# Think Tank > Austrian Economics / Economic Theory >  Krugman: Mises was "insane" (fail)

## heavenlyboy34

*Just for lolz at Krugman's expense:
hxxp://krugman.blogs.nytimes.com/2011/11/14/mental-monetary-disorders/
Mental Monetary Disorders*Brad DeLong has been blogging about von Mises and his belief  shared by a number of people to this day  that any economic expansion driven by monetary expansion must somehow be unsound and destructive.
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.
If you try to ask where the value of that money came from in terms of its production, youve already fallen into an intellectual morass. The point was that the miniature economy of the coop was suffering from inadequate liquidity, and creating more money eased that problem.
I know that a lot of people refuse to accept the possibility of such things, and nothing will convince them that a monetary expansion can ever do real good. But theyre mistaking their own confusion for profound insight.

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## hugolp

Keynesians are going insane. Delong criticized Mises for not respecting subjective value on money. Go figure.

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## BuddyRey

And yet, Krugman still refuses to debate Bob Murphy.

If the Austrians are so "insane", I wonder what he's afraid of..._catching_ some of the insane maybe?

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## heavenlyboy34

> And yet, Krugman still refuses to debate Bob Murphy.
> 
> If the Austrians are so "insane", I wonder what he's afraid of..._catching_ some of the insane maybe?


Maybe he'll debate Bob if Bob wears a straightjacket?

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## Cutlerzzz

Keynes was sane, right? The flip flopping eugenist bi-sexual sexual deviant that claimed that if the government printed money and burried it, that it would end the depression?

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## Lafayette

"_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_"

Nice story, inflating a paper currency, distorting the laws of supply and demand,price controls and ending with massive inflation and a crash.
http://faculty.wcas.northwestern.edu.../sweeneys.html

Krugman is truly insane, not only does this story not prove his point, it in fact disproves everything his wacked out economics is based on.

Hey $#@!,

How did that tech bubble work out for you? Whats that you say? It was a fluke and we just need a housing bubble to correct the problem?
Nope....
So we just didn't do it big enough?.... alien invasions you say?

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## Jingles

http://www.krugmandebate.com/

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## bamafanmco

It is the damnedest thing to here a "macro-economist". Defend expansionary monetary policy with a micro-economy example.

To prove that corn subsidies work consider the case of the corn farmer, for increased taxation, look at the newly utilized road we built, when looking at expansionary monetary policy consider one example of a person on the margin that is helped, but please ignore a cost to anyone else.

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## Bman

GUYS!!!

Seriously we need to build an outer space aliens defense system to end the recession!  We shall call it Operation Krugman is a Dumbass!

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## enter`name`here

From his linked article:  "Eventually, of course, the co-op issued too much scrip, leading to different problems ..."

of course there is no elaboration on this point.

At any rate it seems absurd to me to compare a 'coop' where the price of a baby sitting is fixed and unchaging, to a dynamic market economy.  Obviously if the money supply is fixed *and* so is the price, things can and will go wrong.


EDIT: also if one coupon garuntees you one hour of babysitting, then printing additional scrip would not cause inflation.  But how long can this continue?  will people keep babysitting knowing that scrip is just being printed?  

This example to me seems more like a failure of price fixing then of monetary policy.

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## farrar

Oh my god... Its taken me until now to realize...

Using a metaphor describing micro-economic principles and applying it to the macro-economy...

I have to say... Krugman is a pure genius... I mean, I can't believe I didn't see it before... How could we... 

Seriously... A #$%ing /METAPHOR! thats some higher level $#@! right there.

Really, I mean it... why didn't I see this before... its just... amazing...truly amazing...

I mean, you'd have to be a genius to peddle that kind of $#@! for reality. 

Or maybe I just give the world of academia far too much credit.

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## Rede

I'm not an economist, but in Krugman's story I've got to ask why wouldn't people start babysitting for less than an entire 'scrip' as each 'scrip' became more valuable? It doesn't strike me as a bad thing that the value of whatever your currency is goes up over time, rewarding savers but at the same time making it more attractive/affordable for savers to spend currency as their effective net worth grew?

