

Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin - rosser
http://www.forbes.com/sites/pascalemmanuelgobry/2013/04/05/krugman-baby-sitting-co-op-bitcoin/

======
liber8
This example always amuses me because Krugman guilelessly puts forth the case
for central control while glossing over the results:

>> _"But eventually the economists prevailed. More coupons were issued,
couples became more willing to go out, opportunities to baby-sit multiplied,
and everyone was happy. Eventually, of course, the co-op issued too much
scrip, leading to different problems ..."_ <<

Of course, these different problems are just ignored. Krugman never seems to
want to discuss whether these new problems, entirely caused by centralized
control, are worse than the problem the "alert management" intended to solve
in the first place.

It's what makes his oft-use example so excellent. Here you had, presumably, a
small group of highly-educated and, presumably, reasonably intelligent folks
who _couldn't even manage an economy with 150 homogenous players_. And yet, we
expect much better results when we introduce billions of players and millions
of additional variables.

~~~
andylei
i think its ironic that you're putting forth the case for unmanaged economies
while glossing over the results.

i think most economists (including Krugman) would agree that managing an
economy is hard, and that oftentimes, the people in charge don't get it right.
but that doesn't mean the alternative is better.

in this specific case (bitcoin), the alternative to managing the money supply
centrally is a fixed supply of money. in an environment where the economy (the
gross output of the market) is growing, that leads to deflation. krugman
points out that deflation slows down economic activity, possibly
catastrophically. do you disagree?

------
dmm
To me it seems the problem with the Babysitting coop was price fixing. The
price of of an hour of babysitting was always 1. If the price of an hour of
babysitting was allowed to float you would not have the shortages.

~~~
wwweston
Float compared to what? The price of an hour of babysitting was always 1
because the only thing on the exchange is an hour of babysitting.

I suppose you could argue some hours of babysitting are more valuable than
others, and people could negotiate, say, 4 hours for 5 coupons or vice versa.
It's not clear this either (a) _wasn't_ already done on some ad hoc basis (I'd
imagine if it was agreeable to both parties, it'd probably happen) or (b)
would have provided a solution to the liquidity problem, though.

~~~
unoti
Float compared to supply and demand in a free market. Instead of issuing
1-hour coupons, they should have issued an arbitrary currency, say, Shillings.
Then buyers can request babysitting paying at 1 shilling per hour, and sellers
could say that they want 1.3 shillings per hour. The value of the currency
needs to float with supply and demand.

The whole argument in the article is a pathetic straw-man. The value of
bitcoin floats with supply and demand. When the supply is fixed when bitcoins
can no longer be mined, then the supply is based on how much is circulating vs
being held.

~~~
DasIch
The value of bitcoins floats with supply and demand, that is correct. However
the demand for any currency is tied to the supply/demand for the total number
of goods that are sold/bought with that currency. As the value of these goods
rises over time towards infinity demand for bitcoins will rise over time
towards infinity. Supply of bitcoins on the other hand is inevitably slowing
down and thereby the value of bitcoins will rise towards infinity.

This makes it very cheap to "import" goods but prohibitively expensive to
"export" any. It also provides a huge incentive not to spend or lend any
money. Demand will fall, loans will be harder to get, innovation will come to
a standstill and overall the economy will collapse.

This is called deflation and this is why we have huge central banks full of
well educated people carefully monitoring the economy to adjust inflation and
deflation.

~~~
unoti
Interesting. Do we have the same situation with gold? Continuous deflation,
caused by constant supply combined with increasing demand, causing its value
to rise to infinity?

How is gold different?

~~~
DasIch
Indeed it does apply to gold and to currencies using the [Gold
Standard](<http://en.wikipedia.org/wiki/Gold_standard>) which has caused
problems in the past, which is why it isn't used anymore as a currency on any
significant scale.

------
tlrobinson
_"Now, it’s worth noting that this fatal flaw of Bitcoin is not a fatal flaw
for all cryptocurrencies or algorithmic currencies. One can imagine a Bitcoin-
like currency with a smart algorithmic central bank (indeed, Bitcoin does have
an algorithmic central bank–just an economically illiterate one)."_

It's also worth noting that it's theoretically possible for Bitcoin's
"monetary philosophy" to change over time.

