Tim Harford: What Prison Camps Can Teach You About the Economy

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Economist TIm Harford explain the micro-economies of prison camps and babysitting coops. Even in these simple systems, problems manifest that have macroeconomic analogs. Harford's latest book is The Undercover Economist Strikes Back: http://goo.gl/p7p2yv

Transcript: When we're thinking about how economies work, the tricky thing is that they're systems and you look at any particular corner of the system and you're gonna miss the big picture. But the big picture's complicated, really complicated. So what I wanted to try to do was to find examples of simple economic systems -- systems that were simple enough you could see all the moving parts working and you could understand how recessions worked. And there were a couple of examples that I found. One is not so famous. It's an example of a recession in a prison camp and the other is a lot more famous because Paul Krugman's talked about it. And that's a babysitting co-op recession.

Now these aren't hypothetical examples. These aren't kind of, you know, textbook imaginary things. These recessions actually happened. And in the case of the babysitting co-op recession it was Capitol Hill, Washington DC, the late 1970s. It was written up in a learned journal. And what happened was parents who joined this babysitting circle -- there were about 400 of them. They were trying to keep track of who was looking after who's kids. And it's difficult to keep all that straight on a spreadsheet. And remember this is the seventies so you don't have Microsoft Excel. So they had these little tokens and they'd pass these tokens around. And if you looked after somebody's children then you would be given a token. And then when you wanted someone to look after your children you'd give them a token. So they had this currency and that's great.

Except what happened was when people who joined the babysitting co-op they were given these tokens and they didn't have quite enough, not enough babysitting could be bought with what they had. So they thought to themselves, why don't I go and babysit for somebody else a few times and then I'll have a good stack of these tokens. And then once I have a good stack of these tokens then I'll start going out myself and hiring babysitters. The trouble is everybody in the babysitting co-op was doing exactly this. And if everybody in the babysitting co-op was doing exactly this then no one's able to get a job babysitting because everyone's just trying to work for everyone else.

Now there are a number of possible solutions to this. One is that people would just agree, hey, this token that we've got that's worth an hour's babysitting. Let's say it's worth two hours babysitting. Let's say you could buy twice as much babysitting with this token. And that could potentially solve the problem. But that's not what people did. People, I think, felt uncomfortable renegotiating the contract. So a second thing you could do, and they tried this, was to legislate how often people had to go out. So they came up with this rule that people had to go out at least twice a year. Now I don't have a really hectic social life. You know, I've got three children. I'm an economist, you know. I don't go out that much but, you know, even I think that going out twice a year is not that much.

And if that's your baseline that's gonna kick start the babysitting economy you have a problem. In the end the babysitting recession committee, or the babysitting committee solved the problem by simply issuing more of this currency. They printed more of these little tokens, they handed more out, they handed more out to people when they arrived, they took fewer away from people when they left the babysitting co-op. And that worked beautifully. That kick started the whole thing. And this massive long lasting recession suddenly evaporated which is great. Then they printed too many. They had a hyperinflation problem and the economy crashed again. But that just goes to show it's not easy to run an economy...

Directed/Produced by Jonathan Fowler, Elizabeth Rodd and Dillon Fitton