There once was a French economist whose name was Say. Proclaiming that “Supply Creates Its Own Demand,” Jean-Baptiste Say (1767-1832) entered economic history with Say’s Law. All he meant was that workers are also consumers. The money you receive for producing a good or a service is the money you spend.
When the members of a 1970s Washington DC babysitting co-op paid the scrip they earned for babysitting to co-op members who babysat for them, their supply was creating its own demand. The problems that developed though, are the reason for our story.
Approximately 150 families were members of the Capitol Hill Babysitting Cooperative. Each received 40 pieces of scrip that entitled them to 20 hours of babysitting. They also paid dues of 14 hours a year that was given to the co-op’s officers. For matching sitters with sitting requests, a member got 1 hour per month for each member-family in the group to which he or she was assigned.
Imagine that you were in the co-op. If you went to dinner and a movie on a Saturday night, it might cost you 5 hours and you only had a total of 20. By going out less and doing some extra baby-sitting, you could accumulate the hours you might need, especially for some special occasion when you needed more.
And therein lay the problem.
When people started saving too much, Say’s Law stopped functioning. Although members wanted to “work,” few were willing to “hire” anyone. The cycle was grinding to a halt. We could even say that the diminished spending had created unemployment and less production — a recession.
What to do when you have a recession?
If you are an attorney, which most members were, you make rules. So, they decided to require that members go out at least once every six months. As a member explained, “The thinking was that some members were shirking, not going out enough, displaying the antisocial ways and bad morals that were destroying the co-op. Hence the bylaw to correct morals.”
When the bylaw flopped, the next move was to issue more scrip. Each member got 10 more hours. They also decided that members who left could hand in 20 hours rather than the total of 30 that they now had. It worked.
The extra “income” from this easy money policy generated a new set of incentives. Families felt they had enough hours and began going out. All went well for awhile.
Then though, with more people going out for more hours, the co-op experienced a babysitter shortage. The new hours that everyone received had upset the Say’s Law balance. Whereas initially, there was a babysitter glut when everyone stayed home to hoard hours. Now, responding to inflationary incentives, soaring demand resulted in a babysitter shortage.
Starting with Paul Krugman, economists love this tale. Dr. Krugman says the economic lesson is that easy money can cure a recession. Others, citing quite the opposite, focus on the co-op’s double dip recession. The first was caused by too little money, the second by too much, and both they believe were caused by government interference.
Our bottom line? With all eyes on the Fed, wondering when they will start to nudge interest rates upward, the same monetary policy debate continues. Some say sluggish GDP numbers and high unemployment indicate government has not done enough. Others respond that the market’s supply and demand would have done a better job and too much monetary easing will repeat the co-op’s double dip.
Have you had any co-op experience that echoes the economy? Please let us know in an econlife comment.
Sources and Resources: In Tim Harford’s The Undercover Economist Strikes Back (a good read), he tells the co-op story. Only 5 pages, the original paper (source of my quote) from one of the members whose husband was a Treasury official complemented the Harford book as did an essay from Paul Krugman.