Why Krugman Is An Idiot

Recently an article Krugman wrote in 1998 has been quoted and used as a reason to slate bitcoin.

Luckily, we don't even have to debate bitcoin this time. Krugman doesn't even understand babysitting.

Here's the basics of his article. Don't worry. You don't have to understand economics in great detail to see exactly why Krugman is talking out of his arse. It's pretty simple.

It claims to capture the essence of hoarding being a problem in an economic sense by comparing it to a baby sitting club using 1 hour coupons.

In Krugman's model. One couple (let's call them the Krugman's) decide to undermine the basis of the coupons and increase the value of them by hoarding them.

First problem. To hoard the coupons, the Krugman's spend months baby sitting and gathering vouchers. They never accept an offer for baby sitting in return. In effect, they are being rather generous.

After a couple of months, the baby sitting group meets up and notices the vouchers are running low. There is discussion. Everyone agree's the Krugman's are a bit weird, but they did get some baby sitting done, so it's no real problem. They buy another book of coupon's and carry on exchanging coupon's, some even seek out the Krugman's knowing they will never be asked to babysit in return.

There is no devaluation or economic point you can make out of any of this whatsoever for one very simple reason:

A one hour baby sitting coupon is worth one hour of babysitting. Hoarding it doesn't change anything. It's an hour of baby sitting. All the other coupons don't become worth more or less. Even supplying more to the people that do baby sitting doesn't change the value. Every voucher is still worth one hour of baby sitting no matter what the Krugman's do.

Any other conclusion is a severe distortion of reality. Why do you need to contrive a completely unrealistic situation to prove a point? Hmm... What kind of lunatic baby sitting club would declare a problem with supply of vouchers is causing the value of every voucher to change? Or to simply dissolve the baby sitting circle as an answer?

The Krugman's however are left with a vast pile of vouchers, now to cash in!!! Except ... you can only spend one voucher, per hour, per babysitter. So it's going to take them rather a long time to do it. The Krugman's have in fact taken on additional risk. What if the baby sitting pool vanishes before they can spend all the vouchers? What if the children grow up and don't even need them? ... In short ... The Krugman's are trying to manipulate a bubble and may get burned for it because they don't understand it. Are you listening Paul? I so wish I could know you read this one day.

All Krugman's efforts to demonstrate a problem with hoarding in baby sitting voucher's illustrates is that here is an economic "guru" who doesn't understand simple value and exchange.

It's a stupid model, a stupid analogy, ill thought out and deeply flawed as an example of anything except Krugman's own stupidity.

We don't even have to go on to apply his conclusions to bitcoin, because if he can't even get the economics of a baby sitting circle right, what's the point?

I've had people get back to me and say "No you don't get it. In Krugman's model, they can't get any more coupons, that's the whole point of his argument". To which I say. No. You don't get it. It is trivial for the group to get another book and issue coupons for baby sitting. That is what would happen in reality. To say "Well in Krugman's model they simply can't". Is just dumb. If Krugman wants to prove his point, he needs a real world example of what he's trying to argue where it's not trivially easy and reasonable for the group to just get more coupons.

If he can't find a model that actually fits what he wants to say. Just Maybe what he is saying is flawed as well? To love Krugman's reasoning on this one, you have to also love the fact that his conclusion may be just as contrived and unrealistic as his basic original model.

Yes I am aware of how thought experiments work. When it comes to mathematics, you can be quite fanciful if your end aim is admittedly a theoretical exercise only. For example: We know two men row a boat so fast. I wonder how fast 500 men could row the same boat? It is impossible of course to fit 500 men in the boat, but for the purposes of testing out your theories on how fast the boat might go, it'll do. When it comes to economics, it's not a scientifically testable or correct outcome from a thought experiment, so your start point needs to be pretty darn valid if there's going to be any faith in the conclusions you come to.

In the boat example, you might start off by asking how good are the rowers? How long do they have to sustain that speed? You define reasonable assumptions and the basics for later calculation. If you want to skew the results, you find two very slow rowers, or two very fast rowers and don't pay any attention to that fact in your conclusions. It's called selecting the data to suit the assumption. That's exactly what Krugman is guilty of here.

