Schelling's Equilibrium

Economics text books describe equilibrium as intersection of demand and supply curves. In a market economy analysis, a shortage of goods (demand > supply), the prices will rise incentivising more number of producers to enter into the market. The increased supply of goods accompanied by a drop in quantity demanded following a rise in price will restore the balance in the market. Similarly, a scenario of surplus (supply > demand) causes a drop in prices. The drop results in increase in quantity demanded yet at the same time disincentivizes production causing a fall in quantity supplied till the market is restored back to equilibrium. Yet the concept is quite non-intuitive. It seems it is more of text book idealism than something that can be observed in practice.  

Equilibrium as a concept takes its roots in biology and physics rather than economics. In natural and pure sciences, equilibrium is described as a situation in which some motion or activity or adjustment or response has died away, leaving something stationary at rest in balance. This definition is something posited by Thomas Schelling as delves deeper into economic analysis. For him, equilibrium is an approach but something that is achieved in practice. There is a possibility of a partial equilibrium or may be equilibrium in short run or maybe an approximation in the long run, In fact as Schelling points out, potential equilibrium itself is dynamic and keeps changing with time and context.

Schelling was one of the first to understand and apply equilibrium to situations in real life. Robert Frank, once described him as an ultimate economic naturalist. It would be interesting to explore the applications of equilibrium a concept as understood by Schelling.

On any weekend, a casual visit to a mall would reveal hundreds of people hanging around the mall. There are perhaps many who are on their shopping spree yet there might be some who might be just hanging out to pass time or engage in some window shopping. Maybe for a couple it could be some time out together, for someone dating, it might be good opportunity to hang around with their dates. Irrespective of the reason for visit, there are occasions when as one enters the mall, there is a feeling of overcrowding and looking forward to other alternatives. For a moment, it can be assumed alternatives are available and relatively cost free. So a situation might arise, people wanting to enter the mall are reluctant to enter owing to large crowds thus seeking other pursuits. Yet, for people who are already in the mall, they are sufficiently incentivised enough of not seeking other alternatives. Therefore the crowd level in a mall can be said to be in an equilibrium,

Similar analysis might be applied to beaches and hill stations. Often it is said that beaches in Goa are overcrowded and many suggest of alternative vacations. Those wanting to get into the beach find it little unattractive owing to the crowds, yet for those who have already hit the beach, the atmosphere is robust enough for them continue there and not exit in pursuit of alternative beaches. Therefore one can assume the beach is in equilibrium. There is similar talk of hill stations like Manali, Mussorie, Shimla, Nainital etc being overcrowded. The same principles apply here too. For those visitors in search of summer holiday destination might find there overcrowded hill stations unattractive whereas those who already have made it to the destination find it lucrative enough to continue vacationing in the same spot rather than change the same.

In fact, in Malthusian terms, a society is in equilibrium when the moderate population is balanced by low food production and distribution. The low food production ensures low birth rate accompanied high death rate thus keeping population in a perennial balance thus an equilibrium. Similarly in environmental studies Schelling equilibrium analysis might be applied in interesting ways. Commercial whaling depletes whales making them endangered. Yet within this critical point lies a scope for equilibrium analysis. As the whales deplete costs for the marginal whale increases thus disincentive for the whalers. Yet there would be a whaler or two who would be the last man standing of sorts. For them, the remaining whales are attractive enough to be hunted but the quantity hunted is just enough to sustain the reproductive ratio of whales thus keeping whales in equilibrium. The analysis would be of quite an interest in decoding the impact on deep sea fishing, resolving prospective tragedy of common, grazing of common pasture, deforestation, hunting of wildlife etc.

It must be reiterated that equilibrium is an approach towards setting a activity or motion or response to rest or stay in balance and not a perfect point. Often, these are interplayed at micro levels. Each individual might exercise a preference, yet those preferences when aggregated yield a very different outcome. An individual preference exercised with unrelated factors in the background generate a path dependency with the aggregate outcome manufacturing very different picture. The principle of segregation as elucidated by Schelling is a classic manifestation of the same. An analysis of the economics of segregation is discussed in the post “The Economics of Segregation”.  Ghettoization too is an outcome of equilibrium analysis wherein someone seeking to buy or rent of house doesn’t have incentives to do yet those who are already into the locality do not have disincentives to exit.

Schelling equilibrium analysis brought to the fore the concept into real life practice and action away from the geometrical drawing boards which it had been confined to in the neo-classical and post neo-classical analysis.