Krugman on baby-sitting economics

by Eric on October 14, 2008

I found this very instructive for understanding the motivation behind monetary inflation/contraction.  The sidebar especially enlightens the Keynesian notion that savers are the cause of unemployment – thus the incentive to save must be eliminated by inflation.

I believe the Austrian school would point out the flaw in this reasoning.  In this self contained babysitting example, there is no mechanism to invest saved coupons.  (You can loan them, but that’s just shuffling paper around.  Investing actually results in created value – like building a home.)  The Austrians hold that progress is the result of investing, and investing is possible because of saving.  If there was some mechanism for investing the coupons, the system would see progress (in this case, increased babysitting capacity).  Thus, saving is a good thing – not to be penalized.

This is a gross oversimplification.  Furthermore, I’m certainly no economist.  So somebody please tell me what I’m missing.  Have I misunderstood the Keynesians or the Austrians – or both?

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