Peter Schiff, the well known loudmouth tries to refute the idea behind Paul Krugman’s baby sitting co-op article. (Hat tip to Stefan Karlsson.)
Schiff begins with about twenty or thirty insults before getting to the crux of the argument. That together with Schiff’s loud and excitable voice makes me suspect that Schiff’s real skill is getting drunk and picking fights with fellow drinkers, rather than economics.
Schiff then claims the babysitting coop failed because too many coupons were issued: complete nonsense! At least there is nothing in Krugman’s article about the co-op failing for this reason. (Although the average mentally retarded six year old has doubtless worked out that if excess amounts of money/coupons are issued, there will be a problem, i.e. inflation.)
Schiff then claims that a fundamental flaw in the baby sitting co-op is that baby-sitting hours are priced the same regardless of whether it’s a weekday, weekend, New Year’s Day, etc etc. Perhaps Schiff or anyone else can explain why this “same price regardless” system applies to millions of products in every economy round the world, and without any big problems.
Of course “price discrimination” as economists call it, and as is explained in introductory economics text books, makes sense and is profitable for vendors as long as the administration costs are not too high. But this discrimination is not essential for an economy to function.
The one area where Schiff is half right is his claim that escaping recessions that result from bubbles simply by printing money will lead (if history is any guide) to another bubble sooner or later. Problem with that argument is that most of the human race have worked that one out, and no thanks to Schiff: that’s why we are busy tightening up bank regulations! Doh!
To spell that out in detail for the benefit of people with Schiff’s non-existent knowledge of economics, it was excessive and irresponsible borrowing that contributed to (or were the basic cause of) the credit crunch. Hence the need for tighter bank regulation.
But then it is precisely right wingers, like Schiff who tend to oppose more regulation, and left wingers like Krugman who tend to back tighter regulation.
The irony will be way above the head of Schiff the loudmouth.
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Correction, 18th Dec: Krugman’s Slate article DID SAY that the co-op issued too many tokens, but DIDN’T SAY that the co-op collapsed for this reason.
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The big question is does Schiff have any investors left? They must be true believers, that's for sure!
ReplyDeleteI think price flexibility (not sure if discrimination is the right way to think about this) is essential to solving the problem without inflation (if it *can* be solved by inflation).
ReplyDeleteThe co-op has high price rigidity (by definition?). One hour can only be traded for one hour. A real market would have people who are willing to babysit 2 hours on a slow night trading with people who are willing to babysit 1 hour on a busy night.
Further, the co-op introduces no division of labor. This is actually why you use money in the first place. This kind of segmented like-for-like coupon market would probably dissolve quickly in the real world. The coupons won't become money-like until I can trade them for something else.
Marris, You could be right in saying that “discrimination” is not the best word. I only used the phrase “price discrimination” because it’s the standard phrase used in economics to describe what is involved here.
ReplyDeleteRe your second paragraph, yes, this baby-sitting economy had the defects you point to. As I suggested in the above post, the economy would have been improved by adopting price discrimination.
Re the lack of division of labour, of course this economy was an absurdly over-simple one. But it was JUST SOPHISTICATED enough to illustrate a basic principle, namely that printing money in the right amount during a recession can solve the problem. That was the beauty of the economy in Krugman’s eyes, and I agree.
Re your claim that these ultra-simple economies “dissolve” in the real world, I don’t agree. Some of the towns which issue their own currencies, like Ithaca in New York State, have been doing this for decades. These mini-economies have obvious defects, but they don’t necessarily collapse altogether.
> namely that printing money in the right amount during a recession can solve the problem. That was the beauty of the economy in Krugman’s eyes, and I agree.
ReplyDeleteI disagree that this will necessarily solve the problem. The underlying issue (the reason given by Krugman for the co-op recession) is that coupon holder A is hesitant to give up the coupons he owns since he's afraid he will not be able to earn them back. A's reluctance keeps B, who shares the worry, from earning new coupons. So B holds back as well. The coupons stay saved [bad] rather than spent [good].
The idea behind the inflation solution is to increase the supply and A and B's coupons to the point where they are comfortable spending some of them. When holders see this spending, they realized that coupon-earning opportunities will be available to them. This stimulates more spending and the recession disappears.
