Friday, October 25, 2013

The walrus, for its part, eats neither eggs nor fish

Today's topic lies at the intersection of two curves.

[It's possible this graph will make sense by the end of this post.]

I know, what a bizarre graph.  What a nutso, bonkers bit of nonsense.  I mean, why on earth is the dependent variable on the x-axis?  Who would do that?

The answer, of course, is every economist.  As we all know, economists have their Supply-and-Demand graph axes all backwards.  Don't buyers and sellers decide how many eggs to buy and sell as a function of price, not the other way around?

I guess what we really want to know is not who so much as why.  Why are we backwards?

A slightly embellished history of our own intellectual backwardness.
My understanding* is that this goes all the way back to our buddy Leon Walras.  He set things up with price as the dependent variable, and everyone after him was just stuck with it.  "I AM THE WALRAS!" he bellowed. "I DO WHAT I WANT!"

What was anybody supposed to say?  No one bellows like a Walras.



Okay then.  Thanks, Uncle Leon.

In his defense, at the time he was not thinking of eggs so much as fish.  Fishermen bring their day's catch to the market, and buyers buy them up.

In this context, it's actually not so crazy to think of price as the dependent variable.  With no way to sell more than the day's haul, and no way to store fish without smelly consequences, the supply was essentially fixed in the short run.

So, quantity supplied was not a function of price.  And on the demand side, if fish were being auctioned off, it really would appear as if buyers generated prices as a function of the quantity they were demanding.  Through this lens, one could be forgiven for thinking: First quantity is set, then price is determined as a function of that quantity. I still don't like it, but it's not crazy.

To his credit, Walras did totally get the idea of the fish market clearing, and that's the most important thing, isn't it?

It is a violent scene, without market clearing:
  • If price is too low, there is a mad scramble at the end, as desperate buyers grab hold of any fish they can find, in a vain attempt to fully satisfy their demand.
  • If price is too high, there are unsold fish, soon to be smelly fish.  Desperate sellers are forced to dispose of their extra fish by hurling them after the retreating buyers.  Will somebody please take our fish?!?  How about a flying fish?
Only in equilibrium can the human being and fish coexist peacefully.


Anyway, however understandable the error may be, it does look like Walras is to blame.  I mean, it's either him or the eggman.  And if you think it's the eggman, you seriously need to brush up on your food science.

Come to think of it, I'm sure we could all use a little more food science in our lives...but if you are not interested, just skip down to the last 3 paragraphs of the post. I'll never know.

On the fascinating differences between eggs and fish. You should think of eggs as basically the most durable natural animal product out there.  What other raw animal stuff do you keep in your fridge for a month?  (No vacuum-sealing, please).  Eggs are uniquely designed to survive outside the body, at room temperature or above, for several weeks.  Furthermore, an egg is basically a self-contained super-bundle of energy, with everything an embryo could possibly need to grow big -- the ultimate balanced meal. Unfortunately, that means that everything wants to eat it.  So the egg has to be really super robust against attack!  The whites are loaded with, oh let me just quote Harold McGee:
Biochemical studies have revealed that the albumen proteins are not mere baby food.  At least four of the proteins block the action of digestive enzymes.  At least three bind tightly to vitamins, which prevents them from being useful to other creatures, and one does the same for iron, an essential mineral for bacteria and animals alike.  One protein inhibits the reproduction of viruses, and another digests the cell walls of bacteria.
Most organisms are not adapted to eating raw eggs. Despite their rich stores of energy, they will actually drain your energy if you eat them raw.  (However, this is not a good weight loss idea.  According to Wikipedia, humans who eat raw eggs regularly will begin to suffer from biotin deficiency, which is a big deal).   
The point is, eggs are designed to last a long time even when everything is trying to eat them.  Thus, they last a long time in your fridge, where almost nothing is trying to eat them.  (Until you eat them).
Now, I know what you're thinking: How on earth did Gaston get so large?

Or maybe you're thinking, wait, what does this have to do with economics?

But what you should be thinking is: Gaston is a cartoon character and I want to learn about fish now! 
Fish! You probably know that fish go bad quickly, compared to beef and pork and chicken and other land animals.  There is a very good reason for this, namely that fish live in the sea, and the sea is cold.

When something dies, it immediately starts to decay, through the combined forces of bacteria and its very own enzymes.  The bacteria and enzymes active in land animals operate efficiently around body temperature, but refrigeration slows their activity to a crawl.  Fish bacteria and enzymes, on the other hand, are designed to operate at low temperatures, because what good is a fish bacterium that can't function at fish temperatures?  The fridge isn't much colder than the sea, so it doesn't slow the decay nearly as much for fish. 
Thus, fish do not last a long time.  Although it is true that warm water fish keep longer than cold water fish.
It's possible this was all a big ruse to talk about food science on an economics blog.  But if there is a point, it's that fish and eggs are at opposite ends of the durability spectrum, as animal food products go.  While the 19th century daily fish market is a pretty good example of fixed quantity from which prices follow, the daily egg market is not.  I would expect the daily supply curve for eggs to slope up, wouldn't you?  After all, if demand is low today, sellers can always just hold onto their eggs until tomorrow.
Thus, we can definitively conclude that it was the Walras, not the eggman, who flipped our graphs.  An eggman would never put quantity on the x-axis!


A cure?  
I think we can also conclude that this insanity needs to stop.  If by "this insanity" you mean this post, don't worry, this is the antepenultimate paragraph.  On the other hand, if you mean the business of putting quantity on the x-axis, then you will be interested in my penultimate paragraph.  (For the record, I agree with both meanings of "this insanity.")

These days, there is really only one person with the power to cure economics of this perpetual backwardness.  I am talking, of course, about Greg Mankiw.  I mean, what if he just did it?  What if economics teachers and students across the nation open up their shiny new 7th Editions in January and all the price-quantity axes are just...flipped?  As far as I know, he could actually do this and nobody would be able to stop him.  That's power, my friends.  And with great power comes great responsibility, or at least a lot of royalty payments.

What say you?  Does the thought of putting price on the x-axis fill you with a visceral terror of the unknown?  Or do you look forward to the day when the penny is abandoned, the metric system reigns supreme, and physicists have only n-1 things to mock economists about?  In any case, imagine how much fun the econ blogosphere would be for the week after the textbook came out!



*I learned about Walras and his fish markets from one of my econ professors in college.  I'm not sure it's true, but I'm sticking with this story until someone tells me otherwise, and probably afterwards as well.

2 comments:

  1. With great market power comes great responsibility.

    Yes, I am all for Mankiw setting economics straight. Economists should put price (when it is a given) on the x-axis.

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  2. Not so sure about switching the axes. I thought the point of having price on the x-axis was that "we" (some economists out there) like to draw pictures with (marginal) "value" on the vertical axis. It's not how we formally think about supply and demand in equilibrium, but it is how we think about surplus.

    With the axes as is, a nice trick that we can pull is to draw an industry's cost curves on the same set of axes as a supply and demand diagram. This can yield useful insight (e.g., the relationship of MC to supply). I think this is the reason that P on the vertical, Q on the horizontal has stuck -- despite the perverse mathematical implications, and confusion of Econ 1 students.

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