I posted a link to Bryan Caplan’s paper on Behavioral Economics and the Welfare State. Many of the comments I got from economists were predictable:
- Where is the formal model and existence proofs?
- Where is the data analysis?
- How is this a paper?
- Do you mean to tell me this is publishable?
I too was shocked initially by these features or lack thereof. However, that’s part of what made the paper compelling.
Some papers get a wonderful data set, perform magnificent identification and get a result that really changes your mind about something you care about. Most don’t.
Most are cases that are of very narrow interest or do a 90% good job at the ID but leave enough doors open that you are not really sure if the result is meaningful or not.
On the other hand, one could as Bryan and his co-author did, attack an important question, string together some non-obvious points and in my case leave the reader thinking about whether he or she should reexamine an import view.
The profession should rightly celebrate the first kind of paper. However, what about the relative worth of the second and the third?
I submit that bringing up arguments that use the economic way of thinking matter. This is true even if the argument is not definitive, has no mathematical proof behind it and marshals no data.
Let me give a more timely example. We are now engaged in a debate over the nature of recessions and how the government should respond. There are obviously lots of models and empirical studies, none of them perfect.
However, more than any other analysis the baby-sitting coop story made me a confident Keynesian. Before then I could parrot the New Keynesian models and understood that this was more or less what a smart economist was supposed to say.
However, I didn’t know how to counter the logic of Laizze Faire except to say, “well there are sticky prices and an Euler equation and so the household will adjust consumption . . . “ This is compelling to virtually no one – not even, on a deep level, to myself.
When it really came down to it, I would have been left with “Great Depression! Want it to happen again? No? Then we need to spend more money or cut taxes! Why? Because I am very smart and I have a whiteboard. Do you have a whiteboard?”
However, a simple story about baby-sitting and it all fell into place. Paul Krugman has retold the story many times. Its about a baby-sitting co-op that uses scrip to track how many times a couple has sat for other members of the co-op and thus how many times someone should sit for them.
Because of some mismanagement in the handling of scrip the co-op at one point went into recession. There weren’t any fewer people who could babysit and there weren’t any fewer opportunities for couples to go out. The real baby-sitting economy hadn’t changed.
Bad policies by the co-op leaders reduced the number of scrip per couple. And, for lack of scrip no one went out. And because no one went out, no one sat. And because no one sat, no one got any scrip. And, since no one got any scrip, no one could go out . . .
Excess demand for financial assets led to a collapse in the demand for real good and services. Something that seemed extremely complicated was elucidated by a simple story.
Years ago that story was printed in an economics journal. I read it in the Slate.com archives.
As I have mentioned before I started warning of a Japanese style scenario in early 2008, not because of a formal model, but because of that baby-sitting story.
You see, the investment banks were like a baby-sitting couple who by borrowing and lending script and carefully tracking dining out patterns with fancy computer models had assured everyone that any couple, at any time, could find a baby-sitter whether they had physical scrip or not. Just come to us, and we’ll make it happen. No scrip down as it were.
That system was about to collapse and when that happened the demand for physical scrip was going to skyrocket. If you believed the original baby-sitting story that meant a recession of epic proportions. We were going to need a lot more scrip and the Fed didn’t seem to get that.
Nor, I should mention, did may people familiar with mainstream macro-economics. Its not that you couldn’t have gotten that result out of the math models. Its that you wouldn’t have known where to look.
You would have thought about wealth effects and the distributional impact of housing. Willem Buiter, a very smart man, insisted there would be no recession because the decline in the price of houses made homeowners poorer but homebuyers richer. This does somewhere between little and nothing to the representative agents Euler equation. However, Buiter failed to consider the simple lesson of the baby-sitting economy.
Buiter, forgot about scrip.

14 comments
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Wednesday ~ February 2nd, 2011 at 1:05 pm
Roland
Thanks for mentioning the baby-sitter coop essay..not only incredibly helpful to me, but used many times in a classroom setting.
Wednesday ~ February 2nd, 2011 at 1:50 pm
MRP
‘Scrip’, not ‘script’
Wednesday ~ February 2nd, 2011 at 2:14 pm
Corey Mutter
I’m so stealing the “I’m very smart and have a whiteboard. Do you have a whiteboard?” line.
Wednesday ~ February 2nd, 2011 at 6:14 pm
Verbatim
On the one hand, I am glad such papers can get published (for selfish reasons – I’d like to sell more ‘papers’ and I greatly enjoy reading informal work as you may guess from the fact that I am reading your blog).
