I'm teaching a class in the economics of intervention. Yesterday I was trying to explain Paul Krugman's example of the babysitting co-op, and how a shortage of scrip led the economy into a recession. What I did was actually handout scrip, semi-randomly to different members of the class. Then I told them they each had a desired cash balance. (To keep things simple, I made it the same for everyone in the class.) If their balance was above that, then they would decide to "go out," and would try to hire a babysitter. If their balance was lower, they would "look for work" and accept babysitting jobs, in order to raise it. We went through several "rounds" of this economy, and students saw their cash balance go up and down, and exchanges occurring.
Then I began to withdraw scrip from the economy. After a couple of more rounds, everyone's cash balance was too low, and no further exchanges took place. We had created a Krugmanian recession, right before their eyes. Then I pumped cash back in, and they saw economic activity resume. Now they had witnessed Krugman's solution first hand as well.
This is an exercise I highly recommend. Even if you think Krugman is wrong in his diagnosis of what is troubling an economy in recession, you should want your students to understand his theory.
And next class, I will introduce price flexibility, and show them how reduced wages for babysitting are an alternate solution to pump priming in getting the economy going again.
And then they will understand that the chief dispute between the defenders of Say's Law and the general glut theorists is an empirical one: what predominates in any real economy, quantity adjustments or price adjustments?
Modern excuse: "Dual-factor authentication ate my ability to do my homework."
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