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Daylight savings time and the neutrality of money

Initially when I read Nick Rowe’s seminal blog post on daylight savings time and the non-neutrality of money I thought at last I had found an intuitive way to teach why the doctrine of the neutrality of money was flawed.  Today I went back to Nick’s post, and realized that in fact daylight savings time is analogous to the  neutrality of money doctrine.   Why today? Well tomorrow I have to teach the neutrality doctrine as part of broader exposition of neo-liberalism and the revenge of Says Law.  I think Nick Rowe and PK (hey win a faux noble and I will call you NR) are probably two of the five practising  neoclassical economists who understand why in a monetized economy (fiat / credit) Say’s law does not necessarily hold.

The neutrality of money doctrine holds that changing the monetary base can only impact nominal / current but not real / constant magnitudes in price or value terms.* In value terms we want to know what X is worth relative Y not what the nominal price of X is.  That is we want to know know if X has really increased in value or if its increase is just a chimera created by a general absolute increase in X and Y.

Ok let me transpose this: you get a salary increase of 2% but all the goods and services you consume cost 2% more.  In nominal terms you are 2 % better off, in real terms you are no better off.  Yes workers do suffer under the money illusion.  What does this have to do with Daylight savings time, the neutrality of money, and Say’s law?

Imagine a bucolic time when there was no money. Supply creates its own demand.  All the producers know that what they are producing must be consumed directly by exchanging for the production of others.  To simply all producers are consumers and consumers producers.  The market will naturally clear.  Money makes among other things abstinence possible and credit money makes folly probable.  Money allows for a separation in real significant delayed time between production and consumption and between being a producer and a consumer.  But crucially it also makes possible  that there is a prolonged period in which the equilibrium between what is produced and what is consumed perturbed.

The long run version of the neutrality of money says this is right.  In the Long run relative prices will clear those markets so in effect over the long run Says Law holds.

Using daylight savings time as an analogue to refute this works neither n the short or long term.  Changing the clock merely shifts the hours in which we wok but it does not change efficiency at which we work and thus not the output. In nominal terms we have shifted our output  in real terms we are producing just a much.  That is to say our behaviour has changed in a trivial way but our real actions (output) have not changed at all.  This then is a direct analogue to the neutrality of money doctrine not a quizzing puzzle to get students to step outside the box.

Pedagogically I am screwed .  Yesterday I thought I had short-cut.  Now, I have fourteen hours to find an analogue for the non-neutrality of money.

*Actually that is a good reason to retain the word value as opposed to price in the economic lexicon.

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4 thoughts on “Daylight savings time and the neutrality of money

  1. Are you sure changing the clock doesn’t change outputs, efficiencies, and productivity?
    I have seen some US studies on school children that suggests that (ironically) children actually do better during the daylight saving times. It may, of course not be a result of the clock changes themselves but simply because of more light in the early morning, but it seems evident that if you have more morning light, for example, you receive greater productivity. Also – does this contribute anything – if you shift the school day up, for example, to go from 10 to 3 instead of 9 to 2, highschool students do demonstrably better. Now that should be productively neutral in theory but it is not because studies have shown that the students do better. Thus doesn’t any theory of neutrality risk undervaluing certain normative or even physiological factors by assuming that shifts in, say, time will not affect the productivity?

    Maybe I am off topic here but my instinct is always to go back to normative questions.

  2. I think you are right. And the research you point to (got a link?) would then make daylight savings a good analogue for the non-neutrality of money. Which by the way is not normative.

  3. It has been years since I have looked at this stuff in any detail and I didn’t read the material about high-school students on the internet but a couple of years ago in an education journal, but I know some information on the issue of later school openings and better performance must be easily found because it has become a fairly widespread issue (at least in the States).

    Obviously, the question of better school performance is largely a physiological question but I was simply pointing to the normative issues because they are so easily overlooked in this kind of material. For example, the widespread claim that more daylight increases some retail revenues – there is a clear normative issue here in that many people just think (whether consciously or sub-consciously) that it is more acceptable to shop in the daylight, and some may believe that it is safer as well. These are clearly normative judgements and will inevitably play a large roll in certain behaviours.

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