Bryan Caplan  

The Senile Walrasian

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When economists explain supply-and-demand, they often invoke the Walrasian auctioneer.  Imagine we all gather together at a massive auction house, with all eyes on the auctioneer in the front.  He calls out prices, and the attendees call out quantities.  When there's excess supply, he revises his price downward; when there's excess demand, he revises his price upward.  Once supply equals demand for all goods, the Walrasian auctioneer bangs his gavel down, and everyone buys the amount they called out at the final prices.

It's just a pedagogical metaphor, of course.  But what pedagogical metaphor should we use to explain the failure of markets to clear?  The most obvious example nowadays is the labor market, where millions of able workers who are willing to work at the market wage find themselves unable to find jobs they're perfectly able to do.

To help students understand the situation, return to the Walrasian auction house.  But now there's one difference: the auctioneer is senile.  He's slow to call out prices, loses his train of thought, has trouble hearing the quantities the participants call out, and often fails to adjust prices in the right direction.  Just imagine:

Senile Walrasian: Mmm, let me see here. [pause]  Where are my glasses?  Oh, I'm already wearing them.  All right.  [pause]  $100 an hour...  Oh wait, $50 an hour.  No, $100.  Yes, $100.

[Participants signal the quantities of labor they'll buy and sell at $100.]

Senile Walrasian: OK, it looks like people want to buy 1,100 hours and sell 2,000 hours.  Or is that the other way round?  No, I had it right the first time.  Now where are my glasses?

[Auctioneer pauses.]

[Participants wait politely.]

Senile Walrasian: Well, what are you all waiting for?

Random Participant: We're waiting for the price!

Senile Walrasian: What d'you mean you're waiting for the price?  I already gave it to you!

Another Random Participant: Well, could you give it to us again?

Senile Walrasian: Only sell my cabbage once a day!

Chorus: Please?!

Senile Walrasian: Oh, all right.  So people want to sell 1,100 hours and want to buy 2,000 hours when the wage is $50, right?

Chorus: Argh!

In a world run by a senile Walrasian, the equilibration process takes all day, all month, all year, or longer.  And while it seems absurd, nowadays this pedagogical metaphor isn't isn't so far from the truth.  Of course, it doesn't help when government regulations make the auctioneer's job harder on purpose.


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COMMENTS (11 to date)
WhiskeyJim writes:

While I agree with your post, I am surprised by your answer. The market is not clearing because the Federal Reserve and the Government will not allow it to clear.

Do we really believe propping up residential and commercial prices on fake bank Balance Sheets does not have a freezing effect that ripples throughout the whole economy?

Bailing out the banks and preventing the market adaptation (sell-off) that would have occurred (yes, some of it at very depressed prices) would have resulted in a quick but painful re-arrangement of the economy. But then it could move on and repair itself.

TARP ended up being very stupid, because the toxic securities were never repriced and cleared, which is what Paulson originally said his purpose was. They sit like moldering wheat, festering away in a barrel. Bankruptcy and liquidation of those securities would have helped clear the markets.

The auctioneer is not senile. He is frozen. He refuses to go down when there is no bid. He is preventing the market from working at all.

The stimulus is doing the same thing. It is freezing the auction from taking place. It is not allowing the public employees, where all the stimulus is being spent, to revalue.

Until the auctioneer begins calling prices again according to the rules, we will limp along half in and half out of recession.

Troy Camplin writes:

Perhaps equilibrium is as mythical as the Walrasian auctioneer. Any dynamic, evolving network process -- like an economy -- is on the edge of order and chaos and, thus, in the far-from-equilibrium realm where creativity is maximized. Thus positing equilibrium to be anything even close to a reality is like accepting the geocentric view of the universe or the homonoculus theory of mind. Economics has to get caught up with 21st century science, and leave 19th century science far behind.

Nick Rowe writes:

Bryan: This is exactly the route that Clower, Leijonhufvud and many others took, as an interpretation of Keynesian macroeconomics, back in the 1960's. They asked the question: what happens if trade begins *before* the Walrasian auctioneer has found the market-clearing price vector?

Some people won't be able to carry out the trades they had planned to do, because there is excess supply or demand. So people revise their planned trades, incorporating these quantity constraints into their maximisation problems, and their original "notional" demand/supply functions get replaced with "quantity constrained" (effective) demand/supply functions. And then you need two auctioneers. One is doing a tatonnement on prices, the other is doing a tatonnement on quantities. (And both may be senile).

This whole "Non-Walrasian" approach to macro disappeared with the New Classical revolution, unfortunately.

Rebecca Burlingame writes:

This is a good time for me to get a better grip on my own interpretation of equilibrium. I now interpret it as a certain desirable amount of velocity in economic flow, in order for government to keep up with its current promises and responsibilities. Government wants more flow than exists so it distorts markets upward to maintain its desired velocity. Is this correct?

Doc Merlin writes:

Wouldn't a very basic supply and demand model of employment taxation result in a failure of the markets to clear? Try it. Add a fixed percent tax to the cost of employment in your supply-demand plot and you get a "failure to clear."

Yancey Ward writes:

Rebecca,

That, too, is my opinion of government's efforts to "grow" economic activity. It is important, I think, to ask who/what depends most greatly on growth above and beyond that engendered by population increase.

Ivin Rhyne writes:

The problem with this line of thinking is that there is no auctioneer. The auctioneer represents perfect information with regard to the market participants. This isn't what happens.

Instead, a better analogy (and one I use to teach market dynamics) is the Flea market. The flea market is a location where both sides of the market go to find what they are looking for. In labor markets, as in real markets, there are no rules as to who will set up booths and who will browse. In most cases participants will do both. But there is no guarantee that prospective employees or employers will actually find the quantity of labor at a price they are willing to pay (or accept).

It is the myth of perfect information that the Walrasian auctioneer represents, and therefore why the Walrasian approach to describing markets has such a difficult time dealing with the fact that markets do not usually "clear" in the strictest sense.

Ivin

Pcle writes:

Nick Rowe mentions the work of Leijonhufvud and Clower and says it disappeared. I think Clower thought pursuit of Walrasian auctioneer metaphor was a dead end with no explanatory power, as this post only further attests. Clower went on to develop, mostly with Peter Howitt a new research paradigm based on agent-based modeling. A good example is their paper the Emergence of Economic Organization. They try to model how some type of trading network evolves over time and how it functions as a co-ordinating device in real world economies.

Troy Camplin writes:

The Walrasian auctioneer is the same as the Cartesian homonoculus.

Vacslav writes:

In his "Business Cycles and Equilibrium" Fischer Black attempted to introduce an optimization functional that would describe the actual process of equilibration. Add friction (transaction costs and delays) and exogenous forces - and it turns out that real markets never really clear.

Jacob Hedegaard writes:

Caplan(my emphasis):

(...)millions of able workers who are willing to work at the market wage find themselves unable to find jobs(...)

How do you know that people are offering their efforts at market wage and still don't find jobs?

I'm honestly asking, since I would guess lowering their wage-demand would land many of them jobs.

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