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Bicycle Disequilibrium Theory

Summary:
Suppose you need a bicycle to get to work. Suppose bicycles are a common property resource, because bike locks don't work. Every night the workers deposit their bicycles in the bike bank, and in the morning it's first come first served. And suppose that sometimes there aren't enough bicycles to go around. So sometimes the level of employment is determined by the number of bicycles, and not by all the usual stuff. Any individual can always get a bicycle in the morning, simply by getting up early enough. But in aggregate they can't. Fallacy of composition. A theory of when workers wake up might be interesting, and useful for microeconomists wanting to understand the distribution of employment, but it won't help us understand what determines the aggregate level of employment. Bicycle

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Suppose you need a bicycle to get to work. Suppose bicycles are a common property resource, because bike locks don't work. Every night the workers deposit their bicycles in the bike bank, and in the morning it's first come first served. And suppose that sometimes there aren't enough bicycles to go around. So sometimes the level of employment is determined by the number of bicycles, and not by all the usual stuff.

Any individual can always get a bicycle in the morning, simply by getting up early enough. But in aggregate they can't. Fallacy of composition. A theory of when workers wake up might be interesting, and useful for microeconomists wanting to understand the distribution of employment, but it won't help us understand what determines the aggregate level of employment.

Bicycle disequilibrium theory helps us understand what determines the level of employment and output. It also helps us understand other puzzling phenomena, like why workers sometimes wake up and go to work so ridiculously early.

Making the quantity of bicycles endogenous does not invalidate the theory. It just makes it more complicated, because a very simple supply function gets replaced with a more complicated supply function. The level of employment will sometimes be determined by the parameters of that more complicated bicycle supply function, just like in the simple case where the supply function has only one parameter.

Does bicycle disequilibrium theory tell us exactly how many bicycles the government should produce? No. That will depend on lots of things, like how the demand for bicycles varies over time, and the cost of having unused bicycles. It does not tell us what the best bicycle supply function would be. You need a lot more information to figure that out. But I would still call it a useful theory, if it helps us understand the world, and think more clearly about why the bicycle supply function matters, and the costs and benefits of changing that supply function.

Paradoxically, the bicycle disequilibrium theory would be at its most useful, empirically, if the government had a really stupid bicycle supply function. Like tossing a coin to decide how many bicycles to supply. The coin toss would predict employment. If the government made the supply of bicycles depend on things the government thought might affect the supply and demand for workers, and how many bicycles were needed, it would be much harder to test the theory, even if the government's model were wrong. You can't identify bicycle shocks because you can't distinguish them from regular labour supply and demand shocks.

This post is my response to Scott Sumner's post explaining why he thinks "monetary disequilibrium" is not a useful concept. My bicycle metaphor is a close cousin to Scott's own musical chairs metaphor, except that any individual can always get a chair by choosing to get up a bit earlier. Internecine wars are always the best. But I agree with Scott that it is not at all obvious how one would measure empirically the shortage of bicycles. Perhaps the workers got up earlier because it was a fine sunny morning.

I think there may be some times and places in the real world where many workers do in fact use a bicycle to get to work, so bicycle disequilibrium theory may in fact have some limited applicability in the real world. But the use of money is more common.

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