Tim Harford presents two surprising examples when explaining how recessions work. A contributor to the Financial Times and author of five books, including his latest, The Undercover Economist Strikes Back, Harford tells the story of the Washington, DC babysitting co-op. Sounds innocuous enough.
Unfortunately for the co-op, babysitters outnumbered demand. “No one’s able to get a job babysitting, because everyone’s just trying to work for everyone else,” he says. The co-op’s recession was solved when the babysitting committee cooled the jets of would-be babysitters by distributing more tokens—the currency that drove people to babysit in order to collect and then cash-in on tokens they needed to hire a sitter. Everything worked beautifully, says Harford, until the committee printed too many tokens, and the co-op was hit with hyperinflation.
It’s certainly tough to run an economy, as Harford points out. Watch Big Think’s interview with Harford to hear the example in full.
But what can a prisoner of war camp teach us about recessions? In his interview, Harford shares a little-known economic story from a prisoner camp in World War II. The prisoners developed a dynamic economy, especially given the circumstances. Based on exchange, the economy ran on prisoners bartering goods, which they received from International Red Cross packages, and services, like boot shining, that they were able to provide. “It was very sophisticated,” says Harford. “There was a futures market for bread.”
The British could have their beloved tea, and the French could access coffee. Everything seemed to be going well.
When the war impeded the Red Cross’s ability to deliver packages to the camp, the goods dried up, and the prisoners faced starvation. The economy was hit by an external shock.
According to Harford, the prison camp (the economic equivalent of an asteroid) and the babysitting co-op (internal policy) are what economists debate in regards to recessions and how to solve them.
“So when you hear economists arguing about whether there should have been a stimulus program, whether there should still be a stimulus program, what they’re really arguing about,” says Harford, “Is the American economy more like the babysitting co-op or is it more like the prison camp?”