2 The babysitting recession - The Undercover Economist Strikes Back: How to Run or Ruin an Economy by Tim Harford - #lamonetanonconta #iprezzirigidispieganotutto #sensodigiustizia #costodelmenu #cooridarelabenza #miracolidellinflazione
a quasi-currency or ‘scrip’ was used. Families who joined the co-op were issued with forty pieces of scripRead more at location 478
each worth half an hour of babysitting, or fifteen minutes at specified peak times.Read more at location 479
You look at your forty pieces of scrip, and you think: ‘Hmm. That’s only ten hours of prime-time babysitting. That’s not much.Read more at location 484
On reflection, we’d better not go out this weekend. Instead, let’s first put in a couple of evenings of babysitting to build up our reserves of scrip.’Read more at location 487
everybody wanted to stay in and save up some scrip. And if nobody goes out, who’s going to get the chance to babysit and earn scrip?Read more at location 493
The co-op was largely run by lawyers (we’re talking about Washington DC here), so they tried a legalistic approachRead more at location 505
The co-op introduced a rule making it mandatory to go out every six months.Read more at location 509
the co-op committee abandoned the ineffective legalistic tactics and switched to economics, and that did work. The solution was actually rather simple: print more money.Read more at location 513
Of course the recession ended. If you can print money you can fix most economic problems, can’t you? It’s so easy it’s cheating.Read more at location 524
In his fictional economy, Fintlewoodlewix, they named the leaf as legal tender. That’s a lot of money creation but it didn’t do them any good.Read more at location 534
A pretty good starting point for understanding how an economy works is that production depends on the underlying resources available – labour, machinery, infrastructure. Printing money doesn’t create more roads, factories or workers.Read more at location 535
But in the babysitting co-op, printing money did solve the problem.Read more at location 538
think about that story often; it helps me to stay calm in the face of crisis, to remain hopeful in times of depression, and to resist the pull of fatalism and pessimism.’Read more at location 546
this parable is a little bit messier than Professor Krugman’s most recent retelling suggests. In his book, End This Depression Now!, he neglects to mention how the story ends.Read more at location 555
‘After a while, it naturally followed there was too much scrip and more people wanted to go out than to sit.’ When once nobody had been willing to go out, now nobody was willing to stay in. The end result was much the same: a babysitting recession,Read more at location 560
turned to crude legalistic tactics again. As the Sweeneys drily commented in 1977, ‘a truth squad is envisaged to find out why individuals aren’t sitting enough’.Read more at location 563
We can reasonably expect that monetary authorities in the real world, staffed by experienced and educated technocrats, would do a far better job.Read more at location 570
the lesson remains: in principle you can stimulate an economy by printing money. So we should understand why that might happen. And the fundamental reason is sticky prices.Read more at location 576
If prices adjusted with complete freedom in response to competitive forces, then the actual amount of currency in an economy simply would not matter.Read more at location 579
Since people were desperate to babysit and accumulate scrip, and nobody wanted to go out, why didn’t people offer to sit for six hours in exchange for three hours’ worth of scrip? The basic problem, after all, wasn’t really that people didn’t have enough scrip – it was that the scrip they had didn’t pay for enoughRead more at location 580
players could agree to redenominate all the values in the game, so that £1 becomes worth £2,Read more at location 591
Because prices do not, in fact, adjust smoothly, sometimes the central bank needs to print more money.Read more at location 595
The owner of the shop reduces the employee’s wages to $14.2 What a jerk. You’re not the only person who thinks so. Daniel Kahneman, a psychologist who later won the Nobel prize in economics, co-wrote an article about how our sense of fairness tends to constrain what we do, and in particular how prices and wages might move.Read more at location 601
That emotional reaction is strong enough to change the way the economy works.Read more at location 611
She feels constrained by fear of awkwardness, by her own sense of decency, or by the prospect of disruption, strike or sabotage. This kind of reluctance to cut wages is a matter of simple humanity. But it has negative consequencesRead more at location 612
supply and demand won’t match up in the labour market: there will be people who want to work (say, for $15 an hour) who can’t get jobs because employers don’t dare cut wages.Read more at location 619
When the first batch hits the shelves, people queue around the block for them. But this is a puzzle – given high demand and limited supply, why don’t companies just whack the price up?Read more at location 626
In the light of Daniel Kahneman’s research, the argument against this plan is obvious: a sharp, temporary price hike would really annoy potential customers in a way that a long queue simply doesn’t.Read more at location 631
