The Senile Walrasian
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?
[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!
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?
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.