand what is going on here. In a moment Krugman is going to liken this babysitter co-op to the economy. But this is far from the case of what the co-op is, on any scale. In actuality, what is going on here is barter. You watch my kids, I'll watch your kids, with scrip inserted to make sure there is a balance between watching and leaving off.

So the first important thing to understand is that in Krugman's little world there is no money! Money is a medium of exchange you use in nearly all daily transactions, not a piece of script that can only be used for babysitting purposes. So he is trying to justify the printing of money using a model where there is no money!

Let's move on. Krugman writes:
Well, it turned out that there was a small technical problem. Think about the coupon holdings of a typical couple. During periods when it had few occasions to go out, a couple would probably try to build up a reserve--then run that reserve down when the occasions arose. There would be an averaging out of these demands. One couple would be going out when another was staying at home. But since many couples would be holding reserves of coupons at any given time, the co-op needed to have a fairly large amount of scrip in circulation.

Now what happened in the Sweeneys' co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple's decision to go out was another's chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.

In short, the co-op had fallen into a recession.
First, let's consider this "small technical problem". Krugman doesn't go into details, but for some reason there is an obvious taking away of script from some of the participants. The dues sound like some kind of a tax. The rational conclusion would be, "Hey taxes are bad, they are taking from some and giving to others. If you do it at a high enough rate, you are going to collapse the system". The script system, because of these tax/dues, appears to have pretty much collapsed the co-op. But what is cute is that Krugman doesn't call this tax/dues caused collapse a tax/dues caused collapse, he calls it a recession.

It's Krugman getting really mentally disorderly. These scripts, I emphasize again, are barter tools, not money. The scripts do not have an exchange ratio against all products the way money does, i.e. money is about prices. The scripts simply reflect a call on babysitting services. That's it. A recession is about changing prices. The stock market collapses in a recession, housing prices collapse, prices are too high for some products, causing fewer sales resulting in businesses laying off employees and sometimes failing. How is any of this action reflected in Krugman's babysitting story? The answer is that it is not.

Yet, Krugman plows along with his model and says that the issuing of more calls on babysitting services is like printing money. But, it is an entirely different thing. If the money supply somehow dropped, prices would adjust downward so that the economy could function. In Krugman's model with script, when the script declines because of dues/taxes, there is no mechanism to adjust the economy, because we are not talking about an economy or a medium of exchange, we are talking only about a script good for one hour of babysitting. Print more calls for babysitting services and, duh, you will get more demand for babysitting services. If you print more money, prices adjust through out the economy having only distorting impact on the economy that favors those who get the new money first.

Bottom line: Krugman's babysitting model is so poorly constructed and has so little to do with the real economy that one has to think that it's easy to understate the depth of his incomprehension. If nothing else, Krugman's backing up of DeLong's absurd ramblings using this babysitter model indicates that Krugman is in no way fit to judge the work of Mises, Hayek and Rothbard. He's an embarrassment to the economics profession.

15 comments:

  1. The problem was that each coupon was good for one hour of services regardless of time used. In reality, an hour of baby-sitting on a nice summer evening is worth a lot more than an hour on a weeknight in the middle of winter. Had prices been allowed to float by allowing parents to negotiate prices, you would have seen people babysitting 3 or 4 times during undesirable times in exchange for 1 night of prime date night services. This is really a tale about the folly of price fixing.

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  2. First, let's consider this "small technical problem". Krugman doesn't go into details, but for some reason there is an obvious taking away of script from some of the participants. The dues sound like some kind of a tax. The rational conclusion would be, "Hey taxes are bad, they are taking from some and giving to others. If you do it at a high enough rate, you are going to collapse the system". The script system, because of these tax/dues, appears to have pretty much collapsed the co-op. But what is cute is that Krugman doesn't call this tax/dues caused collapse a tax/dues caused collapse, he calls it a recession.

