Are Recessions Like Prison Camps or Baby-sitting Co-ops?

The Undercover Economist Strikes Back coverTim Harford, who writes the Financial Times‘s “Undercover Economist” column, has appeared on our blog many times. This guest post is part of a series adapted from his new book The Undercover Economist Strikes Back: How to Run or Ruin an Economy

Robert A. Radford studied economics at Cambridge University, and worked at the International Monetary Fund. In between, he spent half the war in a German prison camp, and on his release wrote an article, “The Economic Organization of a P.O.W. Camp.” It gives a surprising insight into economic recessions.

The building blocks of the P.O.W. camp economy were parcels of food and cigarettes that the prisoners received from the Red Cross. These parcels were standardized—everybody got the same, beyond the occasional package from home. Occasionally, the Red Cross received bumper supplies, or ran short; in those circumstances everybody enjoyed a surplus or a shortage. Naturally enough, while prisoners had equal rations, they did not have identical preferences. The Sikhs didn’t have much use for their rations of beef or razor blades, for example; the French were desperate for more coffee; the English wanted more tea.

There was not much production in the prison camp economy, but there was some: some men would, for instance, offer to polish boots or press uniforms. One entrepreneurial fellow set up a cart selling tea, coffee, and cocoa. At one stage, he enjoyed the services of a chartered accountant, and paid other prisoners to gather fuel. And there was government provision too, of a sort: the Senior British Officer set up a camp shop and restaurant, including live entertainment. Chiefly, though, the P.O.W. camp economy was built on trading, and plenty of trading took place.

Market institutions emerged spontaneously. There was a currency: the cigarette, which was portable and reasonably homogeneous. Non-smokers, not being tempted to burn their “money,” were naturally at a distinct advantage. There was a futures market: with bread rations handed out on Monday, on Sunday evening “bread now” traded at a premium to “bread Monday.” There were even imports and exports—coffee would go “over the wire” to be sold in black-market cafés in Munich because at times the Red Cross was able to supply the prisoners with things that German civilians themselves couldn’t get. And of course, when there is an opportunity to supply a scarce resource, the profit motive will usually find a way. Middlemen prospered, especially if they had the ability to speak multiple languages or had friendly relations with German guards who let them visit different parts of the camp.

Once Radford arrived at a permanent camp, he found that prices tended to be stable and well known, precisely because there were middlemen around, seeking out bargains and arbitrage opportunities. But while prices didn’t bounce around like the offers to naïve tourists at a bazaar, they did move in response to broader developments—for example, an influx of new, hungry prisoners of war would generally drive up the price of food; when the weather was hot, the price of cocoa fell and the price of soap rose; dried fruit prices rose sharply and stayed high after someone discovered that, in Radford’s words, “raisins and sugar could be turned into an alcoholic liquor of remarkable potency.”

These are all examples of what economists call an exogenous shock—meaning it isn’t a part of the economic system that we might model with our usual equations of supply and demand. Exogenous shocks (good and bad) to the economy of the United States itself have included cheap goods from China, the invention of the mobile phone, oil price spikes, fracking, and of course the collapse of the financial system in 2008.

Toward the end of the war, the camp economy suffered its biggest exogenous shock of all: the supply of Red Cross parcels gradually dried up. This caused a recession—volumes of trade grew smaller and smaller.

What is interesting about this recession is the contrast between another – now notorious – recession in a tiny economy. That was a babysitting co-op on Capitol Hill, made famous in accounts by Paul Krugman. In the babysitting co-op, the recession was caused because the economy itself misfired and got stuck; it needed a policy response to unstick it. This is typical of the “Keynesian” view of recessions, which is why Krugman, a Keynesian, finds it a helpful example.

The prison camp was different. The economy inside the camp worked perfectly. In difficult circumstances, the well-oiled economic machine worked just as it should. Unfortunately that didn’t stop the prisoners from approaching starvation, because the external shocks to the prison camp economy were so severe.

I realize that it sounds odd to contrast a prison camp with a babysitting co-op, but I think it can shed a lot of light on contemporary arguments among economists—for instance, over the question of stimulus versus austerity. What they’re really arguing over is this: is the economy currently operating more like a babysitting co-op, or more like a prison camp? 

Excerpted from The Undercover Economist Strikes Back: How to Run or Ruin an Economy by Tim Harford, published by Riverhead Books.

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  1. mk says:

    an hour of baby sitting time contracted by co-op coupon is always an hour regardless of number of coupons. but keynesian dollar doesn’t always buy McD coffee, sometimes 2 are needed for same coffee.