On the other hand, I think it is dangerous to extrapolate from simple stories. The baby-sitting co-op and the parable of the broken window (or even the sushi-island example that Krugman referenced in his blog a couple of weeks ago) suggest COMPLETELY different policies. A formal model with some structure will identify restrictions on parameters or suggest empirical patterns that we can then test using positive economics.
The whiteboard can help streamline our thinking (are there any fallacies in our implicit modeling, are the parameter restrictions realistic, and so on) and data analysis can help confirm whether our model and its implications apply to our real world rather than merely represent a hypothetical possibility in some distant coordinates of our multiverse.
Thursday ~ February 3rd, 2011 at 11:01 am
Evan
Interesting that you bring up the sushi-island example, because that to me is an excellent case of why these “parables” are useful. I’m not an economist and don’t have the background to argue with Murphy on the math… but when I read his story of the islanders and the sushi, the flaw in his reasoning leaped out at me. (Specifically, his claim that unemployment is inevitable because only so many boats and nets are needed and therefore only a handful of islanders can be employed making them; neglecting the fact that more workers can often be used to get the same amount of work done faster, rather than doing more work overall, and doing so would result in a strictly better outcome.)
Obviously, this kind of reasoning has its limits. But I know from my own experience in software development how easily one can become lost in abstraction, building elaborate systems to move electrons around when what you really need to do is step back and ask yourself, “What is the user trying to do here?” You need the abstract model, but you also need to keep it grounded in the reality it’s modeling.
Moreover, economists make up a fairly small share of the electorate. But we the voters are being asked to choose between two competing economic views. Having each side put its “parables” forward gives us non-economists some basis for making that choice.
Wednesday ~ February 2nd, 2011 at 6:24 pm
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Wednesday ~ February 2nd, 2011 at 11:09 pm
teageegeepea
Steve Williamson should write about how Minneapolitans are better babysitting co-opers than Washingtonians. On his blog, of course.
Wednesday ~ February 2nd, 2011 at 11:35 pm
Richard H. Serlin
See this comment by Nick Rowe:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/09/blogging-as-crack.html?cid=6a00d83451688169e20133f4117dce970b#comment-6a00d83451688169e20133f4117dce970b
Thursday ~ February 3rd, 2011 at 12:36 pm
Jeff
The situation with the babysitting co-op is different from this paper. In that case, there already were mathematical models of the phenomenon in question, and there was a body of research and data analysis connecting the theory to the real world. The problem was that this wasn’t very intuitively accessible. As you yourself note, you can know all of that stuff and still not really ‘get it’. The role of the parable is very specific to this situation: it allows the ideas to ‘click’. Thus, this anecdote shows that there is a positive role for parables, but that it is limited to situations in which certain conditions apply.
It does not take long to recognize that those conditions do not apply with Caplan’s work. It is not simply that there weren’t mathematical models in the paper; the requisite models aren’t anywhere. Furthermore, there have been many investigations of whether programs aimed at alleviating poverty end up further entrenching the poor, and the data do not unambiguously support this theory.
Thursday ~ February 3rd, 2011 at 6:29 pm
Richard Allan
I regard the Capitol Hill Babysitting Co-op article as complete garbage. Scrip representing half an hour of babysitting time is not “money”. Money is the most general of the general commodities, ie. a commodity whose marginal utility declines more slowly than all others. Babysitting labour is the most specific of the specific goods; I would expect its marginal utility to decline very rapidly.
The problem with Capitol Hill was not that the supply of scrip was curtailed, but that the system, by its very nature, fixed the price of everybody’s labour equal to each other. Imagine if we passed a law stating that everybody had to earn the same wage! Of course we would face a recession in that instance, no matter how long the gov’t decided to run the printing presses.
The empirical literature I’ve seen is unequivocal that inflation does not boost real output. If you’re facing a recession, then you need to look elsewhere than the money stock for a cure – like the taxes and regulations that make it unviable to work and invest.
Thursday ~ February 3rd, 2011 at 6:45 pm
Evan
“The problem with Capitol Hill was not that the supply of scrip was curtailed, but that the system, by its very nature, fixed the price of everybody’s labour equal to each other.”
Then why did issuing more scrip fix the problem?
Thursday ~ February 3rd, 2011 at 7:39 pm
ecolecon
Seriously, would you care to explain what you “learned” from the coop example, why you think it is reasonable as a model of the real world, and perhaps how the model could be empirically validated so that Richard Allen could be convinced by the evidence? To put it differently, is the coop story a metaphor that you either find convincing or not, or is it a conceptual model that helps us frame and empirically test a falsifiable hypothesis?
Thursday ~ February 3rd, 2011 at 9:29 pm
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Thursday ~ March 31st, 2011 at 4:21 am
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