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Paul Krugman repeatedly refers to this model to justify money printing. Amazingly, though, he misunderstands his own model.

What’s Wrong with Krugman’s Baby-Sitting Co-Op Model?

The famous Keynesian economist Paul Krugman says a story about a baby-sitting co-op “changed my life”, and he argues that it’s a “story that could save the world”. From his 1998 Slate article:

The Capitol Hill co-op adopted one fairly natural solution. It issued scrip--pieces of paper equivalent to one hour of baby-sitting time. Baby sitters would receive the appropriate number of coupons directly from the baby sittees. This made the system self-enforcing: Over time, each couple would automatically do as much baby-sitting as it received in return.

Okay, so an economy with “money” that can only be used for one thing. This is not really money, more like barter. Couples trade baby-sitting services for promises to babysit in the future. Note also, prices are fixed to one hour of babysitting per coupon.

The story continues:

[F]or complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple's decision to go out was another's chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.

In short, the co-op had fallen into a recession.

In other words, the supply of coupons was reduced, increasing demand for the remaining coupons. Evidently, unlike the real economy, prices were not allowed to adjust. One coupon was officially worth one hour, even though the market clearing price was higher. Naturally couples preferred hoarding/saving the more valuable coupon instead of getting one hour of babysitting.

This is where the model completely fails to resemble the market economy. Prices are apparently not free to adjust, and the coupons- good for only one product- don’t even resemble money in the first place. Yet this doesn't stop Krugman, he equates the coupons with money:

Since most of the co-op's members were lawyers, it was difficult to convince them the problem was monetary.

Now in his model, he is correct to say...

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