Static money supply and sticky prices

Economics Economics Questions
1

So I’ve been reading through two chapters in Rothbard’s What Has Government Done to Our Money?: The Problem of Hoarding and Stabilize the Price Level?. The basic theory seems to be that if money supply stays constant and the quantity of goods in the economy rises, or if effective money supply drops because people start saving more thus reducing the velocity of money, that prices will then adjust accordingly… dropping to account for the fact that there is now less money apparent in the system relative to other goods/services.

A couple of years back I remember reading Economics for Dummies, which I realize isn’t one of the Austrian texts but is none the less a good middle of the road fairly objective read. One of the points that is mentioned in Economics for Dummies is that whilst the prices of some goods can adjust more or less instantly to reflect changes in supply and/or demand, other prices are “sticky” - implying they don’t like to move so quickly (if at all). A good example might be the ski passes at any ski resort - the prices for these passes are usually decided before the ski season at the beginning of each year… so can only change once every 12 months (even if the ski field’s costs and/or demand for it’s services change much more frequently than this).

The most common example of sticky prices, however, is wages and salaries - which typically account for around 70% of the average company’s total costs. Employees, of course, don’t like to hear during their annual review that the company will be reducing their salary by 30% this year. Typically if company’s have to reduce costs (as is happening presently in the building and finance sectors in the US and the UK) they go about doing so by laying staff off entirely. If they then need to hire people again, they hire them at lower salaries…

I could see various problems resulting from the stickiness of labour costs in a market that has a shrinking effective money supply (due to, for example “hoarding” as Rothbard puts it). To start with, although the prices of labour must necessarily drop to account for the decreased effective money supply, the stickiness of these prices and the requirement to fire people on mass (and then re-hire other people more cheaply) can take quite a long time and be quite costly. For the companies, the effects can be minimized by hiring at the same time they’re firing (something I know various international companies have been doing recently, laying off thousands of people in Western Europe and hiring almost exactly the same number of people more cheaply in Eastern Europe). The individuals usually adapt somewhat less well to the situation however. Many of these individuals may have stubborn pride that gets in the way of them finding new work at a significantly lower salary than they have come to think “they are worth” and indeed may decide to change profession entirely… which is perhaps exactly what they should be doing given the signal that the market just sent them. Many more will have long term commitments such as mortgages etc. that need to be paid, and lacking the salary that they’d anticipated these people may default on their mortgages (which I guess is an argument in favour of income insurance, the free market might say).

Typically sticky prices are used as an argument for the existence of some kind of moderate inflation. Inflation would give companies a little bit of an advantage in wage negotions - if they don’t give someone a raise (but don’t drop their salary either) then they’re effectively cutting the employees real salary (i.e. what they can buy for their money) without the employee necessarily realizing it (unless the employee in question is an economist).

It’s an interesting argument and I’m not suggesting that any of the tiny grumbles presented above should in any way rule out the possibility of a more or less static money supply as being a feasible or desirable monetary system - I simply have a few questions that I’m unable to adequately answer myself… and which Rothbard doesn’t address at all in the text indicated above. I wondered if the idea of sticky prices was addressed elsewhere in Austrian thought and what the general thinking was as to how a deflationary system would deal with sticky prices.

Cheers,

Jimmy

2

I never got the idea of sticky prices. All they essentially imply is that some prices will move more easily than others for various reasons. So what? So long as nothing is messing with the feedback mechanisms of the market they will eventually move to the level dictated by the true state of demand in the economy. For example house prices are somewhat ‘sticky’ here where I’m at supposedly, because people are mortgaged to the gills and not too hot on the idea of selling their house for 10% less than they paid for it because they owe a ton more than that. All well and good, they refuse to lower their house price, and it sits on the market until someone comes along who is willing to buy it at that price, or until the pressure the owners are under gets to a point where they feel they have to sell despite the loss. The price isn’t ‘sticky’ because some outre thing makes it hold when it ‘should’ drop. It’s a perfect reflection of the seller’s values. They’re just not in sync with other people’s values. Prices aren’t ‘supposed’ to anything in particular except reflect information accurately. There have to be trillions of sales that never happen every day because the buyers and sellers aren’t in sync. Are those prices sticky? Or are they only sticky when more people tend to notice? Costs tend to change slower than other factors. And the nature of capital as nonhomogenous means it’s not going to instantly transform to serve consumer demand. The market is a real world process, not a math equation that responds instantly. Some economists have trouble realizing that, and come up with nonsense ideas like ‘sticky’ prices which is like assigning some kind of mystical significance to the fact that the sky is blue during the day and turns black at night.

