This is only true if you believe recessions are caused by a lack of confidence, rather than by negative returns on bad choices.
It also assumes that A stuffs the money into the mattress rather than lending it to C, who uses the money to create something that B wants to buy.
It's a very simplistic two-part scenario and has a lot of problems, not in the least what the 'something scares A' part of it. It also assumes that nobody else wants to buy products from B.
In fact the more I read it, the less I am convinced it has any merit at all.
Re:TED and inequality: The real story
by aptwebapps on Friday May 18, 2012 @12:33AM
(#3990364)
In fact the more I read it, the less I am convinced it has any merit at all.
Which? The model ealloc describes or the Babysitting Co-op scenario? They aren't actually the same.
Re:TED and inequality: The real story
by aptwebapps on Thursday May 17, 2012 @11:45PM
(#3990267)
I believe the Babysitting Co-op scenario is a little different. The solution there was not to redistribute the scrip but to print more.
Nevermind its simplicity, that model is just not an accurate representation of why economic transactions take place. I will only pay you $5 if I value the goods I'm getting in return more than my money, and likewise you will only accept it if you value the money more than the goods. The "babysitting co-op" scenario would only happen if everyone involved ultimately values everything equally, which of course they don't.
Sure they can, according to some models.
Here's the argument: Say A and B produce goods for each other, and so A might buy something from B for $5, and B might come back and buy something from A with the same $5. They are happily creating value, trading back and forth. Now, say something scares A so that he wants to save some of his money instead of spend. Then B is getting less income from A, and so she also becomes worried about her future income and spends less. Then A gets even less money, and is even less willing to spend. As you can see there is a feedback cycle where A and B produce (and spend) less and less. This is a recession.
Now give B some money, possibly even taken from A. Now B is getting a more reliable income, an is more willing to spend on A, who thus earns more and becomes more willing to spend on B, and so on in positive feedback.
This is basically Krugman's "Babysitting Co-op" scenario.