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Wednesday, August 17, 2011

Hypnocracy

Over at Coordination Problem, one J. Oxman writes, "Total demand and aggregate prices are not economic phenomena that affect human action, other than by policy makers. They are statistical constructs that don't have real economic counterparts."

You see the kind of thing often. It is amazing the rubbish one can convince oneself of in the interest of buttressing one's ideology. So no worker has ever asked for a 4% raise because there is 4% inflation? No business has ever cancelled a planned expansion because GDP is falling? No one has ever sold his house because he thinks there is a housing bubble?

5 comments:

  1. Well...has a worker ever demanded a paycut before his employer does, because he sees a deflationary spiral going on, and predicts that it may affect his employer and thus his job?

    Has a business ever started cutting down on production, not because they are receiving fewer orders, but because they see a general slump in other industries which may spread to their own?

    I think Oxman has something of a point.

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  2. "Well...has a worker ever demanded a paycut before his employer does, because he sees a deflationary spiral going on, and predicts that it may affect his employer and thus his job?"

    Of course workers have done this.

    "Has a business ever started cutting down on production, not because they are receiving fewer orders, but because they see a general slump in other industries which may spread to their own?"

    Certainly.

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  3. Oh.

    My personal understanding was that the average person and layman to economics only pays attention to macroeconomic trends for these two reasons and nothing else:

    1) purchase of a new house, and financing that purchase

    2) current job security

    But I am speaking from the POV of the Third World, where people are less educated, so of course I shouldn't have assumed the same for US.

    The New York Times did have a report on certain sectors touched perhaps minimally by the recession - such as the high-end luxury goods sector. The Economist also said that art dealers were doing quite well even under recession. It would seem that painters and fashion designers (at the very least) don't have to pay as much attention to macroeconomic trends. What I haven't figured out is whether such sectors are extreme exceptions or a fairly large minority.

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  4. If aggregate prices don't affect human action then a fortiori neither doesn't inflation (which is an increase in aggregate prices).

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  5. "has a worker ever demanded a paycut before his employer does, because he sees a deflationary spiral going on, and predicts that it may affect his employer and thus his job?"

    By the way, Prateek, the way they do this is not to walk in and demand their pay go from $80,000 to $60,000 a year. Instead, in a downturn, they begin working harder, for longer hours, and showing this. That, of course, is a self-enforced pay cut! (Same pay for more hours of harder work.)

    ReplyDelete