3

You could use the same argument about inflation though. So what - prices will rise to adapt to the new money in the economy. As you are probably aware though, this is a bit naive. Inflation benefits primarily the guy who printed the money, to a lesser degree it will benefit the first line of people that the money goes to and then the second… all of which will be at the expense of the people at the back of the queue who come into contact with the “new money” last - those guys will have seen increasing prices without increased revenues to compensate.

Well, sticky prices and deflation would be kind of the same scenario. First of all, there are less dollars in the economy. Next, the prices for a bunch of products which are quick to change do so almost immediately and neither the supply, demand or production of these products is affected. However, for prices like ski passes at Vale ski resort, which are fixed at the beginning of the year, the owners of the business see their costs rising but not their revenues. As such I think you’d see lower production of goods that have “sticky” prices in a deflationary economy… but that’s just my suspicion - I’d really like to hear what the big hitters like Mises and Hayek had to say about the topic.

I see what you’re saying about prices - they’re not “supposed” to do anything. They merely serve as a communication tool between producers and consumers but you’re no doubt quite well aware of what happens to supply and demand curves if you fix prices, provide subsidies or price floors (like minimum wages, which are currently being discussed in another thread here). In order for prices to function correctly certain pre-requisites must be met. For one thing, you have to tamper with them as little as possible. In a country like Zimbabwe they can’t function correctly because of massive hyper-inflation… essentially the guys printing the cash are confiscating heaps of cash from the people that have it (and would otherwise use it to communicate their needs to producers) and so the signals are massively distorted. Just about the only signals you see for what needs to be produced are those coming from the government and military… if Zimbabwe was Wall Street then basically the civilians have all been gagged and Mughabi has a lound speaker - he’s the only one that can send signals to the market.

What I’m saying is that in an inflationary or a deflationary environment industries who’s prices are less flexible will suffer at the cost of others. A simple answer might be that these industries simply have to adapt such that they are able to price their products more flexibly (Vale maybe needs to think of other ways of pricing it’s ski passes). However, as I also noted in my first post, roughly 70% of the costs for your average business are made up of a prime example of a good/service with a sticky price - i.e. human labor… The solution could be that people accept variable wages - although I’m a bit nervous about the implications that might have. The alternative solution, which implies hiring/firing people all the time and individuals constantly changing jobs/specialization all the time, is quite expensive (expensive for the economy as a whole I’m talking about here). This sounds initially at least like quite an aluring argument for a monetary system that incorporates a small degree of inflation (although not necessarily in the form that we see in our current monetary system - maybe something like what I suggested in one of my previous posts where you have the central bank paying out central bank interest to anyone who has savings… so that the new money going into the economy would not have been confiscated from someone or otherwise alter the eventual price signals that the market would send naturally - not the Mughabi kind of inflation).

However, I’m almost certain that such an aluring argument couldn’t have been overlooked by our methodical Austrians.

4

In a full reserve system with gold coin, slight deflation and some hoarding are a good thing.

Savings increase in value without having to pay interest.

I don’t see a problem. The ski fields can cut prices each year, inline with deflation stats.

The only problem is such a diciplined system runs against the wants of the greedy.

A swelling fiat money supply grants these wishes, but it’s just an illusion.

They get more money, but in doing so, it becomes worth less.