It seems to me that, in his story, the price of goods (babysitting) cannot fluctuate freely... so I would suggest perhaps that the 'recession' would have been caused by price controls, not lack of quantitative easing.

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## hugolp

> I'm not an economist, but in Krugman's story I've got to ask why wouldn't people start babysitting for less than an entire 'scrip' as each 'scrip' became more valuable? It doesn't strike me as a bad thing that the value of whatever your currency is goes up over time, rewarding savers but at the same time making it more attractive/affordable for savers to spend currency as their effective net worth grew?
> 
> It seems to me that, in his story, the price of goods (babysitting) cannot fluctuate freely... so I would suggest perhaps that the 'recession' would have been caused by price controls, not lack of quantitative easing.


The problem with the babysitting story is that there is only one type of good. Therefore the economy of the story can only sell more or sell less. It can not change the type of goods it produces, there are no coordination problems. Manipulating the money you directly affect the demand for the only type of good. In the real life, manipulating money affects and distorts the type of good you are producing instead of just changing the amount of the only type of good being traded.

Its a really bad metaphore of reality. But Kruggy promotes this metaphore because macro-economic models assume there is only one type of good in the economy to make the models simpler and manageable. And thats one of the main reasons why these models dont predict $#@!.

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## flightlesskiwi



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## heavenlyboy34

> http://www.krugmandebate.com/


Didn't Dr Woods also issue Krugman a challenge like this?  I doubt Paul will have the courage to debate Bob Murphy, but I'd like to see it.

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## hugolp

> Didn't Dr Woods also issue Krugman a challenge like this?  I doubt Paul will have the courage to debate Bob Murphy, but I'd like to see it.


It was Bob Murphy.

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## mczerone

"You know what explains why the Misesians are so out of it on monetary policy?  Cinderella.  They always say "Midnight must come sometime", but they haven't figured it out!  I have it perfectly figured out, like some kind of story from Arabian Nights - you just keep wishing for more crap from your fairy godmother as soon as midnight is about to hit!  They're stuck in that old paradigm of there being no such thing as a free lunch.  But I know that to get every lunch for free, we just need to print more money for each lunch every day! Don't You See all the GOOD that comes from printing money?!?  Free LUNCHES FOR EVERYONE!!!"

People dislike Jim Cramer for being an over-enthusiastic tool that's always wrong, but Krugman is 100x more looney than Cramer could ever pretend to be.

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## GBurr

The babysitting co-op story has more holes than Swiss cheese. 

http://blog.mises.org/9699/krugman-a...-baby-sitting/

http://reason.com/blog/2011/11/16/pe...p-is-not-the-b

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## LibertyEagle

> "You know what explains why the Misesians are so out of it on monetary policy?  Cinderella.  They always say "Midnight must come sometime", but they haven't figured it out!  I have it perfectly figured out, like some kind of story from Arabian Nights - you just keep wishing for more crap from your fairy godmother as soon as midnight is about to hit!  They're stuck in that old paradigm of there being no such thing as a free lunch.  But I know that to get every lunch for free, we just need to print more money for each lunch every day! Don't You See all the GOOD that comes from printing money?!?  Free LUNCHES FOR EVERYONE!!!"


Did Krugman really say that?

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## unknown

> Anybody have a better theory?


Seems like a silly way to defend a system which has resulted in blatant failure.




> And in its scarier moments some of the trains of thought emanating from this deep point of view slide over to: "good German engineers (and workers); bad Jewish financiers" (and "good Russian Stakhanovites, bad Jewish Trotskyite intellectuals").


Any argument is strengthened by some good ol' fashioned antisemitism.




> Note that this does not just apply to fiat money produced by a government.


Our money is produced by our government?  Thats odd, I thought it was produced by the Federal Reserve.

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## KingRobbStark

Instead of claiming someones instead he should prove it. Unfortunatly keynesians have no substance, just like there money.

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## Steven Douglas

> Our money is produced by our government?  Thats odd, I thought it was produced by the Federal Reserve.


