Saturday, January 22, 2011

Krugman on Baby Sitters and Depression Economics

In his blog post against Robert Murphy, Paul Krugman gently chides Murphy for using a fictional  story to explain capital theory and the business cycle, while noting that at least the baby-sitter co-op story he likes to use is based, as they say in Hollywood, on a true story. Krugman explains economic recessions using the tale of a baby-sitting co-op that ground to a halt due to members hoarding babysitting tickets.  He used this metaphor as the key explanatory tool in his book Return of Depression Economics, first published in 1998 and then re-issued with additional material discussing the most recent economic crisis.

The problem is that, while the baby-sitting co-op may have really existed, it is not a good metaphor for an economy supported by a vast, complex structure of heterogeneous capital. Interested parties can read my evaluation of the weaknesses of Krugman's paleo-Keynesian approach in this essay reviewing the first edition of Krugman's book..

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