5

Sure… and I suppose at your yearly review with your employer you negotiate how much they’ll be cutting your salary as well. If you’ve been a really crap employee they cut your salary in half and if you’ve been quite valuable they leave your salary as it is - is that more or less how you’d see the system working? Or maybe people simply wouldn’t have salaries - the employers would say, “I can pay you $x per hour and more or less guarantee you work for the next 6 months. After that I’ll have to look at my income/expenses again and we can renegotiate.” If the employer comes back in 6 months and says, “sorry, revenues are down [deflation] - I can only offer you $x - y now… it’s up to you, maybe you can find a better offer elsewhere” then it would be up to the employee as to whether he accepted the now reduced wage or not. Basically, the Europeans wouldn’t be too keen on this system - it would require a completely deregulated labour market with no requirement (indeed almost an impossibility) to sign “permanent” contracts or fix “permanent” salaries as they tend to want to do in Europe.

If so then I can certainly see some parallels between and inflationary system (like the present one) and a deflationary system. The difference is that with an inflationary system you see a net transfer of wealth as a consequence of the system’s design to those printing the cash (and those that see the new cash that’s being injected into the system first - i.e. the finance industry) and in a deflationary system you have a net transfer of wealth as a consequence of the system’s design to those people who’s revenues exceed their consumption (i.e. those able to save)… given the choice, the later certainly sounds more just/fair - it implies rewarding those that produce more than they consume. The earlier implies rewarding those who are accorded a monopoly on money creation (rather arbitrarily it would appear). So as far as the ebbs and flows of net wealth are concerned, I have no problem with the deflationary system and, providing you could convince people to deregulate their labour markets it could potentially work (although I think you’d have your work cut out for you there, in the developed world at least).

6

And you would be right. The adjustment of the prices and the reallocation of misallocated resources are the basics of that process. However the issues aren’t quite the same. Inflation is a deliberate manipulation of the economy by the government on a macro level. Prices and their ‘stickiness’ are just a fact of life, and would exist with or without anyone messing with the economy. ‘Stickiness’ comes from the bottom up, inflation from the top down.

I get what you’re saying but I think you’re looking at it wrong. There is no correct or incorrect. The use of the words implies there’s a correct way to manipulate prices when there isn’t. And fixed or otherwise manipulated prices can’t communicate information because the primary element added by the government is uncertainty. Prices have to be the result of a free exchange system. Where they’re manipulated they’re no longer prices, they’re just labels.

Why? The industry will only suffer if people reallocate away from that industry. They may just as well decide ski vacations are a prime concern and worth an extra buck, and economize elsewhere. Which is why I made the statement about prices only being sticky when people notice. In other words a sticky price isn’t one that stays high and discourages sales, which happens a trillion times a day and is essentially the sum of unmade sales in the world. My car’s price is ‘sticky’ because I won’t accept less than a certain amount and likely no one is willing to pay that amount, and I’m not lowering my asking price. No, a sticky price is one that given certain market conditions people want to see drop, but doesn’t for whatever reason. It achieves significance because people notice it. But then there’s what is seen and what is not seen, and what is not seen is the other trillions of sales that never happen because asking prices are too high and potential sellers are not budging.

So essentially when economists try to say sticky prices are significant, they are like a third grader discovering his first erection. It’s amazing to him, but it’s really nothing special in the grand scheme of things.

7

So I’ve been reading through two chapters in Rothbard’s What Has Government Done to Our Money?: The Problem of Hoarding and Stabilize the Price Level?. The basic theory seems to be that if money supply stays constant and the quantity of goods in the economy rises, or if effective money supply drops because people start saving more thus reducing the velocity of money, that prices will then adjust accordingly… dropping to account for the fact that there is now less money apparent in the system relative to other goods/services.