    Can you explain this a little further? How is the babysitting co-op example experiencing a TAX? Nobody is being robbed of their scripts. They're merely holding onto them, thus reducing the quantity of scripts in circulation.

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    1. From Krugman's piece:

      "Now what happened in the Sweeneys' co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low."

      Those "dues (paid in script) is the tax. Krugman himself, in the next lines, cites this as the reason the co-op "runs into recession.
      "

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  3. RW, good post.

    I think Krugman's anti-economics goes even deeper though.

    He is, as usual, ignoring the law of scarcity and opportunity costs. This ignorance is no doubt brought about by a failure to consider Bastiat's lesson of taking into account not only what is seen, but also what is seen. This step takes imagination and economic logic, of which Krugman has neither.

    This pundit actually believes that increasing the number of babysitting scripts is capable of stimulating the babysitting industry at no costs, and at no reduction in activity elsewhere (and hence, by way of analogy, the entire economy is capable of being stimulated in this way). But there is ALWAYS foregone opportunities when people engage in any action, because humans can't do everything they want to do all at the same time. There are lost opportunities that must be given up if the couples are going to spend more of their REAL money in restaurants on account of there being more babysitting scripts, instead of, say, spending that money on their own children while babysitting them.

    Krugman's silly analogy whimsically assumes away the fact that if couples are going to be spending relatively more money in restaurants, it means they must spend relatively less money elsewhere. Sure, printing new money and spending it in restaurants will stimulate restaurants, but it means that less resources are available elsewhere in the economy. Resources are scarce, they are not infinite.

    An influx of additional babysitting scripts may stimulate babysitting, but that means that all the couples must refrain from doing other things, including spending their money on other things besides restaurants, like board games to play with their children. Creating new scripts cannot succeed in stimulating the entire economy, which is the context of recessions and depressions. Krugman is equivocating a rise or fall in a particular service as a "recession" on that service, thus hoping that by saying that word, he can show something true about the whole economy, where demands offset.

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  4. As Richard Cantillon showed over 300 years ago(!), inflation can only stimulate the particular areas of the economy that the additional money enters FIRST, which means a reduction of real activity elsewhere. Resources are scarce! This principle is true for babysitting scripts also. If there are more babysitting scripts for couples, and they therefore spend more money in restaurants, then it means they have less money to spend elsewhere, thus reducing activity elsewhere, thus generating a "recession" elsewhere. Resources are still scarce!

    It's like we're supposed to believe that if someone counterfeited money and bought pizza, which brings into effect a redirection of scarce capital away from other lines of production, say at the expense of baby food, and if we only focus on the pizza sector and ignore the baby food sector, then it looks like creating new money can stimulate ANYTHING, and thus EVERYTHING.

    Krugman is simply unable to think economically. He cannot understand the economy to be in essence a collection of people and of scarce real goods and services. He thinks that printing money can stimulate the entire economy, when in reality it can only stimulate some REAL goods and services at the expense of other REAL goods and services.

    If I counterfeited money for myself, then that inflation will result in a real wealth transfer away from those who will receive the new money later on, towards my possession. I will get the most wealth from the people who will receive the new money last, and somewhat less wealth from those who will receive second last, and so on, up until the first person or group of people I gave the new money to in exchange for their goods and services. They lose out the least, because the only higher prices they have to pay are the prices for their own goods on account of my higher demand, which is typically only a small fraction of the total supply of goods and services in the economy.

    Krugman is quite simply the most idiotic pundit who faked his way into a fake Nobel Prize in economics. He is absolutely clueless on basic economic principles of scarcity and of opportunity costs. His mind is that of a mystic who refuses to accept the limitation of labor, the limitation of goods, and the limitation of time. It's like they all can be overcome simply by printing new money, and then adding to the misery, by focusing only on the immediate people and market while ignoring everything else that is affected.

