I had hoped to get this up at Ezra’s place but there is actually a backlog there and it takes some time for all of our posts to get up.  I am guest blogging there if you didn’t know.

Pondering Daylight Saving Time, Nick Rowe notes

A purely nominal change (whether we say than solar noon is called "12.00" or "13.00") will have a big real effect. Even though we all know that it’s just a nominal change. Nobody is fooled by the government changing our watches without us seeing them do it. Nobody suffers from "time illusion". We know it’s notreally earlier. In fact, it’s the people who don’t hear that the time has changed who are likely to still get up at the same real time, by the sun.

And the real effects of this nominal change will last, at least until the Spring, when the government will tell us to change our watches forward again.

[…]

If we understood Daylight Savings Time better, and how it works, we might understand monetary policy better.

When analogizing Daylight Saving Time to monetary policy the proper question, isn’t, why does it work?  The proper question is, why doesn’t it spontaneously emerge? Why does Daylight Saving Time require central planning and government coordination.

Indeed, Ben Franklin argued for DST, saying:

I considered that, if I had not been awakened so early in the morning, I should have slept six hours longer by the light of the sun, and in exchange have lived six hours the following night by candle-light; and, the latter being a much more expensive light than the former, my love of economy induced me to muster up what little arithmetic I was master of, . . .

[Detailed Candle Use Calculations]

An immense sum! that the city of Paris might save every year, by the economy of using sunshine instead of candles. If it should be said, that people are apt to be obstinately attached to old customs, and that it will be difficult to induce them to rise before noon, consequently my discovery can be of little use; I answer, Nil desperandum. I believe all who have common sense, as soon as they have learnt from this paper that it is daylight when the sun rises, will contrive to rise with him

This should be especially poignant to Bastiat fans enjoy the satirical argument in favor of blotting out the sun so as to sell more candles.

Yet, here Franklin is shocked by people choosing to burn candles when daylight is freely available. He goes on to argue that people are “obstinately attached to old customs” and this is the reason why the obviously superior equilibrium of waking with the sun does not occur to them.

It makes more sense to me that there is a sticky information. In the case of daylight saving time, you know the hours of operation of many businesses, you know when various appointments are and that given all other appointments these appointments work, etc.

If we all allow our nominal times to float then that would impose enormous costs of gathering information. As such the only way to discrete jump in time relative to the sun is for everyone to do it at once. Even if we all very much want to jump, we can’t because without central coordination information is too sticky.

We are stuck in a liquidity sunlight trap.

There are two things I think should be noted

First, without the mass interactions of the city this problem is not a problem. Nominal rigidities seemed to be linked to the size of the network in which you are embedded.

Second, imagine a world in which there were no nominal rigidities. Does this off the top of your head sound like a world in which you would like to live? Imagine if every purchase were an ebay auction, where you could not be sure if you would be able to purchase anything at your reservation price and even if you did you were never sure of the consumer surplus that you would receive.

Overall, such a world would likely produce much cheaper prices and greater consumption but much more stress at the same time. It seems natural that people would look to avoid this stress by cutting long term deals with familiar merchants. They would say look – I’ll come back every week if I can have it at X price guaranteed. The merchant would accept because he is now receiving a higher price. The customer would offer because he is now facing lower uncertainty about price and availability.

By making such a side deal we have introduced a nominal rigidity, created a world with constant excess supply, and in which consumers feel cheated by unexpected rises in prices or unavailability of merchandise. A world that seems to resemble our own.

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