You mean that genie in the sacred bottle that government created and gave permission to create money in the first place? I never take my eye of the one that pulled the trigger, even by proxy or "from a distance" (or even at the behest of bankers who wanted some of their own to be made into genies).  The government created the Federal Reserve that creates the money - therefore the government created, and is responsible and accountable for, everything the genie does -including the creation of fictitious money.  Without government there is no Federal Reserve - just a bunch of renegade-but-mainstream banks engaged in fractional reserve lending which repeatedly and periodically fail, alone or in domino effect, as their inherent insolvency and fraud is tested and uncovered.

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## fisharmor

> I'm not an economist, but in Krugman's story I've got to ask why wouldn't people start babysitting for less than an entire 'scrip' as each 'scrip' became more valuable? It doesn't strike me as a bad thing that the value of whatever your currency is goes up over time, rewarding savers but at the same time making it more attractive/affordable for savers to spend currency as their effective net worth grew?


My immediate question was why the scrip holders didn't try to trade scrip for non-babysitting items.
Find something that the scrip hoarders value higher than the babysitting, problem solved.

Of course, his entire analogy assumes that the coop members have jack-booted thugs holding guns to their heads, with an implicit promise to do very nasty things to them if they try to pay with babysitting with something other than scrip.

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## Steven Douglas

*LAWYERS AND ECONOMISTS* - oh yeah, that's a virtual guarantor of intelligence and wisdom at work right there.  

*WHERE DO THESE IDIOTS COME FROM?*

Krugman's trip down the babysitting co-op rabbit hole was a pathetic attempt to bolster both the Keynesian "Paradox of Thrift" and simultaneously the wonders of an infusion of worthless scrip (issued equally to everyone, no less) as a means of "stimulating" the spending of scrip. 

Let us cut to the story's end, which passingly, almost dismissively, states:




> *Eventually, of course, the co-op issued too much scrip, leading to different problems...*


...followed by Krugman stating, _"If you think this is a silly story, a waste of your time, shame on you."_

Paul, if your arguments have any merit, sentimental pronouncements like shame and pride should be irrelevant - but they do serve as a tip-off that the logic is not so airtight, so that moralizing shame has to be invoked.  


*THE BABYSITTER CO-OP ECONOMY* (on its own merits)
Forgetting that the entire story begins with *"...obviating the need for cash payments to adolescents..."* (excluding pay to teenagers in our wonderful idealized economy is a good thing), the primitive, simplistically childish rendering of the Keynesian so-called Paradox of Thrift at work in Krugman's Babysitting mind goes like so:




> ...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.


Ooooh! A chance to baby-sit, yippeee! And a reluctance to spend precious “hoarded” scrip...awwww... poor co-op. If it wasn't for those damned hoarders of pre-issued, unearned scrip...whatsomever shall we do about it? 

What Krugman's favorite little infantile story failed to acknowledge was that there was never an _extinction_ of scrip (although arguably there is nothing inherently wrong with that) - only that the few spenders of scrip heavily outnumbered the many savers who were (ostensibly) more than willing to work for it, but not spend it themselves.  

What really happened:  the "collective savers" made RIGHTFUL KINGS out of the spenders, who could pick and choose _their favorite babysitters_ at will (given no rational or sane assumption on the part of even the goofiest-minded that all babysitters are somehow equal). But the smoking caterpillar and the Cheshire Cat both insist that they are all equally fungible services, so let's go with that. 

Note: the entire co-op is designed with an _a priori_ assumption that 




> *"...there must be a system for making sure each couple does its fair share."*


This assumes that a "fair share" can even be determined, given that not all couples have the same babysitting requirements, let alone the same availability of time to babysit.  This is _not a naturally self-regulating system_, let alone a free market that acknowledges or respects individual differences. A master manipulator had to be involved, up front, to dream up ways of "making sure" that a "fair share" (assumed at the onset) was taken on _by each couple_.  

Another fatal mistake was made: 




> It issued scrip--pieces of paper equivalent to one hour of baby-sitting time.


Now, why in the hell would you ISSUE unearned scrip in advance?!  

Unless, of course, they are like checks - worthless until signed, and all on the assumption that the co-op is tracking personal accounts - thus, a self-checking system _"...for making sure each couple does its fair share..."_ (individual accountability, without the requirement of strange external predictions or machinations)

The above is what they never tried - a common sense, working, completely voluntary, self-checking, self-regulating "free market" co-op system - in a nutshell. 