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  2. Andrew says:

    You cannot fairly compare a multiple goods and services economy functioning through barter with a single service economy that can only function through the exchange of a specific fiat currency (coupons).

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  3. Shane L says:

    Did they occasionally get increases in the supply of money (cigarettes), I wonder? Would be interesting to see if that caused inflation, or even a bubble of some asset!

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  4. Howard says:

    How could austerity have helped end the recession in the prison camp or the baby sitting coop?

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  5. Joe D says:

    Isn’t this an obvious difference between a recession as a result of a supply shock (Red Cross parcels dry up) and one from demand shock (parents deferring dates to hoard coupons, even though there’s babysitting available)?

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  6. Voice of Reason says:

    There are so many problems with the analogy to POW camps to real world economies. As the writer admits, they aren’t actually producing anything of value, they’re just trading what they already have been given. So, there’s no explanation as to why everybody would be starving just because the fiat currency (in the sense that the currency has nothing to do with hunger vs. being full) is in short supply. Here’s a thought: they’re starving because it’s a POW camp, and everybody starves in them.

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  7. steve cebalt says:

    This is a fascinating article of how markets develop spontaneously in prisons. In US prisons, the currency is commissary packaged mackerel, which is traded for drugs, tattoos, toilet-wine, sex, haircuts and help on tax returns. Cigarettes seem a poor choice of currency since some addicts (hard-core smokers) need to literally burn their money and others have no need for cigarettes at all; that form of “income inequality” is one I’ve never seen. In contrast, no one would willingly eat packaged prison-commissary mackerel, making it a perfect currency, as its “value” is purely symbolic of a unit of value for trading. Here is a highly relevant and enlightening (to me) article from the Wall Street Journal:

    http://online.wsj.com/news/articles/SB122290720439096481

    As for the babysitting co-op, Andrew has rightly pointed out the massive flaw in this “debate.” The two things are so unlike each other that any attempt at comparison or analogy is meaningless.

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    • Lassie says:

      The prison near me, at least, has banned smoking altogether. THAT must be REAL punishment. So cigarettes are ‘out’ and ‘packaged mackerel’ is the new currency?? How odd. Why? Is it extra tasty or something? Can it make you high, somehow?

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      • Lassie says:

        OK, just read the article. Still think it’s odd, but there ya go, it’s the new prison currency then.

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      • James says:

        Whether banning smoking in prison (or anywhere) is a punishment depends on whether you’re a smoker or not. Confining a non-smoker in a smoking area should count as torture: maybe not quite at the level of waterboarding, but bad enough.

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    • Steve Cebalt says:

      Hi Lassie and James: Indeed, the fact that depriving cigarettes in US prisons would be torturous for hard-core smokers — and totally irrelevant to non-smokers — is the very reason it (“the cigarette”)would seem to make a poor currency in POW camps. It has tremendous value to some people and NO value to others. It is itself a high-value, consumable, tradable product, and thus not the “symbolic” stuff of currency — a thing such as paper, coin tokens, etc., that can’t be consumed and has no value beyond its symbolism as a unit of trade. I know, Lassie, the mackerel thing is so weird, I have saved that link for a long time :) . It must really suck.

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      • wait a minute says:

        Dear Steve; you don’t have it altogether right. There are certain people (my dad for one) for whom the cig is symbolic of a choice. His choice was not to ever touch a cigarette again and he would not allow anyone in his car or home to smoke for fear that he would not be able to overcome that urge to smoke again. Does not the same principle apply to guns and our need to control the use of them? Not everyone is so disciplined as was my dad when it came to smoking. This is not a rhetorical question. I am gonna look up the expression “smoking gun” now!

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      • Steve Cebalt says:

        Hi Wait a Minute. I’m not going to drift as far afield as you’re going. My point is very simple: As a currency-of-mutual-choice in a finite environment (Nazi death camp), an addictive product that some are addicted to and others are not seems an odd choice, since the currency itself is a highly prized, trade-able, CONSUMEABLE commodity. Seems like the tips from German-issued shoelaces or a certain type of button or some other thing of no real value would have made for a more effective currency.

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  8. Pallavi says:

    I think the real world income inequality and burning money inequality here is quite comparable. In the case of the smokers, the cigarettes get used up because of an addiction- a NEED, oh-so-familiar in economics, which leaves them with less to spend on other stuff and hence, ‘poorer’. Similarly, the poverty trap that perpetuates income inequality in developing countries is a major problem because poor people spend a significant portion of their income on basic NEEDS and not those that could help them out of it.

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