The problem with this analysis is that although an increased supply of coupons may make me more willing to spend them, it also makes me less willing to accept new coupons for my babysitting services. Why bother? My supply was inflated, too. Further, I see that others are also reluctant to offer services in the inflated world [they're in the same boat].
My conclusion may be that it's not clear that my new increased stock of coupons makes me any better off than I was before. The other co-op members and I may just find ourselves in a different [bad] state.
Of course, the new bad state may be avoidable. I think flexible prices is key to avoiding it.
> Re your claim that these ultra-simple economies “dissolve” in the real world. , I don’t agree. Some of the towns which issue their own currencies, like Ithaca in New York State, have been doing this for decades.
I wasn't saying that scale [the number of people involved or the quantities of goods/services] is the problem. The issue is the like-for-like property of this market. I think one good way to get out of the co-op recession is to make it OK for people to "buy" coupons with other goods/services, like apartment cleaning, grocery shopping, etc. This market heterogeneity would have been available in Ithaca. The fact that it's not available in the co-op makes the co-op more susceptible to recession standoffs.
Marris,
ReplyDeleteI agree that one effect of expanding the stock of coupons is that some people will be “less willing to accept new coupons for their babysitting services.” Translated into the real world that equates to “expanding the supply on money will make some people less willing to go out to work and earn money”.
But I disagree when you say that these people are not better off. I suggest they actually ARE better off because they enjoy (presumably) the same consumption of goods and services, but do less work to obtain these.
However, I suggest the proportion of the population adopting the above strategy will be very small. This is because, as you rightly say, the effect of coupon or money printing is to increase peoples’ STOCK of money, which in turn causes an increased FLOW of money and goods. Anyone adopting the above “do less work” strategy will soon find their stock of money declining to below their preferred level.
Re your second point, yes, clearly the wider the range of goods that the coupons buy the better.
> I agree that one effect of expanding the stock of coupons is that some people will be "less willing to accept new coupons for their babysitting services." Translated into the real world that equates to "expanding the supply on money will make some people less willing to go out to work and earn money".
ReplyDeleteReally? Doesn't it translate to good/service holders raising their offer prices? [Reserve demand shifting right in a total demand to hold analysis, or equivalently, supply curve shifting left?]
The co-op coupons map to money. Babysitting hours map to general goods/services.
The biggest irony is that Schiff incessantly complains about the deficit, not realizing that the deficit is precisely where his clients get their money.
ReplyDeleteYou complain about calling names but you spend most of your article doing so. Krugman and you are both wrong, and Shiff is correct. The baby sitting script is an example of labor dollars. Labor dollars are NOT the same as money, and do not allow for pricing. As an good economist should know money lowers transaction costs in free trade, and allows the flow of information on scarcity (and demand). Money is an improvement over barter. Labor dollars actually are worse than having barter because it sets a fixed trading ratio for differing goods.
ReplyDeleteEven in this baby sitting coop there are different goods. Just like a potato out in the field is a different good than one washed and sitting on a grocery shelf, the different times and conditions of the baby sitting stints render them different goods. Baby sitting on the weekend vs. weekday, normal work hours vs. off hours, summer vs. winter, now vs later, and at a moments notice vs. prescheduled, are all different goods. There also be differences in quality, such as, the baby sitters take on multiple kids at once, do they already have many kids of their own to watch, is their house a mess, and so forth. From the perspective of the laborer there are also many differences in the good provided. Is the kid a brat, how old is the kid, how many kids, plus all the same timing issues already mentioned.
At least with barter you can trade off these issues. You can trade one hour of weekend babysitting against every four workweek. You can trade two hours of emergency babysitting now for three later at a specific time. You can't do that with script and obey the rule that one script equals one hour no matter what. Thus unlike a barter system with record keeping it will freeze up.
Printing more script doesn't solve these problems. Who gets handed this new script matters. It could just become a way for the managers of the system to get free services. If it is handed out evenly in an identical fashion with how people join in the first place (fairly) then it is no different than starting the system with a larger quantity of script issued upon initial membership in the first place.
Money has no such issues.
Money married to a fractional reserve banking system (a kind of temporal pyramid scheme) is an entirely different system with completely different flaws and problems which arise. Flaws that are aggravated by having a central bank and fiat currency.
