Babies With Candy (or Baby Sitting on Capitol Hill)

The heart of Krugman's Times Magazine article is a cute"parable" about the Capitol Hill Baby Sitting Co-Op, first recounted in a 1977 article:

This co-op... was an association of about 150 young couples who agreed to help one another by baby-sitting... To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons... entitling the bearer to one half-hour of sitting time. Initially, members received 20 coupons on joining and were required to return the same amount on departing the group.

Unfortunately, it turned out that the co-op’s members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer. . . .

[in] this particular example... a recession is a problem of inadequate demand — there isn’t enough demand for baby-sitting to provide jobs for everyone who wants one...

Freshwater economists... believe that all worthwhile economic analysis starts from the premise that people are rational and markets work, a premise violated by the story of the baby-sitting co-op. As they see it, a general lack of sufficient demand isn’t possible, because prices always move to match supply with demand.

To Krugman's perverse view, we are always in a recession as there is never enough demand for -- to take an example -- Princeton Economics Proffessors or New York Times Columnists to provide jobs for everyone who wants one. More sensibly viewed: The problem was that people went out less then they otherwise might have.

Reading the actual 1977 article, it is evident that Krugman, for his purposes, misrepresents crucial detail:

• The price of the scrip was constitutionally pegged to one half-hour of sitting time.


• According to the authors the shortage of scrip did not stem from irrational fears of co-op members. Rather there was an ill thought out co-op management regime which removed about 5% of scrip from circulation annually.


• The co-op first attempted a rule mandating that members go out more. When this failed, they adjusted the rules such that new members received 30 scrip but only had to pay 20 on exit. According to the authors this worked for a while but eventually resulted in the reverse problem where more people wanted to go out than babysit.

The "Freshwater" premise, that free markets work because prices move to match supply with demand could hardly be violated by dysfunction in a "market" in which prices were constitutionally fixed.

The key to this whole thing is the silliness of the scheme. The scrip served no earthly good. There is no advantage to a couple babysitting for scrip to spend on babysitting over babysitting for dollars to spend on babysitting. The value the co-op created by establishing a babysitting exchange was impaired by the demand any transaction be in the heavily regulated scrip rather than dollars.

This was, in other words, a market designed to fail by regulators who didn't believe in markets. The primary lesson of this parable is the opposite of what Krugman would have his readers believe.

There is, to my mind, a more interesting take away from the observation that given the silliness of the scheme, there was an anti-market selection bias amongst people choosing to participate. More enterprising people may well have created a black market for scrip in which prices varied with changing supply and demand, saving the co-op from itself.

If this can be applied more broadly, it would argue that a foolishly regulated market economy (and, frankly, which isn't?) depends on a market-oriented culture to function well. In such an economy, market dysfunction can be caused by cultural change.