An economic model that even George Osborne should be able to understand

A friend sent me something that gets to the essence of the present economic situation in a way that even George Osborne should be able to understand.
‘There’s a group of us – parents with young children. We decided to
start up a babysitting club, whereby each couple would babysit for the other. To ensure the system was fair, we used a system of IOU paper slips to encourage each couple to take their turn.
The system worked well to begin with each couple doing their turn and trading IOU slips instead of cash for babysitting services. The system was designed so that over time, each couple would automatically do as much baby-sitting as they received in return.

What could go wrong?

During periods when they had few occasions to go out, couples tried to build up reserves-then run that reserve down when occasions arose.

There should have been an averaging out of these demands. One couple would be going out whilst others were staying at home.

But since most of us would be holding onto reserves of IOU slips at any given time, we needed to have a fairly large amount of slips in circulation. Our naturally cautious tendency to build up reserves meant that the number of IOUs in circulation became quite low.

As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple’s decision to go out was another’s chance to baby-sit; so it became difficult to earn IOU slips. Knowing this, we all became even more reluctant to use our reserves except on special occasions, reducing baby-sitting opportunities still further.

In short, our baby-sitting club had fallen into a recession.

We tried to legislate for a recovery-passing a rule requiring each couple to go out at least twice a month. But eventually, more IOU slips were issued, couples became more willing to go out,
opportunities to baby-sit multiplied, and everyone was happy.’

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