Brian,
ReplyDeleteYou are just re-stating Schiff’s basic claim, which I dealt with above. But I’ll go over it again. Schiff claims that “labour hours” or “lack of price discrimination” as I call it, was the fatal flaw in the baby sitting economy. My answer is that it wasn’t because the economy recovered after the money supply was increased. And that is all that Krugman claimed. Period. Full Stop.
The fact that the money supply was subsequently increased TOO MUCH is irrelevant: that’s always a potential problem with money, whether you have entirely free market form of money, or whether the central bank adjusts the money supply. Booms and slumps occurred (e.g. in the 1800s) long before governments deliberately manipulated the money supply.
Also, Schiff’s theory that “labour hours” contribute to bubbles will be a new one for 99% of economists. Schiff could do us all a favour by writing an article that explains this strange new theory, but that’s probably too much like hard work for him. 99% of economists think that bubbles are caused mainly by for example Greenspan’s “irrational exuberance”, plus the fact that private banks tend to create money during booms which exacerbates booms, plus the fact that banks get away with creating worthless mortgages (or South Sea Bubble shares) which they sell on to gullible buyers.
Actually I'm not just restating Schiff’s position. I actually disagree with Schiff on many points here. He doesn't correctly understand Austrian economics in the first place despite calling himself an Austrian. I will give one example of that fact in this response. I could give others but I don't want the comment to be too long. It will be long as it is.
ReplyDeleteI actually agree with the last paragraph of your latest comment about Schiff being mistaken that there is a bubble in this babysitting economy but this is a new criticism on your part. My retort to Schiff's mistake would be that it is impossible to have a "bubble" [presumably in the price of babysitting] precisely because there are no prices with a labor dollar system.
If you'll notice my comment was not addressing this issue. The issue I believe Schiff is correct about and both you and Krugman are wrong about is the issues I brought up. Which relate mainly to the fourth paragraph of your article. Krugman certainly doesn't grasp them, nor did he even consider them, nor a great many other things about this baby sitting coop, and the original 1977 "study" by the Sweeneys.
The baby sitting coop based on labor dollars is so different from a system with money that one cannot draw the kinds of conclusions that Krugman is trying to draw. So Schiff laughs but he does so while making laughable mistakes himself.
You do not understand my position if you think I believe that adding "price discrimination" is a solution to the problem here. Price discrimination is the charging of different prices for the same good. It is usually done to allow the seller to extract a larger profit by getting a larger proportion of the difference in value that different customers place on the good. The seller can charge higher prices to those who value the good more highly, while expanding his market to those who while still profitable to sell to, would not buy at a standard price.
I'm making a different claim. I'm claiming that what appears to the naive eye to be a single identical good is in not uniform at all. I plainly stated that there were actually many different goods involved. Baby sitting on the weekend is clearly not the same good as baby sitting during the work week during working hours. It is a different good for both the consumer and the producer.
It's not that different prices need to be introduced for an identical good. It's that prices need to be introduced, period. There are no prices in this system. Also there is NO MONEY. Since there is no money in this system it is not a good model from which to draw conclusions about the world of money.
At this point giving you the benefit of the doubt on why you are mistaken on these issues. I’m assuming you are an honest guy who has unfortunately assumed that other people are telling him the correct characterization of others theories and information. I am now pointing out to you that you were mistaken in doing this and I ask you to go back and reassess your assumptions. I don’t have time now for full explanations but I want to point out that you have done this same mistake with regards to the addition points you’ve made in this last comment. You are mistaken both about the Austrian position, and the historical facts surrounding monetary mischief and various bubbles.
ReplyDeleteThe Austrian position is NOT that a central bank is the cause of booms. Their position is exactly that “private [fractional reserve] banks tend to create money during booms” and the printing of this money doesn’t merely “exacerbate” but causes the booms in the first place. They also believe that central banking exacerbates the natural instability of the fractional reserve system by allowing the banks to work in concert with the central bank to expand the money supply to a much greater extent than any set of uncoordinated and competing private banks could. They are correct in this belief. Pointing out that booms and slumps have happened in the past rolls of their backs like water off a duck once you understand their actual position (and not the straw man caricature reported by guys like Krugman). Such criticism further rolls of their backs when you understand that the actions of a central bank don’t need to be “deliberate” to cause these problems.
