Daily Archives: January 6, 2014

Keeping it Simple

Many academics, and economists are no exception, rate difficulty of understanding as a virtue in itself . A look at any modern economics journal confirms this. A incomprehensible argument can bring a lot of academic kudos! The problem, though, is that when an argument appears incomprehensible, it often means the person making it doesn’t understand it either and it therefore may well turn out to be quite wrong.  I’ve seen one blog which compares economics to Quantum mechanics! Which is a load of b******s IMO!

We can often get a good insight into what is wrong with the real economy by looking at a very simple economy. For example, suppose we look at the case of a baby sitting circle which has been set up by parents of small children. They set up a club, elect a club council and issue everyone with two tokens. Straightway we can observe that the council are going to be in ‘debt’ to the number of tokens they have issued. That’s no big deal is it?

If every parent  both sits, and is sat for, regularly then the system should work very well. Those doing the sitting are paid one token. Those who are sat for have to pay one token.

But, say, after a time some parents start to like the idea of accumulating tokens which they keep in the proverbial cookie jar at home.. For whatever reason, they do more sitting than they need to cover their spending.  Maybe they are planning to have lots more children at some time in the future and they think these tokens will come in handy. Or maybe they just have a squirrel – like mentality. Who knows?

Inevitably, the number of active tokens in the club diminishes. Parents notice that there just don’t seem to be many tokens around any more. Parents still need baby sitting and other parents are willing to do the sitting but there are no tokens around to to pay for the service. Invitations to social events have to be declined because of that! So the members petition the club council to issue more tokens. Of course those with the biggest store of tokens don’t care for this idea. They say the members of the club have to learn within their means. They say its wrong for the council to issue more tokens and go even further into debt. They’ll warn that issuing more tokens is just a sure fire road to hyperinflation. They’ll ask if members of the club really want to have to pay with a wheel barrow full of tokens for just one night out!