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

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. Now I've been fascinated by these two simple cases of economies that went wrong. One, the babysitting co-op, very famous. So what's the other one? The other one is what I call the prison camp recession. And again this really happened. This was a recession that took place in a Second World War prison camp. And it's a very different kind of recession to the babysitting co-op, and that's why I think it's interesting.

So what happened was this was an economy -- there was an economy in this prisoner of war camp. It was mostly based on exchange. Food would come in from the International Red Cross. There'd be bread. There'd be medicines. There'd be coffee. There'd be cigarettes. These parcels would arrive and prisoners would trade them. So some people didn't eat meat. The English wanted tea. The French wanted coffee. People wanted different things.

And there was a little bit of production that took place in the camp as well, so people would polish each other's boots, or offer to fix up suits or uniforms, do stitching. There was even a guy who had a food cart. He'd sell tea. He'd sell coffee. He even had an accountant working for him. So there was this economy in this prisoner of war camp.

Now what's interesting about this economy is it worked incredibly well under the circumstances. It was very sophisticated. So there was a futures market for bread. You know you could buy bread now or you could buy bread on Tuesday. And the price, you know, pay now for bread to be delivered on Tuesday. And the price of those two things was different.

There was an export market. So at the time, Germany -- this prison camp was in Germany with allied prisoners. The Germans couldn't get coffee. Well the prisoners were getting coffee sent to them by the Red Cross. So there was this market price for this coffee, and the coffee would go over the fence and be exported to Germany and be sold in black market cafes. So a very sophisticated economy.

Only one thing. Those prisoners nearly starved to death. And the reason they nearly starved to death wasn't because of any flaw in the way that economy worked but because of an external shock. And it's not hard to see what the external shock is. The Red Cross food parcels stopped arriving because the war had got so severe that they couldn't get through anymore.

Now that sounds like a really extreme example, and of course, in many ways it is. But it actually illustrates a very important disagreement in economics. So there are economists who focus a lot on the idea that the economy itself malfunctions, gets out of equilibrium, maybe because prices don't move. And they would look to the babysitting co-op as their totalic example. The New York Times columnist Paul Krugman does this. It's a great way of explaining how a recession can happen because an economy gets stuck internally.

And when an economy gets stuck internally you need a government to come in and give it a kick start, maybe some kind of stimulus. A prison camp's totally different. The prison camp reflects an economy that was working perfectly well; prices are adjusting, everything's working brilliantly. But there's this shock that comes from outside the system.

And in the real world, that shock could be a change in China's trade policy. It could be a change in oil prices. It could be a shock from the financial system. You know, hitting the real economy in the manufacturing and services. The banking crisis hits us from the outside. And if that's what's going on, then a government stimulus program won't necessarily help you.

The government can't necessarily get things started because fundamentally there's nothing wrong with the economy. The economy's working fine. It's just that something -- we were hit by an asteroid. The economic equivalent of an asteroid. So when you hear economists arguing about whether there should have been a stimulus program, whether there should still be a stimulus program, what they're really arguing about is: Is the American economy more like the babysitting co-op or is it more like the prison camp?