Since this is an empirical claim, it requires empirical proof. I don’t see the relevance of comparing it to ‘the same pretense of knowledge as any central planner’. Some things are empirical claims and can be researched by empirical means. This is one of them. Wether or not you call it economics, is a whole different discussion. (Mises probably would not.)
Could you explain to me how this is based on ‘the useless imaginary constructs of equilibrium models’? Also; where do you see Esuric saying ‘entrepreneurs should do x’? He’s only saying: ‘entrepreneurs generally do x’ (historical-empirical claim). Where are the ‘equilibrium models’?
The appropriate question is, how do you know that they do? It’s just some flimsy attempt to patch a hole in the argument for expedience. My explanation at least makes sense on the face of it, as opposed to wage cuts lowering morale and productivity, which does not and is simply made up without any concern whether it is true.
Saying that prices are sticky, implies they are not where they should be.
You would have to first objectively define “sticky” prices to even talk about empirical proof, even if it was valid for economic science. You still haven’t done so and so you haven’t shown that the notion of sticky prices can have any scientific meaning.
You presume to know where the economy is going, or needs to go based on what exactly?
To say that a price is “sticky” is to say that it’s price is not where it should be. How do you assert such things without presuming omniscient knowledge about the course of where the market is going or needs to actually be.
I was referring to this: “Yes but frequently firms will choose to layoff workers rather than reduce wages in order to avoid productivity losses (lower morale).” <= This is an empirical claim. Both are ways to cut down on your costs; so both are means for the entrepreneur to reorganize his investment. Nobody was talking about prices being sticky there.
" You presume to know where the economy is going, or needs to go based on what exactly?
<= Again; the quote you were attacking was Esuric saying the following: “Yes but frequently firms will choose to layoff workers rather than reduce wages in order to avoid productivity losses (lower morale).” It doesn’t imply knowing where the economy needs to go. It’s an empirical observation: if entrepreneurs are faced with certain problems, they tend to fire people in stead of the alternative of offering overall lower wages to everyone. It’s just an empirical claim, which could be true or not. Where does it presume the kind of knowledge you are talking about?
The concept of ‘price stickiness’ implies, indeed, that prices aren’t where they ought to be, as judged by the underlying preferences of people. For epistemological reasons: this can only be a concept. There is no way of knowing - as far as I know - to point at any given price in the real world and saying: well, obviously, this is a sticky price. But that’s not necessary for the concept to be meaningful: is it possible to have prices adjust more slowly than otherwise would have been possible, because of pre arranged contractual obligations? Sure it can. People make mistakes: people can fail to see certain changes and have a certain kind of path dependency concerning the height of wages (or other prices). This is conceptually possible.
Your analysis of people refusing to work hard etc. makes a lot of sense, but it is not relevant to Mr Bewley’s excellent field work. The employee will never walk over to the employer and say “Pay me less.” And even if he does, Mr Bewley is saying that the employer’s response is “I’d rather fire you altogether. It’s better for my business that way.” So that the option you mentioned of accepting lower wages is just never raised in practice.
People don’t want to stay unemployed. In this situation, they accept a lower wage, and because of the fear of becoming unemployed again, they will increase their productivity even if entrepreneurs think it’s better to fire them all together. Do you think entrepreneurs cannot notice that ?
And about Bewley’s work. You can find his book here.
GM went bankrupt because their side company, GMAC, made foolish loans. Also, they are enslaved to a powerful union.
A friend of mine works in a large electronics firm. She said that when times were bad, the first thing the company did was mass firings. When that wasn’t enough, and the company was going to have to close, as a last resort they cut wages for everyone by 10%.
Instantly morale dropped. There was intense resentment and anger. Nobody felt like working beyond going through the motions, because “What’s the use?”
When they were asked to work overtime, there was a revolt. How dare you ask for overtime before you give us our salaries back.
This went on for 18 months. Then things picked up and people got their old salaries back. There was a month of grumbling that it should be retroactive, but that died down. Some people felt they like they got a raise. Some eagerly wanted to work overtime, to catch up.