A couple of years back I remember reading Economics for Dummies, which I realize isn’t one of the Austrian texts but is none the less a good middle of the road fairly objective read. One of the points that is mentioned in Economics for Dummies is that whilst the prices of some goods can adjust more or less instantly to reflect changes in supply and/or demand, other prices are “sticky” - implying they don’t like to move so quickly (if at all). A good example might be the ski passes at any ski resort - the prices for these passes are usually decided before the ski season at the beginning of each year… so can only change once every 12 months (even if the ski field’s costs and/or demand for it’s services change much more frequently than this).

Let me explan the problem with traditional macro:

So according to traditional macro the quantity of goods rises in the economy. The price of the goods fall, so this causes wages to fall and that makes workers poor and hurts the economy.

Does that make sense to you? That people having to work less because they are more efficient is a cause of poverty? 100 years ago 90% of the population was involved in agriculture. Today 2% is. Where is all the poverty caused by increased efficiency? What did all those farmers go do instead?

Good. Now you know why traditional macro is broken.

If the quantity of money falls in the economy because of bad debts getting defaulted on this causes the kind of deflation that central bankers scare you with. That’s because the demand for goods and services that were artifically inflated by the debt bubble will drop off and the wages of the workers in these industries will rise in nominal terms, causing the profits in these industries to be squeezed leading to layoffs.

To use a real world example:

All the cheap money floating around from low interest rate loans has dried up because they funded a lot of condos out in Stockton that nobody bought. Now the money from these loans is gone, there is oversupply of houses at the current prices and the wage increases lately have squeezed real estate industry firms which must now layoff workers. Oh no! Where’s Ben Bernanke to help us get the lending going again so we can keep the “deflation” monster away.

8

Fiar enough - stickiness exists in inflationary systems as well as in deflationary systems… but then many other phenomena exist in both systems as well. Corruption, for example, exists in both systems. If the effects of corruption are not desirable though, then you’d certainly want to try to minimize or eliminate corruption, if possible, in either system. So I guess the question then becomes, are sticky prices necessarily undesirable and thus is there any reason why you might want to design a system that minimizes the negative effects - if any - of sticky prices… don’t reply to this just yet - I think I’ve found my answer below (last three paragraphs).

I think we’re saying the same thing here. I was saying you have to fiddle with prices as little as possible for them to be effective… that’s what you’re saying right?

I think this is more or less certain. A price, in a perfect market, is the point at which supply meets demand. If either supply changes relative to demand then the price will adjust accordingly. If demand goes up, normally price goes up too - in order to sustain increased production. If the price doesn’t go up then typically what you’ll have is a shortfall supply side (and thus a bunch of people that want something, would be willing to pay more for it, but can’t have it). If an industry is unable to change the price of it’s goods however (e.g. because they’re sticky) and the price sits above what the market is willing to pay given the available supply, lots of people that would otherwise have bought (at lower prices) no longer buy - so any industry that has inflexible pricing will inevitably suffer from an inability to adjust their supply such that it appropriately meets demand… this can hardly be contested - it’s the economics that everyone agrees on (Austrians and Keynesians alike).

I think where the misunderstanding comes from is that you’re talking about sticky prices such as the price of your car where you’ve made a conscious decision not to accept less than $x for the car… which is to say you could accept $x - y if you wanted to - but you don’t want to. In the case of the company that sells by mail and publishes a monthly catalogue and is incapable of changing it’s prices any more often than once a month, it may not be a conscious decision on their part not to increase the price of their deck chairs (despite the fact that they know there is a national shortage of deck chairs and the price should be logically higher)… they want to increase prices really badly - they know they’re going to sell out of deck chairs in the first week of the month and a whole bunch of people that would be willing to pay a higher price for their deck chairs are going to be sorely disappointed. But their pricing system is, unfortunately for them, sticky by nature and thus their business will suffer as a result of the inflexibility of their pricing mechanism.