If a majority of Bitcoin miners, and thus (in theory) the "economic majority"
(<https://en.bitcoin.it/wiki/Economic_majority>), agree on changes to the
system (for example, the rate of mining) everyone can migrate to newer
versions of the software that will accept those rules, and those who don't
will risk their version of the blockchain not being accepted by the majority
of users.

One interesting question is what happens if there's a fairly even split
between the group that accepts the old and new rules. Would the value of each
blockchain be effectively halved?

~~~
wmf
Realistically, Bitcoiners can't even agree to fix unspendable UTXOs. I can't
imagine that they would ever agree to devalue their own holdings.

~~~
bcoates
What is there to fix? Can't a minority client just blackball UTXOs, allowing
them to exist in the blockchain but refusing to publish or accept transactions
built off them?

By definition, a UTXO is not in the history of good money.

~~~
wmf
That's a good point. Someone could troll you by spending such an output in a
"valid" transaction which you would treat as invalid, but who cares.

------
27182818284
The overwhelming main gripe I read not only on HN, but also on business
websites is that Bitcoins aren't US dollars.

It reminds me of the apocryphal, famous Ford quote, "If I had asked my
customers what they wanted they would have said a faster horse."

------
ph0rque
Can someone pro-bitcoin provide a counterpoint to the deflationary spiral
criticism? I don't have enough of an understanding in economics to think of
one.

~~~
1053r
The flaw in the argument is that BitCoin is not (currently) a unit of account
(we don't price contracts or goods or services in BTC), and is (nearly)
infinitely divisible.

So even if 90% (or 99%) of all BTC is being hoarded, the other 10% (or 1%) can
be divided up for use in transactions. That much speculations will cause wild
gyrations in value and massive short term volatility, but the people using BTC
to transact JUST DON'T CARE.

I really don't care if I'm buying my $1000 flat screen with 1 BTC or 0.0001
BTC. Neither does the merchant. I bought the BTC, sent it to the merchant, and
the merchant sold it so quickly that the value didn't change much, and we are
happy.

So that's the short term. In the long run, the volatility might decrease as
the total market capitalization increases to 10x or 1000x of its current
value.

Then we can start to think about using it as a unit of account. If we do, we
may enter a deflationary spiral, but by then BTC will already be used in an
enormous swath of the economy.

So I interpret Krugman's argument not so much that BTC CAN'T take over the
world, but that it SHOULDN'T take over the world. (I'm not sure if I agree.
Many economists have been arguing over this point for decades, and I'm not
smart enough to sort it all out.)

~~~
ars
That is not a flaw in the argument - that is a flaw in your understanding of
the argument, which makes you think this is a valid rebuttal.

Money is supposed to _represent_ value. Not to actually _be_ value. There are
new humans arriving in the world all the time. And new resources are being
mined from the earth, and created intellectually all the time.

If the money supply does not match these new things then the currency fails.

You can't just do a "currency split" and issue more notes - doing that
effectively tells everyone their resources are half as valuable which is
clearly wrong - the value of the resources didn't change.

You need to issue more currency so that the sum total of money available is
equal to the sum total of value in the world. Any currency that doesn't do
that fails.

~~~
crazygringo
> You need to issue more currency so that the sum total of money available is
> equal to the sum total of value in the world. Any currency that doesn't do
> that fails.

That's only if you want the currency to maintain a stable value, neither
inflationary nor deflationary.

Alternatively, the currency will have deflation. It's not obvious that that
necessarily implies "failing".

~~~
james1071
No one will be able to use it for transactions because everyone will hoard it-
buying the currency will be impossible.

------
Jtsummers
Well, I just linked to the cited Krugman article. In case anyone else has
difficulty with the pkarchive.org link, here's another source:
[http://www.slate.com/articles/business/the_dismal_science/19...](http://www.slate.com/articles/business/the_dismal_science/1998/08/babysitting_the_economy.html)

------
seanalltogether
In other words, when people run out of physical goods to trade, they will
start trading IOUs, at which point inflation has occurred within your economy
whether you intended it to or not.