Reducing the number of employees makes sense when you want to lower production. That has no relation to not wanting to cut wages due to supposed morale and productivity losses. Using that reasoning you would be claiming that productivity is determined by wages.
In the above anecdote there are so many blanket statements. “Nodody” and “everyone” sounds like union propaganda. Unofficial unions don’t work without coercion. I’m sure it was the same divide as always. Some rabble rousers contended that they are entitled to a salary whilst others just wanted to continue working. Large non-unionized employers fear intervention in response to their decisions. It isn’t only existing unions that have effect.
Cutting wages has a double positive effect. It increases the chance of staff turnover, which is good. You have fewer workers and you are paying them less at the same time. I highly doubt that the corporate giants of the world haven’t figured that out. If productivity does fall for some reason, less product flooding the market.
There is opportunity cost to every entrepreneurial decision. The possible alternative means to attain any goal are infinite. So what? Is this what “sticky” prices means for you?
What is a “sticky” price as oppose to a non-sticky price? Define sticky prices. You still haven’t done so.
I have given a definition. If you disagree with it, fine. But don’t ignore a post and than tell me I have not done something I actually did.
So, to repeat my previous attempt to define it:
"A sticky price could be any price that is a price that because of prior actions can’t be changed to it’s current DMVP without undoing those actions or something like that. Again; if a contract stipulates that one works for 10 dollar/hour but his DMVP drops to 7, this could be considered a sticky price if there are certain obligations to uphold the previous agreed upon price. "
Telling that there is ‘a cost’ doesn’t exclude the conceptual possibility of different costs and that some have the cost of causing slower adaptable prices than others.
If I’m a store and I want to change the price of a certain good x, there (usually) is no long term contractual obligation with customers to change the price. If, however, I have a contract with a person to deliver good x for a certain price, during a year, the price of this good is contractually bonded and thus can’t be changed, even if when there would be a market need for it.
You are right in saying if you say that this is not a market failure (estimations that go wrong, can hardly be called ‘market failures’). You are right if you say that there is no real problem with it. You are right when you say that we shouldn’t make something illegal. The only thing I disagree with, is the claim that the concept of sticky prices doesn’t make sense in an unhampered economy. The concept above is conceptually possible and thus the concept as such, makes sense.
So, again: “(is) it possible to have prices adjust more slowly than otherwise would have been possible, because of pre arranged contractual obligations?” The way you respond, it seems that you accept this possibility, but deny calling it a sticky price.
If you take the general definition of wikipedia - “Sticky, in the social sciences and particularly economics, describes a situation in which a variable is resistant to change” - it seems to me that this conceptual idea I’ve given is (1) in accordance to the general definition used and (2) can actually happen in a free market.
Again: this doesn’t mean it’s a big problem, this doesn’t mean there is market failure, this doesn’t mean anything besides the fact that people can make mistakes in trying to estimate what kind of contractual arrangements they want to have. And sometimes these can cause inflexible prices. There could be reasons for that (e.g. more certainty of income or what not), but that doesn’t mean that the concept of a sticky price doesn’t exist. It can.
Also remember that ‘price stickiness’, even in the mainstream, is often used as a concept to explain the consequences of government inervention and always a short run concept. In the long run, prices will adjust. I take your criticism to mean something like: ‘this is just arbitrary: prices always adjust. Sometimes faster, sometimes slower. Price stickiness only makes sense against a (false) idea of instantly changing prices.’
I’ve tried to explain that this is not necessary the case: the idea of sticky prices can make sense, even if it’s not a problem.
To look at it from another way: you can think of it of the problem of what causes the price from not adjusting. There is a difference between ‘the entrepreneur didn’t adjust his price yet’ (for future exchanges) or ‘the entrepreneur wants to adjust his price, but because of certain items is prohibited from changing it’ (for future exchanges, between certain people). Since in a unhampered market, outside regulation is excluded, the only thing that is left, are certain contractual relations that can prohibit price change for a certain duration.
I’m not saying that this is a big problem, market failure or whatever. I’m only saying that there is a conceptual difference between these two causes, which have different consequences.
