Krugman Meets Marx and Keynes at the Baby-Sitting Co-op

Abstract

Paul Krugman tells the story of the Capitol Hill baby-sitting co-op as a means of introducing readers to the economics of recessions. We take the story from where Krugman stops and develop it by presenting different aspects of a monetary economy with the help of a graphical analysis. This is done with the introduction of history of economic thought to the curriculum by visiting monetary theories of Karl Marx's Capital (1867) and John Maynard Keynes's A Treatise on Money (1930). The benefit of using these two sources is twofold. First, it is possible to find a common theory in both Marx and Keynes's writings to explain the baby-sitting co-op story. Second, it is possible to move beyond the story and introduce other aspects of a monetary economy such as endogenoity of money, industrial and financial circulation of money, etc. In addition, a graphical framework is developed as teaching aid.

Keywords:

• teaching
• money
• Marx
• Keynes
• JEL classifications
• A22
• B31
• E11
• E12

Acknowledgements

Authors would like to thank Korkut Ertürk of University of Utah, Tracy Mott of University of Denver, Christopher J. Niggle of University of Redlands and the participants of Eastern Economic Association annual conference in New York in 2003, and the anonymous referees of the journal for their insightful comments. Usual disclaimer applies.

Notes

 1 Paul Krugman (2009) recently used the same story in an article explaining why and how economists missed the current recession in his New York Times piece, entitled “How Did Economists Get It So Wrong?”. See (accessed on 12/24/2010) ( http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all)

 2 In fact, the relevance of Marx for the story is not out of place at all. Marx's critical remarks on labor- money schemes are very relevant in this context. In addition, Marx's critique of Ricardo and others on Say's Law relies heavily on the understanding of money and a monetary economy.

 3 See Joseph A. Schumpeter's (1959: 289–290, 699) condemnation of Marx as a monetary theorist that carried much weight. For Schumpeter (1959:699), Marx's understanding of money was limited to metallic money (or gold) functioning as only a medium of exchange and measure of value: “But even most of those who used that comprehensive concept of Means of Payment did not, as do most of us, identify it with the concept of Money. The great majority of leading authors, among them Thornton, Ricardo, Seniro, Fullarton, J. S. Mill, and Marx, defined money, as it had been defined by Galiani, Beccaria, and Smith, as a commodity that has been chosen for means of exchange, measure of value, et cetera. Roscher expressed dominant opinon when he said that the false theories of money may be divided into two groups: those that hold that money is more, and those that hold that money is less, than the most salable commodity. This, on the face of it, makes them Theoretical Metallists.” For Marxist views of Marx as a monetarist theorist, see Suzanne de Brunhoff (1976), Fred Moseley (2005), Suzanne de Brunhoff and Duncan Foley (2006). For similar point of view from non-Marxists, see Collin Rogers (1989), L. Randall Wray (1990), and Basil J. Moore (1988).

 4 Such economy reflects typical of Say's world where supply would always be equal to demand in aggreate. Marx used this hypothetical simple commodity production economy as a mental exercise to criticize Say's Law. For an excellent presentation of this point see Peter Kenway (1980).

 5 It is within the circuit of capital that potential problems can begin to mount. First, financing must be arranged to begin production. Second, the commodity must be sold at a price that will yield a normal profit. Third, the sale of the commodity must take place within a particular period of time in order to meet debt obligations. Which of these actually adjusted was not the main concern at this stage. The point was that the increase in the desire to hoard money would initiate a crisis. Marx (1939, p. 447) usually assumed some combination of price and output adjustment.

 6 As a useful exercise, the circular flow can be drawn for the baby-sitting co-op without scrip. This can be compared to the circular flow with scrip. At this point, the double coincidence of wants can be discussed along with the benefits (e.g., absence of time in book-keeping) of the scrip.

 7 However, Marx notes that these prices may or may not be realized depending upon the market conditions.

 8 It is in this sense that Marx can be said to have an endogenous theory of the money supply. When a banking system and bank money is introduced in Volume III of Capital (1894), Marx continues to build on this endogenous money supply theme.

 9 Which of these actually adjusted was not the main concern at this stage. The point was that the increase in the desire to hoard money would initiate a crisis. Marx (1939, p. 447) usually assumed some combination of price and output adjustment.

10 Authors are indebted this point to Korkut Ertürk.

11 At a more advanced stage in his analysis, though little developed, Marx argues that the interest rate does not necessarily rise during the early expansion phase of the business cycle. The reason is the accommodating increase in the money in circulation.

12 See Jim Crotty (1985, 1986, 1987) and Kenway (1980) for more on Marx's possibility for crisis.

13 In the Treatise on Money Keynes did not acknowledge any inspiration from Marx. However, soon after the publication of the Treatise on Money, while working on ‘a monetary theory of production’, the early drafts of the General Theory make an explicit appreciation of Marx's theory of a monetary economy. Significantly, in these early drafts, Keynes (1973) was developing a classification of economies. The classification was not intended to represent real economies but rather approaches to economic theory. Some of this mirrored Marx’s criticism of his classical predecessor’s mistaken devotion to Say’s law on the basis of theorizing about a different type of economy.

14 See Korkut Ertürk (2002) for the inspiration behind this reading of the Treatise on Money.

15 Note that the velocity of money here is still velocity of narrow money and stable. Keynes employed narrow money in the Treatise while he had broad money whose velocity is not stable in the General Theory (Ertürk 1998).

16 The limitations of the traditional liquidity preference theory of the interest rate are obvious at the point. In the traditional theory, an expansion of output causes an excess demand for money which raises the interest rate. Here, the increased demand in the industrial circulation is accommodated by a decrease in the financial circulation.