This isn’t just a theory: in fact, Apple once tried something like this. When they launched the original iPhone, in 2007, they cut the price from $600 to $400 after two and a half months. What happened? Early adopters were infuriated,Read more at location 633
It became such a public relations nightmare for Apple, Steve Jobs quickly handed out $100 vouchers as compensation for those who had paid the higher prices.Read more at location 635
So your point is that nobody wanted to risk social pariah status by being the first member of the co-op to say, ‘I demand six hours of babysitting in return for three hours of scrip.’ Precisely.Read more at location 637
Number two is what economists call ‘menu costs’.Read more at location 640
That’s right: for seven decades, the price of a bottle of Coke never budged from five cents. In comparison, the price of coffee rose eightfold over the same time.Read more at location 642
Coke was sold in vending machines that accepted only nickels. If you wanted to increase the price to six cents, you’d have had to refit every machineRead more at location 648
The company grew desperate: the boss of Coca-Cola wrote to his friend President Eisenhower in 1953 to suggest, in all seriousness, a 7.5 cent coin.Read more at location 651
Coke also advertised heavily that a glass of Coke cost five cents.Read more at location 654
Daniel Levy, has also estimated that in the mid-1990s, it cost 52 cents to change the price of a single type of product in a supermarket.Read more at location 661
The total cost of changing prices was over 20 per cent of profits.Read more at location 664
Imagine a world where two companies sell exactly the same product, and customers are completely aware of all price changes.Read more at location 674
Whichever firm has the cheapest price will get all the sales. Now imagine that Shell and Exxon can change prices only after their monthly board meetings. Shell hold theirs on the first of each month, and Exxon on the fifteenth of each month. Prices are extremely sticky,Read more at location 676
If either of them cuts the price by another penny, they would be making zero margin and thus zero profits. If either of them raises the price, they would lose all customers and, again, make zero profits.Read more at location 679
One day – let’s say it’s 22 February – the underlying cost of fuel falls sharply to 49p a litre.Read more at location 682
For a few days, both companies are going to make a killing, because they can’t cut their prices. They make 51p a litre – 51 times as much profit as before! – but of course on 1 March, Shell will be able to change its prices. What happens?Read more at location 684
The logical move for Shell, then, is to cut prices by a single penny, to 99p. All Exxon’s customers would then buy fuel from Shell,Read more at location 689
On 15 March, Exxon has its chance to respond, and we’ll assume again that Exxon isn’t trying to collude, but just wants to compete aggressively to make money. With the same reasoning, Exxon cuts prices to 98pRead more at location 691
On 1 April, Shell cuts prices to 97p a litre. The process continues. How long before prices fall to their equilibrium level, just above cost? More than two years,Read more at location 693
That’s reason number three for price stickiness: coordination problems.Read more at location 700
There’s a fourth and final reason for price stickiness. To illustrate it, let me tell you a true story: one day a professor received notification that his salary was being cut. Incandescent with fury, he stormed into the department head’s office and threatened to quit. He was, with some effort, pacified. A few years later, the same man received another pay cut. This time, no tantrums. In fact, he was perfectly content. Why the change of attitude? Because the pay cut didn’t look like a pay cut: it looked like a pay rise. Specifically, the professor’s salary was increased by 3 per cent at a time when inflation was 6 per cent.Read more at location 701
what economists call ‘money illusion’.Read more at location 710
Psychological research demonstrates that nominal salaries influence our thinking even though real salaries are, logically speaking, all that should count.Read more at location 714
in the real world, all successful economies have a substantial government presence that creates still further possibilities for prices to stick: regulated prices, minimum wages, public-sector pay that becomes a political football.Read more at location 723
If wages and prices quickly adjust downwards, the suffering that this fall in GDP will cause is going to be contained. But if firms hesitate to cut prices because of coordination problems and menu costs, their products are going to be overpriced. Sales will fall. They will need to reduce costs, but workers will be outraged at a cut in their nominal wages, so some will be sacked instead. Unemployment will be higher than it should be, meaning that demand for goods and services will be lower, and firms will need to reduce costs more, and on, and on. Sticky prices are a recipe for trouble. Indeed, the consequences can be as severe as the Great Depression.Read more at location 725
Note: RIEPILOGO