Now having said that, I think I may have isolated one of the ways in which this whole sticky prices thing is pretty much a bad analogy and that is that in Economics for dummies they give, as the first example of a sticky price, the example of the monthly/yearly price catalogue… they then go on to say that wages/salaries are sticky too because although people readily accept higher salaries they are very resistant to accepting lower salaries/wages for the work they do. However, whilst the earlier (the catalogue) is what I’d consider a sticky price, the later example (a salary/wage) is what you’re talking about and what you’re arguing is not really a sticky price at all but a conscious decision on the part of the employee not to accept a lower price… so not really a sticky price at all (no more sticky than the price at an auction in any case).

So I think I’ve got part of the answer to my question right there - many of the prices which modern economists currently refer to as “sticky” (such as salaries and wages) aren’t really sticky at all and if they are then it’s only as a consequence of tightly regulated and highly legislated labor markets (not necessarily as the result of natural market forces)… And for the other part of my question, as you say, genuinely sticky prices will suffer in the wake of inflationary, deflatonary or static prices - since supply and demand for products in any industry will be liable to change regardless of the stability of other goods such as the currency.

9

No I’d say it’s a vast oversimplification of the issue. If the quantity of goods in the economy rises (due to increased production or increased competition) then yes, prices will logically fall. At that point, the producers have two choices:

  1. Lower their production costs (which is what the sentence above talks about - cutting wages)
  2. Decrease production

But this macro argument is talking about a change in prices due to a change in supply - what I’m talking about has nothing to do with this… I’m talking about a change in prices due to a change in the value of the medium used for exchange (the money). For industries that are able to change their prices this won’t have any effect at all - the nominal price of their goods will change in accordance with the increase/decrease of money in the market but neither supply nor demand will be affected.

Here again, we’re talking about completely different things. You’re talking about deflation in the wake of a recession. Personally I think there are some necessary adjustments that are being made in such a system but that wasn’t the subject of my original post which was persistent and sustained deflation in a monetary system where the money supply was constant.

Arguments about credit expansion/contraction in the current fiat money system are interesting in their own right, but weren’t the topic of my original post.

10

If a firm goes into a line of business where prices are sticky, would it not take this into consideration in its business model? If it knew that there is a lag in the time it takes for a price to change, it would seem to be utterly irrational not to account for this. Yet such firms survive nonetheless - the question should be, how they are able to?

11

I would just like to point out that many businesses and industries have effectively dealt with the problem of “sticky wages”. A variety of techniques are used:

  1. Salaries based on commission. I note that commission based compensation tends to exist in those businesses where business revenues are the most variable.

  2. Bonuses. Many businesses pay annual/semiannual/monthly bonuses to employees. A prime example is in commodity producing industries such as mining. Most miners are paid a base salary plus a monthly bonus based on tonnage that your unit produces and commodity price received. This is a technique that I use at my business. I own a small manufacturing business that has 25 employees. It is a union shop, and therefore I am contractually bound to wage rates. Typically, I give a yearly bonus of approximately 2% of their salary. When times get rough profit wise, this bonus is curtailed or eliminated.

  3. Invest in capital equipment to increase productivity. If the deflation of prices is mild (low single digits,) then the problem of paying higher real wages can be effectively dealt with by investing to increase productivity. It should be noted that in the case being discussed here, deflation brought on by an increase in savings in a fixed monetary enviroment, has provided the funds to lend to accomplish this.

  4. Outsourcing. From my own business experience, I have discovered that the smaller the business, the less sticky the wage rate. For example, I deal with a number of small 1-2 man operations that do specialty sub-assembly for me. In these situations, the owner provides a sizable proportion of the total labor. When things get slow, he drops his pricing to draw more work, and the savings are passed on to my business. Please note that I am not suggesting that they spontaneously drop their pricing but that I re-negotiate terms with them when I am facing cost pressures.

  5. Re-negotiate with suppliers. In a deflationary enviroment, prices will be falling for your non-wage inputs. While this may not compensate for the increase in the real wages paid, it can be a substantial savings.

  6. Firing and hiring at a lesser wage rate. This is NOT a preferred option, as severence expenses, hiring costs and training costs are substantial.