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    1. Although it is great fun to call a Nobel Prize Winner 'idiotic' and 'clueless', it would be far more accurate to characterize him as a very intelligent and effective spokesperson for a gang of parasites running a counterfeiting racket. No matter what the arguments - no matter what the consequences, Krugman will recommend more counterfeiting. It's his job. He (and the NYT) are part of the gang running the racket.

      To assume he is stupid but has the interests of the economy at heart is to buy into his cover story.

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    2. The truth is spoken.

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  5. I don't understand this line: "But one couple's decision to go out was another's chance to baby-sit; so it became difficult to earn coupons."

    Isn't it like saying: "But one employer's decision to hire was a laborer's chance to work; so it became difficult to earn wages."

    Is it not better to solve the hoarding problem by placing a cap on the number of scrips allowed to be held by a member? Why do scrips being held in reserve automatically lead to printing more scrips? Shouldn't only an increase in babysitting demand lead to more scrip printing, which is essentially just a debit/credit ledger and has no effect on the price of babysitting?

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  6. DeLong wrote a followup post in which he quoted a commenter saying that the problem with artificial credit expansion is it creates the illusion of additional resources, when in fact there are none. This is what he said:

    "See? That is what is completely wrong!

    If private demand for liquidity rises and credit does not expand--if we have what used to be called an "internal drain"--then that gives the economy false signals: it leads entrepreneurs to believe that there aren't available savings when they are. Similarly, if private demand for liquidity falls and credit does not contract, that gives the economy false signals as well--that leads entrepreneurs to believe that savings are available when they are not."

    I commented on his blog asking to explain that position, but my comment was never posted. Anyone here understand what he is saying? There is no attempt on his part to demonstrate that what he is saying is true, he just asserts the Misesian view is clearly false, and in fact when demand for credit rises and supply doesn't increase - that is what gives entrepreneurs false signals? When it seems to me, that would just raise the price of credit? Any insight into this would be appreciated!

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  7. These scrips, as Mr Wenzel points out, are not a medium of exchange. They are a crude form of accounting. They function just as arbitrarily and irrationally as coupons for rations. Krugman's example is a giant red herring.

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  8. Whatever that scrip is, it sure isn't money or even money-like.

    It's more like an accounting mechanism or a substitute for a more explicit contract and it seems to cause more problems than it solved.

    We know that Krugman's minions are both dumb and dishonest. Is Krugman this dumb or does he just know what his dingbat minions will lap up [meaning Krugman is dishonest]?

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  9. Does the issuance of scrip steal purchasing power from those not getting scrip? Will scrip be confused with existing money and bid up the prices of the factors of production? I don't think so.

    Let's call this one another complete Austrian victory, a total vanquishment. We've won. They've lost. They seem to know it even if they will never admit it.

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  10. Damn. First Delong last night, and now Krugman today. You have totally destroyed both of them, Wenzel!

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  11. What I can't understand is how anyone can read the story of the babysitting co-op and fail to realize that what was really happening was that the co-op form grossly overpriced babysitting as a service, and that naturally and properly led to lower demand.

    The co-op participants are described as Capitol Hill lawyers and economists. In other words, people with very high hourly incomes.

    That means that every person who joined this co-op went from a situation where babysitting services were dirt cheap (the hourly wage of some teenager who probably hadn't even graduated high school yet) to a situation where babysitting services were very expensive (their own labor, the opportunity cost of which is the equal of their own hourly wage).

    If an hour of babysitting service suddenly cost me the same as an hour billed to a Capitol Hill lawyer, I wouldn't hire babysitters either.

    That's the real reason demand was depressed, and the real reason people were hoarding scrip.

    Basically these co-op participants had just seen 1000% increases in the real price of babysitting service, and in reaction to that they quite naturally and properly curtailed their use of babysitting services and stopped going out.

    So the lesson here isn't "Fiat money is great" but "Never participate in some dumb touchy-feely co-op for a service that already costs you less per hour than your own hourly wage."

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