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When we're thinking about how economies work, the tricky thing is that they're systems and
you look at any particular corner of the system and you're gonna miss the big picture. But
the big picture's complicated, really complicated. So what I wanted to try to do was to find
examples of simple economic systems -- systems that were simple enough you could see all
the moving parts working and you could understand how recessions worked. And there were a couple
of examples that I found. One is not so famous. It's an example of a recession in a prison
camp and the other is a lot more famous because Paul Krugman's talked about it. And that's
a babysitting co-op recession.
Now these aren't hypothetical examples. These aren't kind of, you know, textbook imaginary
things. These recessions actually happened. And in the case of the babysitting co-op recession
it was Capitol Hill, Washington DC, the late 1970s. It was written up in a learned journal.
And what happened was parents who joined this babysitting circle -- there were about 400
of them. They were trying to keep track of who was looking after who's kids. And it's
difficult to keep all that straight on a spreadsheet. And remember this is the seventies so you
don't have Microsoft Excel. So they had these little tokens and they'd pass these tokens
around. And if you looked after somebody's children then you would be given a token.
And then when you wanted someone to look after your children you'd give them a token. So
they had this currency and that's great.
Except what happened was when people who joined the babysitting co-op they were given these
tokens and they didn't have quite enough, not enough babysitting could be bought with
what they had. So they thought to themselves, why don't I go and babysit for somebody else
a few times and then I'll have a good stack of these tokens. And then once I have a good
stack of these tokens then I'll start going out myself and hiring babysitters. The trouble
is everybody in the babysitting co-op was doing exactly this. And if everybody in the
babysitting co-op was doing exactly this then no one's able to get a job babysitting because
everyone's just trying to work for everyone else.
Now there are a number of possible solutions to this. One is that people would just agree,
hey, this token that we've got that's worth an hour's babysitting. Let's say it's worth
two hours babysitting. Let's say you could buy twice as much babysitting with this token.
And that could potentially solve the problem. But that's not what people did. People, I
think, felt uncomfortable renegotiating the contract. So a second thing you could do,
and they tried this, was to legislate how often people had to go out. So they came up
with this rule that people had to go out at least twice a year. Now I don't have a really
hectic social life. You know, I've got three children. I'm an economist, you know. I don't
go out that much but, you know, even I think that going out twice a year is not that much.
And if that's your baseline that's gonna kick start the babysitting economy you have a problem.
In the end the babysitting recession committee, or the babysitting committee solved the problem
by simply issuing more of this currency. They printed more of these little tokens, they
handed more out, they handed more out to people when they arrived, they took fewer away from
people when they left the babysitting co-op. And that worked beautifully. That kick started
the whole thing. And this massive long lasting recession suddenly evaporated which is great.
Then they printed too many. They had a hyperinflation problem and the economy crashed again. But
that just goes to show it's not easy to run an economy.
Now I've been fascinated by these two simple cases of economies that went wrong. One, the
babysitting co-op, very famous. So what's the other one? The other one is what I call
the prison camp recession. And again this really happened. This was a recession that
took place in a second world war prison camp. And it's a very different kind of recession
to the babysitting co-op and that's why I think it's interesting. So what happened was
this was an economy -- there was an economy in this prisoner of war camp. It was mostly
based on exchange. Food would come in from the International Red Cross. There'd be bread.
There'd be medicines. There'd be coffee. There'd be cigarettes. These parcels would arrive
and prisoners would trade them. So some people didn't eat meat. The English wanted tea. The
French wanted coffee. People wanted different things.
And there was a little bit of production that took place in the camp as well so people would
polish each other's boots or offer to fix up suits or uniforms, do stitching. There
was even a guy who had a food cart. He'd sell tea. He'd sell coffee. He even had an accountant
working for him. So there was this economy in this prisoner of war camp. Now what's interesting
about this economy is it worked incredibly well under the circumstances. It was very
sophisticated. So there was a futures market for bread. You know you could buy bread now
or you could buy bread on Tuesday. And the price, you know, pay now for bread to be delivered
on Tuesday.
And the price of those two things was different. There was an export market. So at the time
Germany -- this prison camp was in Germany with allied prisoners. The Germans couldn't
get coffee. Well the prisoners were getting coffee sent to them by the Red Cross. So there
was this market price for this coffee and the coffee would go over the fence and be
exported to Germany and be sold in black market cafes. So a very sophisticated economy. Only
one thing. Those prisoners nearly starved to death. And the reason they nearly starved
to death wasn't because of any flaw in the way that economy worked but because of an
external shock.
And it's not hard to see what the external shock is. The Red Cross food parcels stopped
arriving because the war had got so severe that they couldn't get through anymore. Now
that sounds like a really extreme example and, of course, in many ways it is. But it
actually illustrates a very important disagreement in economics. So there are economists who
focus a lot on the idea that the economy itself malfunctions, gets out of equilibrium, maybe
because prices don't move. And they would look to the babysitting co-op as their totalic
example. The New York Times columnist Paul Krugman does this. It's a great way of explaining
how a recession can happen because an economy gets stuck internally. And when an economy
gets stuck internally you need a government to come in and give it a kick start, maybe
some kind of stimulus.
A prison camp's totally different. The prison camp reflects an economy that was working
perfectly well, prices are adjusting, everything's working brilliantly. But there's this shock
that comes from outside the system. And in the real world that shock could be a change
in China's trade policy. It could be a change in oil prices. It could be a shock from the
financial system. You know hitting the real economy in the manufacturing and services.
The banking crisis hits us from the outside. And if that's what's going on than a government
stimulus program won't necessarily help you. The government can't necessarily get things
started because fundamentally there's nothing wrong with the economy. The economy's working
fine. It's just that something -- we were hit by an asteroid. The economic equivalent
of an asteroid.
So when you hear economists arguing about whether there should have been a stimulus
program, whether there should still be a stimulus program, what they're really arguing about
is is the American economy more like the babysitting co-op or is it more like the prison camp.