Weekend Reading: John Maynard Keynes on the Baneful Consequences of Ricardo's Rhetorical Victory Over Malthus
Weekend Reading: The Riot Act of 1714

Nick Rowe: Bicycle Disequilibrium Theory: "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.... 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....

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...


#shouldread #monetaryeconomics

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