One of Paul Krugman’s favorite stories is about the baby-sitting co-op that almost collapsed when members started hoarding scrip; similarly, he says, a lot of economic activity can dry up when people start hoarding money. Last Tuesday, in a post called Nursery Tales, I observed that money-hoarding can’t retard economic activity (at least in anything like Krugman’s sense) unless something prevents prices from adjusting. So absent an auxiliary story about what that “something” is, I don’t find the baby-sitting story terribly helpful.
Several commenters responded that in the real world, prices and/or wages are “known” to be sticky (that is, slow to adjust), and thought that this rescues Krugman’s metaphor. I don’t agree. Here’s why:
- The stickiness of wages and/or prices is an empirical question. It certainly can’t be dismissed out of hand, and I didn’t intend to imply that it could be. Color me agnostic (though instinctively skeptical) about the importance of these phenomena.
- My point was not that stickiness does not exist. It was that if your entire story rests on stickiness, then it ought to include some sub-story about where the stickiness comes from. Different sub-stories will have different macroeconomic implications.
- In the baby-sitting case, it’s pretty clear where the stickiness came from — the scrip was denominated in terms of baby-sitting hours and there were strong social strictures against trading at non-official rates. But none of that applies to money, which is not denominated in terms of labor hours or any other kinds of goods. Nowhere is it written on a dollar bill that this piece of paper is good for exactly 1/800 of a laptop computer. So if recessions are caused by stickiness, it’s not at all the kind of stickiness we see in the baby-sitting co-op — and therefore the co-op story cannot illuminate the root causes of a recession.
- On a side note, the baby-sitting story is not a story about wage stickiness; it’s a story about price stickiness. The baby-sitters in question were not each others’ employees; they did not have set hours or fixed duties. Keynesian economists tell stories about price stickiness and they tell stories about wage stickiness, but those are two different stories, with different implications for how recessions are likely to play out. So if you are the “sticky wage” brand of Keynesian — which Krugman often seems to be — then the baby-sitting story is not the story you want to tell.