I've been trying to read Krugman's book (I find it heavy on rhetoric and short on logic) and have been thinking about his babysitter analogy. I see RockyRacoon's point about the price-fixing. Maybe I'm wrong, but it seems to me there are other problems as well. In this analogy, the money is originally distributed equally in an amount set by the "government", and they clearly did not forsee the need of the members to have a reserve of coupons. Of course, even our fiat money system does not work this way (although perhaps we are headed in that direction), but this raises the question of how a real money system works.
It seems to me that real money is a real commodity, like metal, that has worth in an of itself. This means that there is not a fixed amount of money, since there is not a fixed amount of goods. If we ran out of gold, something else could be used for money. As productivity goes up, so can the amount of money in circulation. When we trade in a real money society, we are really trading goods for goods. The total wealth of society can and does increase over time because new and more things are produced.
Krugman's analogy seems to imply that this cannot occur, and this causes problems for his illustration. In his illustration, there is no way for a parent to get more coupons except to trade them back and forth with someone else. That is, they must obey the law of conservation of money--it cannot be created or destroyed. They cannot make more money themselves--they cannot produce wealth, only trade it back and forth. This leads to a problem if the total amount of goods originally present is exactly enough to meet the needs of everyone, and no more. In such a case, one person's hoarding means that others don't get what they need.
In the real money world, there is not a fixed amount of goods that exactly matches society's needs. There is an excess of goods and new and more goods can be produced. In other words, there is not a fixed number of coupons (money) because there is not a fixed amount of products (babysitting). If the analogy is to be realistic, the babysitting must stand for products. But it really does not work well for this purpose. There is no provision in Krugman's analogy for increases in productivity or innovation. His "economy" is a static one. It cannot grow.
And his solutions are worse. Even in his frozen economy, his solution of printing coupons only, as others have said, devalues the coupons. If I have been saving coupons, I do not want to hear that everyone is going ot get a whole bunch of new ones. Or, at least, I want to be the first to get and use the new coupons.
Am I missing something? I am new to this.
William Green: Krugman's analogy seems to imply that this cannot occur, and this causes problems for his illustration. In his illustration, there is no way for a parent to get more coupons except to trade them back and forth with someone else. That is, they must obey the law of conservation of money--it cannot be created or destroyed. They cannot make more money themselves--they cannot produce wealth, only trade it back and forth. This leads to a problem if the total amount of goods originally present is exactly enough to meet the needs of everyone, and no more. In such a case, one person's hoarding means that others don't get what they need. In the real money world, there is not a fixed amount of goods that exactly matches society's needs. There is an excess of goods and new and more goods can be produced. In other words, there is not a fixed number of coupons (money) because there is not a fixed amount of products (babysitting). If the analogy is to be realistic, the babysitting must stand for products. But it really does not work well for this purpose. There is no provision in Krugman's analogy for increases in productivity or innovation. His "economy" is a static one. It cannot grow.
So they can't make more money, but they should be able to increase productivity (i.e. how much babysitting they can do for a certain amount of coupons), which would bring down the price enough to allow people to buy products and still hold reserves of money. I guess it really all comes down to price, then, as was suggested in the other thread.