I’m not the one claiming that forcing out workers whilst paying more is preferable to losing workers whilst paying less. Cutting wages absent intervention is always the best move no matter how you slice it. It’s simple math. It does everything you want in one.
You want more workers and you want to lay off workers at the same time? it’s time to take a break from the computer.
Assuming the fallacy that wages determine productivity, worst case scenario you are no worse off having a lower paid, lower producing staff than a higher paid, higher producing staff. All equal it’s better to be smaller. But, that is assuming a fallacy.
Whether there is a union is irrelevant. You can’t seriously tell me that every single worker in that factory unanimously made every decision in unison, as if each one was demanding to be layed off instead.
Bureaucrats cut wages every time they hike taxes and after 5 minutes of bluster and blather it’s normal.
First, nothing is “changed to it’s current DMVP”. The DMVP exists only in the mental construct of the ERE.
Second, there is no such price that “can’t be changed” on the free market. There is a cost to any change in price, but all prices can be changed. If you want to argue that some changes are more costly then others, then that’s fine, but that’s just pointing out the obvious a priori truth about human action. Nothing particular to some notion of sticky prices.
As I’ve said before, A contract is not some mythical contract with the devil (or with the government). It simply represents a cost, like all other cost of the means of production.
The entrepreneur does not break a contract only on account that he does not deem the expected return of such a move profitable. He may err in his action or he many not, but it is impermissible for you to claim to know the “correct” direction of the market and to declare such contracts (costs) as “in the way” or as some hindrance.
I said devoid of scientific meaning. Not concept!
I don’t know if this is a question of a complaint, buy anyhow, yes! it’s not enough. You need to objectively define your terms for them to have any scientific meaning. Otherwise, they’re just arbitrary personal value judgments.
Right, and since all variables on the market are “resistant to change” different only in degree, then either sticky prices is a useless redundant term that conveys absolutely nothing to our understanding of economic science since all prices are sticky, or it is not, but then it must be objectively defined and distinct from say, a “normal” price.
I don’t deny anything. You can define whatever you want. It’s just that the above can be applied to any price on the market. There isn’t a price on the market that could not adjust more quickly if an alternative different “better” action was taken. So all prices are sticky according to this definition.
Smiling Dave,
I got it.
You accept the idea that a deflation would lead to a recession, causing mass unemployment. Is deflation a problem, I suppose productivity gains must be offset by an increase in the quantity of money, in order to maintain the price level.
Your anecdotal evidence makes a lot of sense. I have a little doubt. Do you really believe that unemployed won’t find a job elsewhere ? Even if they accept a lower wage… ?
Caley McKibbin,
You want more workers and you want to lay off workers at the same time? it’s time to take a break from the computer.
Whether there is a union is irrelevant. You can’t seriously tell me that every single worker in that factory unanimously made every decision in unison, as if each one was demanding to be layed off instead.
He (Smiling Dave) did not say that. I think that is what he means :
falling prices give a “signal” that their profits and businesses are no longer sustainable even if production factor prices fall at the same time because falling prices are perceived as a lasting decline in profit. Companies see falling prices as demand down. In this situation, employers don’t want to hire even if employees accept a lower wage.
nobody would accept to suffer wage cuts (prisoner’s dilemma) even if they understand that is mean layoffs. Of course, no one is demanding to be layed off. I suppose, from an entrepreneur’s point of view, it is preferable to hurt a few of them instead of all of them. I’m not sure.
See his post above :
Instantly morale dropped. There was intense resentment and anger. Nobody felt like working beyond going through the motions, because “What’s the use?”
Hazlitt in his book about inflation convinced me that deflation is never really a problem, unless it is a sudden sharp deflation. And even then the problem is that people are not able to accept the idea that they will have to work for less and charge lower prices for their wares [even though they get equal or more purchasing power]. Once they swallow that seemingly bitter pill, all goes well.
There have been long debates here about whether a deflation needs more money printed into the system. I understand the later Mises’ position, that there is no need to do such a thing.