  7. Lastly, in a major deflation, the only option may be to dissolve a company. This then frees the capital to be used in a new or existing enterprise that has a more effective business model or compensation structure to deal with the issue.

So my answer to the question: Don’t you have to have a modest level of inflation to deal with the sticky wage issue? Is no. The free market has and will continue to deal with this problem.

-J P White

12

And they’ve made a conscious decision to adopt that business model.

13

I’ve read this topic and its follow-up posts with considerable interest, yet I am still struggling to understand the whole situation.

I’ll give a classic example: fuel. Crude oil is (at least officially) paid in dollars. The Euros steadily rose ever since 2003 and now you need 1.48 dollars (haven’t checked this morning’ datas yet) to buy a Euro. Let’s just say to keep things simple that if oil price was a constant (let’s say 100 dollars a barrel to mek calculations easier) : a stronger Euro should mean that we should pay less for our fuel than we did in 2003. Yet fuel prices are spiralling out of control. During last month the price of Brent fell by about 10%, Euro gained a little bit on dollar (from 1.44 to 1.48) yet fuel prices remain fixed. Not only that, but each time oil experiences a raise prices immediately shoot upwards while drops are not followed by any benefits from the consumer.

I know that it takes about three months for a barrel of oil loaded on a supertanker in Nigeria to find its way into my motorcycle’s tank so why this discrepancy? Either we are not told the whole truth (most lilely) or the system is flawed to say the least.

This discrepancy is even more noticeable in green groceries: it takes much less for a pound of peas or beans to find its way to my table than a gallon of fuel, and prices fluctuate dramatically according to many variants. Then why salad and spinaches get more expensive by the day, even if their wholesale value is plummetting and transport costs are staying put?

Please keep it as simple as possible.

Thanks

14

That one I think I can help answer. Firstly, ignore the US dollar, people buying oil from the eurozone are effectively paying euros for oil (even if they have to buy US dollars for 24 hours to facilitate that purchase). As such, and as usual, there are two things that would cause a rise in nominal prices:

  1. In increase in demand relative to supply (and since oil is sold on the global market this means global supply and demand)

  2. Monetary inflation (i.e. an increase in inflation)

I think you’re seeing a mix of the above (although not an equal mix) and in addition to these two universal factors, I’d add two more factors that effect the particular situation that you’re talking about:

  1. Taxes. Over 70% of the price of petrol in France is tax - so even quite large rises/falls in the global oil prices are going to have a much smaller impact on the real price of petrol at the pump for most French people (at least directly). This means that monetary inflation will likely play a more important role in the price of petrol in France than it would in the US, for example.

  2. I think the OPEC nations are also setting their prices slightly higher because they KNOW the US dollar is only going to get weaker and a good number of them have their currencies pegged to the US dollar. So between the time that they accept payment for their petrol and the time that they spend that cash on something else (like a US or European bank that’s just gone belly up) they’re going to be sitting on a reserve of US dollars that is wasting away.

More generally though, since it’s not just the price of petrol that has gone up in Europe, or indeed the UK, the US, Australia, New Zealand or pick pretty much any other country on the planet at random (major exception being Japan) I think there could only really be one explanation for the kind of inflation you’re talking about, especially in view of the fact that as both you and Adam Smith point out the production costs of the majority of things have been plummetting over the last few thousand years as we improve growing techniques etc, and that is quite simply monetary inflation - more dollars in the market relative to the amount of goods in the market… the guys at the printing presses are going crazy basically.

