People can be expected to follow Bitcoin’s conventions (like accepting the greatest-difficulty chain) without making promises to one another, because Bitcoin has its incentives in the right place. But because the exchange rate of bitcoins is set by the market rather than fixed, nothing like this has ever been a problem. Therefore the newly mined bitcoins should not be expected to have any effect on the Bitcoin economy to prevent liquidity traps. Krugman misrepresented or misunderstood the original article and failed to discuss the price control imposed by the co-op, which means that he fails to show that the co-op’s situation has anything to do with the American economy. 1. I suspect that Krugman did not go back and review the original article when he wrote his 1998 column because he makes a few errors that he probably would otherwise have caught. It is different for reasons that have been noted neither by the Sweenys, nor Krugman, nor Gobry. Gobry ought to provide evidence that his theory will apply in the future even though it has not in the past, but the way he deals with this problem is totally inadequate. This in turn would reduce the expected future value of the co-op, thus induing people to leave it, thus, further reducing its value.
The value of the co-op is enabling people to receive babysitting from within a group of people who already have some trust for one another. There is not necessarily a single ideal supply of scrip that would work permanently because people will have different babysitting needs at different times, so there would have to be continual adjustments. There at least two possible ways of dealing with a suboptimal supply of scrip: the supply of scrip per capita could be adjusted or the price of the scrip could be adjusted. For example, he says that one unit of scrip was worth an hour of babysitting time, when it was really worth one half-hour. In 1977, Joan and Richard Sweeney wrote an article called “Monetary Theory and the Great Capitol Hill Baby Sitting Co-op Crisis” which describes the economic woes of a certain babysitting co-op whose members traded scrip between them in exchange for babysitting one anothers’ children. Within the co-op, the value of having a balance of scrip is flexibility.
Gobry also shows no evidence of having read the original article. Finally, Gobry has merely repeated Krugman’s claims without showing any relevance to Bitcoin, and failed to deal cogently with the evidence that Bitcoin is not at risk of a liquidity trap. Finally, how does Bitcoin fit into everything? But once again, there is no corresponding problem with Bitcoin. “Once the supply of Bitcoin is fixed, at some point the Bitcoinomy will run into the same problem as the baby-sitting co-op: there won’t be enough currency, and there will be a recession, and there will be a liquidity trap,” he says. That would be a very severe liquidity trap! There is an important reason that both the American economy and the Bitcoin economy both differ from the babysitting co-op. The American economy is at least relatively free of regulation and could be made even more free. In 1998, Paul Krugman wrote a commentary on it called “Baby-Sitting the Economy.” He interpreted the events it describes as a microcosm for the economy as a whole, and he analyzed it according to his Keynesian framework.
Krugman has done nothing to show in his article that deregulation, rather than monetary policy, is a valid response to a recession. I will show that both Krugman’s article and Gobry’s follow-up are confused, do not establish their case, and say nothing about Bitcoin. Above, when I described such a possibility, I said “ceteris paribus” but, in fact, all things are not equal, because changes to the rules of the co-op can change its competitive advantage over its alternative. And if you are willing to really wrap your mind around the co-op’s story, to play with it and draw out its implications, it will change the way you think about the world. Consequently, there would be a self-reinforcing trend of members reducing their holdings of scrip in expectation that others will do the same, and demanding higher prices for the same reason. As long as they have all pledged to accept scrip at a certain rate for babysitting, then they have given some real evidence that the co-op is worth joining and holding its scrip is worthwhile, but without a fixed price, there is effectively no such pledge. Everyone desires a certain flexibility, so there is a need for a certain amount of scrip per capita to be issued.