~~~
trhtrsh
Is it "inflation" if each new IOU is accompanied by a corresponding unit of
production?

I thought not, but I am no expert.

~~~
seanalltogether
Yes, because an IOU can be traded after its initial creation, and due to
peoples inherent desire to save (hoard) assets theres no guarantee the IOU
will ever be cashed in. Inflation occurs because people learn that more IOUs
can be issued then are ever cashed in.

Economies are naturally structured around this asynchronous trading structure
because we want to help each other survive.

------
forgingahead
In 1998, Krugman also predicted that "by 2005 or so, it will become clear that
the Internet's impact on the economy has been no greater than the fax
machine's."

[http://web.archive.org/web/19980610100009/www.redherring.com...](http://web.archive.org/web/19980610100009/www.redherring.com/mag/issue55/economics.html)

~~~
squid_ca
That has nothing to do with whether he is right or wrong about this issue,
though.

------
drcode
The mistake in the article is that bitcoins can subdivide AND increase in
value. Bitcoins are not going to have liquidity crisis, as much as some people
seem to want it to.

~~~
podperson
If/when bitcoins ever become an important currency they will have all the same
problems as other currencies, and others unique to being bitcoins. E.g.
central banks will try to manipulate them, governments will tax and regulate
them, and people will speculate on them.

Being able to subdivide and increase in value are not attributes unique to
bitcoins.

Oh, and the article DOES address this exact point.

~~~
drcode
> Being able to subdivide and increase in value are not attributes unique to
> bitcoins.

I didn't claim that.

> Oh, and the article DOES address this exact point.

No, they always assume the value of a coin remains constant when discussing
subdivision.

~~~
podperson
> There are some objections to this: for example, that since each bitcoin can
> be infinitely divided into components, the money supply can keep growing.
> But that’s not related. If you have a $10 bill and I replace it with ten $1
> bills, do you feel richer?

This seems to address the point to me. If the supply of dollars is constrained
(liquidity trap) then deflation does NOT make people happier.

~~~
drcode
If I have ten $1 bills and they are each worth $10 of previous spending power,
I would ABSOLUTELY feel richer.

------
kirian
A slightly related article I read recently about how should we evaluate the
claims of people much smarter than ourselves. i.e. in this specific article
the example is if Krugman makes some claim about economics should we just
accept them as he is probably leagues ahead in terms of knowledge and
expierience in the subject.

[http://theumlaut.com/2013/03/13/paul-krugman-is-brilliant-
bu...](http://theumlaut.com/2013/03/13/paul-krugman-is-brilliant-but-is-he-
meta-rational/)

------
jrs235
"If you have a $10 bill and I replace it with ten $1 bills, do you feel
richer?"

Yes, If I split my 10 into 10 ones and if 9 can pay today for something that
cost 10 yesterday, I feel richer.

This causes folks to save and horde like in Japan. Because its deflationary.

It's more difficult to control the masses via monetary policy if things are
deflationary... That's why governments try to maintain slight inflation.
Comfortable folks don't produce for the government.

~~~
trhtrsh
It has nothing to do with "comfortable folks producing for the government" and
everything to do with coordinating production and consumption. If everyone
produces for 20 years and accumulates money, and there is no inflation for 20
years, and then they all try to retire and spend it, but there is no one to
produce, since everyone wants to retire, you get hyperinflation chasing the
small amount of available goods. Alternatively you inflate the currency for 20
years, to encourage people to consume their savings as a sustainable pace.

Remember: if you spend your inflationary money NOW on durable goods (canned
food, wood, whatever), then you can trade those goods for inflated currency
later, and not lose any value.

But, if you don't spend your money (maybe because there is nothing on the
market worth buying), then inflation is the natural correction to bring the
money supply into balance with the goods supply.

------
jl6
I don't quite buy the analogy. Seems to me that part of the problem was having
tokens that could only be exchanged for one thing, and even then at a fixed
exchange rate.

~~~
dsr_
Here the problem is that bitcoins are illiquid: you can't spend them freely on
most goods and services, and you can't get a consistent exchange rate into a
liquid currency, and the supply problem means that hoarding is sensible...
right up until the crash.