Usually the guys at the printing press would only go this crazy when they were in times of trouble. But in the US, at least, Greenspan’s tenure in office ushered in a new era of economic policy where they decided to try printing cash like crazy regardless of whether the economy was in a slump or a boom… which was no doubt quite exciting for them. So, who’s printing all the cash? Well, most of the western countries are running massive trade deficits - so they’re basically exporting their own currencies in exchange for goods and services produced in Asia. That worked well as long as the guys in Asia thought those currencies (primarily US dollars) would hold their value. Some of those Asian peoples must have had a propensity to save and save they did… the Chinese accumulated over a trillion dollars in US currency and god only knows how much cash the Sovereign oil funds are sitting on. But now the wind has changed direction and the US dollar is dropping, a lot of those folks have decided to try to get something back for all those dollars they’ve been saving… and they’re spending those dollars on things like petrol, Airbus’s/Boeings, trains and power stations… primary goods like wood and metal are required to build all these things and these things also sell on a global market. So all the inflation that has been mounting up like water behind a dam over the previous 30 years - the hidden inflation (hidden by the fact that it was exported) is starting to trickle through the cracks in the damn and find it’s way back home.

15

To get back to the original question, the “stickiness” problem is not really a problem at all. Let me address the issue of labor first because this seems to be the thorniest problem. I will assume an economy with no monetary inflation.

First, in an expanding economy, although the supply of most factors of production will increase, the supply of labor, relatively speaking, will remain fairly static. (This assumes there is no sudden increase in the supply of labor due to immigration for example). Thus the price of labor, (i.e wages) will fall less in nominal terms than other factors. In fact they may not even fall at all. Of course in real terms, they will rise.

Second, in today’s environment wages are often “sticky” because of the coercive influence of unions. In a free economy, unions (if they existed) would not be able to exert the kind of influence they do.

But third, even if the discounted marginal value product of labor were to fall, and labor refused to accept lower nominal wages, it would still not be a problem. Because by their refusal, those at the margin (i.e those who objected the greatest) would in effect be indicating a higher preference for leisure. Thus the supply of labor would fall slightly. This in itself would tend to raise wages, but just as important, total output would be reduced. The supply of finished goods would therefore be slightly less, causing a relative increase in the price of goods, and an increase in the DMVP of all factors (including labor). Thus we see that no matter what the owners of the factors of production do (labor included), the economy will always tend towards the equilibrium position.

After a while workers would begin to accept the notion that nominal wages hardly ever rose, and might fall slightly, but that their real wages were constantly increasing.

Other factor owners would accept the notion of rapidly decreasing nominal incomes.

16

Thanks Jimmy, that was good read. Since I am a bit tick-headed and you managed to explain to me that speaks volumes…

I have a thing to say about production prices though. While the costs of the process itself have plummeted, the massive regulation growth of the last thirty years resulted in large expenses to get all the necessary paperwork and certification. I strongly suspect that when we buy a Chinese-made cellphone the total costs of CE-certification, import duties and other direct and indirect taxes far outweighs the real costs, including transport and R&D. I am currently awaiting a delivery from Japan and I tremble at the idea of how much I’ll be required to pay in VAT, import duties etc!

17

Indeed, virtually the only industry whose productive increases has been able to outpace the increase in inflation and bureaucracy has been technology (flat screen TVs and the like). Otherwise though (and especially in Europe) Bureaucracy has managed to get it’s sticky little paws into more or less everything.

18

I think I could be persuaded that this is the case but only if such a system were accompanied by a completely deregulated labour market. I fail to see how companies could be expected to deal with ever decreasing revenues per unit AND at the same time be constrained never to lower and employee’s salary or fire them.

If you’ve never worked in Europe then you might not appreciate the importance of this point - it can cost between 2 to 5 times someone’s annual salaray to fire them in Europe, if the company wants to restructure. Even in an inflationary market those are ridiculous sums of cash - the governments in Europe have made it all but illegal to fire people. In a deflationary market this would simply be unworkable.

19

Stickiness merely means a preference, or ignorance, on the part of certain entrepreneurs to respond slowly to market fluctuations.

Either the entrepreneur knows that his price should be at X but expects it to shift back to Y very soon and does not want to waste the resources changing the prices, or he’s oblivious and soon will go out of business for it.

20

It’s usually assumed here that we’re talking about a simple economy. There’s a difference, I think, between natural stickiness and artificial-government caused stickiness.

You know what else can cause price stickiness? Regulations, price controls, and taxes.