If you belong to such a co-op, the entire system can theoretically start out from zero - and can just as theoretically return to zero with nobody hurt. The moment JUST ONE couple wants to finally go out (thus hiring another couple) a single scrip can be created and circulated within the co-op. 

So the couple that babysits accepts an IOU SCRIP - a personal check drawn on the previously zeroed account of the couple it babysits for. They are then OWED one scrip worth of babysitting _from that couple_ - and are thus in possession of the ONLY receipt, or scrip, yet in existence. They have "CREATED MONEY", but not out of thin air, because it was created by a service which had value, and was immediately offset by "A CORRESPONDING DEBT".  

Furthermore, scrip does not have to be valued at “one hour”.  It can be ANY VALUE.  Completely divisible, right to the second.  The co-op can track all of this  quite easily.   

Now, when you receive an "IOU scrip", you can 
a) deposit that scrip into your co-op bank account, OR... 
b) bypass the bank altogether and directly "spend" that scrip with another couple, giving them title to the same IOU in exchange for the babysitting they do.  

Because you’re dealing in unequal amounts, it may be more convenient to let the co-op BANK handle the details, BUT...if you have an equal amount (one hour scrip in exchange for one hour of babysitting), you can just “float” the receipt, which can still be deposited later “to the bearer’s account”,  with a corresponding debit to the account of the original issuer. 

Again, nothing out of thin air in either case. When the co-op bank receives scrip with your name on the IOU, it makes a corresponding credit to their account and debit to your account.  When you deposit your scrip with someone else's name on it, that is credited to your account and debited from theirs. Your debt is canceled out, and you are back at zero.  

Now let's say that you have babysat already, and are in possession of a piece of scrip from someone else.  However, for some INSANE reason, you value the scrip you already have so much that you instead issue a new piece of scrip to the couple that babysits for you.  Now you have offsetting scrip - you owe somebody in the co-op, and somebody owes you.  Both are circulation. Big deal, they offset  each other. 

There is no need for some mushy-noodly pointy-headed system for _"...making sure each couple does its fair share..."_, because all of that is very easily tracked - (by any lay person with an ounce of common sense anyway).  Furthermore, mandatory participation BY ANYONE is absolutely unnecessary for the system to work.  (mandatory participation being a very good sign that a system is flawed in such a way that someone is guaranteed to be screwed)

If a couple that is owed never spends their earned scrip, they will have worked for free.  *So what?*  Let them "hoard". IT IS DEBT TO THEM. THEY EARNED IT. 

Now let's look  at Krugman's baseless, moronic assumption that the savers "probably" outnumber the spenders - everybody wants to hoard scrip, nobody wants to go out.  So what?  If you DO want to go out, he assumes that there are plenty who are more than willing to babysit for all that "precious scrip", and the system can be at a standstill until someone, somewhere finally decides to go out!

But let's look at the opposite of Krugman's assumption. What if the spenders outnumber the savers - everybody wants to go out, but nobody wants to babysit?  Some might consider that FAR more likely, but again, who cares.  The IOU's in circulation all have someone's name on them, and UNPAID SCRIP is all tracked by the co-op BANK.  At the very least, you KNOW who is in default - who is incurring debts without payment in return.   

Now, there is risk involved in either system, because there is always the chance that you might work for a piece of scrip that cannot be later redeemed.   For example, someone incurs a debt to the system, but later moves away (defaults).  That's the nature of all debt instruments, and the faith you place in the co-op – but that can EASILY be handled by a deposit or some form of security collateral, in addition to “dues” that cover administrative expenses, to be paid out at the end to anyone who is left holding scrip that is considered worthless in the event of a system-wide default. As long as the failsafe doesn’t “become the system”, the risks can be contained. 

What is so hard about that?


You know what I found the most funny about the whole thing: Krugman's tag-line to that article:

*The baby-sitting co-op that went bust teaches us something that could save the world.*

Well, given that it couldn't save itself, it might as well save somebody!

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