------
mrb
Another article that gets it wrong. _sigh_

 _"I’ve also been told that this is only valid if the entire world is on
Bitcoin"_

So far the author is right. The whole world does not run on Bitcoin only,
therefore the arguments against Bitcoin do not apply. But here is where he
gets it wrong:

 _"but if you think about the world today, that’s not true. There are plenty
of currencies out there, and the supply of some of them is too low, and that
hurts the people who use that currency. The fact that the dollar exists
doesn’t prevent the yen from being too strong."_

The author does not cite examples of people hurt by a currency when a supply
is low, because he is wrong: there are no such examples.

I don't know why he cites the Yen. The Japanese economy is not that bad. It is
not that great either. But it is doing okay. Therefore if Japan is okay with a
deflationary currency, why would not Bitcoin be okay too?

Or someone may cite the example of the failure of the gold standard in the US
in the 1960s, but it would be incorrect. The gold standard failed because the
US Federal Reserve continued to increase notes in circulation, while not
replenishing gold reserves, which triggered all sorts of bad consequences, see
[1]. By contrast, in Bitcoin it is algorithmically _impossible_ to increase
"notes" (coins) in circulation beyond the limit of 21M coins.

[1] See <http://mises.org/daily/3325>

------
hodgesmr
Watch out. You posted an article on HN that doesn't praise Bitcoin. And, you
know, all software developers are also economists. Expect a backlash.

------
pjzedalis
One thing that strikes me is the person with the most coupons happens to be
the person with the least amount of need for the coupons. Therefore they will
never redeem them and eventually everyone runs out.

A true currency (and Bitcoin if its a true currency) allows the most avid
babysitter to get other things with it instead of what she already has a
surplus of.

------
_lex
His argument seems to say that the LIQUID supply of bitcoins is shrinking
because people are hoarding them. You can make the same argument for stocks or
anything else that is traded for cash, but it's wrong. Everybody will have a
price that they're willing to sell at - it's the fundamental idea underlying
every exchange market.

------
unabridged
Why is Krugman being thought of as a genius in predicting market trends and
pricing assets? He has never proven himself in this way, he does not manage
money, he is only rich from book sales. Krugman is just a politician who
promotes his own opinion of how the US economy should be handled.

------
pjzedalis
Coupons are not currency. They were trading coupons of 1 hour babysitting to
save from spending real currency on hours of babysitting.

~~~
ars
Of course a coupon is a currency. What do you thing a currency is? It's a
store of value.

~~~
pjzedalis
Just because something has value does not make it a currency. If that coupon
ONLY gets you a reduction in price off something then its a discount. Here is
another tidbit that makes it not a currency: coupons are intended to not be
redeemed more than once.

If only one person can ever use it then it fails at its intention of goods
exchange. It's not currency.

------
snowwrestler
The key point is that bitcoin is not actually a currency (like the dollar or
euro), it is a commodity (like gold or silver). Thus it will be subject to
speculative bubbles and unpredictable swings in value, and the typical holder
will not be able to do much about that.

Central banks and fiat currency remove the danger of speculative bubbles...or
at least, they centralize the danger to a single, publicly controlled entity.

~~~
drcode
> they centralize the danger to a single, publicly controlled entity.

Come to think of it, we should centralize the backbone for the internet in the
white house basement, so that we "centralize the danger to a single, publicly
controlled entity."

~~~
snowwrestler
The core address data of the Internet is in fact centralized on behalf of the
U.S. government by ICANN.

~~~
drcode
Fair point.

------
Zigurd
Bitcoin can't be debased.

a. That's a bug

b. That's a feature

They certainly were designed to be that way, and that was intended to be in
sharp contrast with the conventional way currency is managed.

A more sophisticated argument about bitcoin might go this way:

a. Bitcoin provides an alternative that is both a useful experiment and is
edifying in a way that may help keep the managers of currency systems honest.

b. Bitcoin is like releasing an uncontrolled nanotech experiment into the
environment that could turn all our money into grey goo, and governments
better put in place measures to prevent and eradicate experiments like this.