The perfect world:
"Yes Mr Krugman, I can see you have started from an excellent simple model with which I can find no major flaws whatsoever. I shall consider your final conclusions when applied to economics as a whole with a degree of belief".

Where we are:
"Mr Krugman? Why can't the group just buy more vouchers?"
"Because I said they can't."
"Could you have chosen an example where limit of supply was more realistic?"
"I don't care. This way I get to prove a problem with hoarding."
"Why babysitters?"
"Limited supply of a small number of vouchers!"
"But that's not at all realistic is it Mr Krugman? Gold would be a better example of limited supply wouldn't it? Why not make your argument using gold as a start point?"
<silence ... mutters something about hoarding examples not working so well for gold>
"So why does your final conclusion work out the way it does?"
"Because I said it does and it matches the original model."
"M'kay. Is this sounding a little circular in the logic department?"
<silence>

So no it's not okay to say Krugman's theory is valid even if he got baby-sitting dynamics wrong. Krugman chose an example to illustrate a principle he believed in. His example is deeply flawed. How much do you trust his principle now? You can't extend a theory from bullshit.

People listen to moron's like Krugman because they have money. Don't. People with money can also be incredibly stupid, as I have just demonstrated in one very short blog post.

On this one. Maybe we get a glimpse of how the great economists controlling our nation's think. They don't very much. They know how to play the numbers given to them in the game they know how to play. They lack a fundamental knowledge of how it all works when the wheels start falling off and basic supply and demand is the economic factor. They live in a world where a "one" is a billion. They no longer have any clue how the part's work that made the "one" possible.

-----

Postscript Diversion

Hey if we can contrive whatever we like out of a situation to prove the point we want to make? Here's my version. Just for the lulz. I'll even stick to the original impossible to replace idea.


We take it that the Krugman's have a significant share of the the impossible to replace vouchers as described above. The circle meets, there is no easy solution. If the Krugman's are excluded from the club then the vouchers can never be earned back in to circulation. Nobody wants to see value adjustment of existing vouchers, nor is there a simple and agreeable way to do it. Dissolving the circle and starting with new vouchers is impossible. These are the only baby vouchers that will ever exist, and each is quite clearly marked "One Hour". The circle meeting breaks up with little in the way of solutions, vowing to meet again next week and review the situation. A few days later, under cover of night, a small faction of baby sitting gun owners storm the Krugman's demanding the return of the vouchers.

Nobody is hurt, but arrests are made. Three of the father's in the baby sitting circle are now facing charges in custody. First the wives of those three, then a larger support group form a passive 24 hour resistance group that camps outside the Krugman's. Hurling abuse at them and demanding the vouchers back whenever they are seen outside the house.

Infuriated that the voucher hoarding plan hasn't worked and harassed by the support camp. The Krugman's light a bonfire one night and burn the vouchers they do have in full sight of the baby sitting support camp.

The cries of loss from the camp are unbearable. All hope is lost.

The remaining vouchers can't sustain even a small baby sitting circle and the group disbands. No baby sitting is ever possible in the town again for the rest of eternity. The Krugman's eventually leave town and try to join baby sitting circles in the next place they put down roots, only to find that they are excluded. Denied the joys of equitable baby sitting, the Krugman's argue bitterly and eventually divorce at great personal cost.

Meanwhile, over a period of decades, the town the Krugman's removed virtually all baby sitting vouchers from produces less and less children, and attracts less and less families with children. It gradually becomes a ghost town, eventually only populated by the childless over the age of 40. Such is the economic wasteland left by the Krugman's hoarding and burning of irreplaceable baby sitting vouchers.

News of the tragedy spreads across America, and soon all baby sitting circles have set an absolute upper limit on the number of vouchers any one couple can hold. It becomes known as "The Krugman Limit". Thus the rest of America is spared the horrors of baby sitting voucher hoarding and the tragic loss to humanity that results.

Well hey. You did say the vouchers were totally impossible to replace right? I like my version better than Krugman's anyway. It has social resistance, drama, fires and divorce in it. What's not to like?