Your claim that these prior bubbles occurred “long before governments deliberately manipulated the money supply” Is false from their perspective. They and I would claim that setting up any central bank is a deliberate attempt to manipulate the money supply, period, full stop. I don’t want to get into the semantics of that but it doesn’t really matter if the central bank is being deliberate or not when it prints more money. It will have the same effect regardless of whether anyone gives careful thought or not.
ReplyDeleteThe historical facts on these prior bubbles are that the monetary manipulation was prior to the bubbles. The stock jobbing, fraud, and irrational exuberance are effects more than causes. It is much easier to run a Ponzi scheme in a boom period of monetary inflation than deflation. That’s why there is such a correlation. Tulip mania was preceded by the establishment of a central bank in Holland. John Law’s Mississippi Bubble was preceded by John Law’s central banking and fiat monetary schemes.
The story of the South Sea Bubble itself is in fact the result of secondary backdoor central bank, the South Sea Company, with the express purpose of letting the government borrow money, and to artificially lower interest rates. To call the system England had “Free Market” is not at all credible. The South Sea Company was a government granted monopoly. Go check out Wikipedia article on “The South Sea Company” and you will see what I am talking about. The second paragraph in the section titled “Foundation” makes it clear that Robert Harley was attempting to set up a bank to fund government debt, was blocked by law from setting one up, and came up with the South Sea Company as a way around the law. It states “However, he could not establish a bank, because the charter of the Bank of England made it the only joint stock bank. He therefore established what, on its face, was a trading company, though its main activity was in fact the funding of government debt.”
Clearly the South Sea Company was a successful attempt by the government to increase the money supply, whether you consider it a deliberate or not. Yes I said government. Converting government debt into South Sea Company shares (worthless paper) freed up the original holders of the government debt to lend to others, vastly inflating the money supply. At one point the South Sea Company was being allowed to lend (essentially print) money to buy its own stock.
I do not have time to explain any further. I think you need to rethink your position and certainly your support for Krugman. The man clearly does not understand what he is talking about. His article describing Austrian economics as a “hangover” theory is a total disgrace and shows a total lack of comprehension of what he criticizes, or some less flattering motivations.
My position (and the Austrian one … at least some Austrians) is that no institution private or public should be allowed to borrow short and lend long. That is the source of instability no matter how it is accomplished. Fractional reserve banks should be outlawed as a kind of temporal pyramid scheme. There is no reason banks cannot operate selling bonds with maturities that match the terms of the loans they sell. There is also no reason they cannot charge fees for checking accounts as they do now. Banking would not end as some people claim with the outlaw of the fractional system. It would just make the monetary system stable, as well as the economy.
I typed this in word, but I see the spaces between paragraphs was lost when I cut and pasted. I apologize to the reader.
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ReplyDeleteWell said Brian - absolutely spot on. Ralph should leave aside the ad hominems on Schiff; we all know his foibles and bluster. But Schiff's basic point is that Krugman completely missed how price signals generated by a free market for scrip would have more directly solved the baby-sittng co-op's "recession". And it would have done so neatly and without central planning. Ralph, you didn't even come close to refuting that point.
ReplyDelete(Edit: fixed typo)
Chris,
DeletePeter Schiff starts by claiming that a big problem with the baby sitting co-op was that it didn’t take account of the different price that ought to prevail at weekends as compared to midweek. Well that just wasn’t the problem according to Krugman.
Moreover, even if that had been the problem, it would have been easily solved, and for the following reasons. The rules of the co-op may have said that the same price should exist mid-week as during weekends, but I completely fail to see how those running the co-op could have enforced that: bar having private detectives snooping on every household involved in the baby sitting. I.e. if someone wanted to offer two tokens per hour for a weekend baby sitter, or one token plus some cash, or one token plus a meal and a glass of wine, what was there to stop them?
In contrast, as Krugman rightly explained, the real problem was an excessive desire to save tokens. The solution was to simply print more tokens and distribute them. And that worked.
AS IT HAPPENED, that solution was taken too far, and they got “baby sitting token” inflation. And certainly the same thing can happen in real economies: it’s obvious to the average ten year old that if too much money is printed, inflation is the consequence.
On the other hand, get it right (i.e. print the right amount) and you can achieve full employment without excess inflation.