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Monday, October 15, 2012

When Seemingly Disparate Ideas Mesh...

it can be very nice.

This semester, I happen to be teaching both economic history and macroeconomics. In economic history, I was explaining to my class how dramatic was the transition between medieval society, were "prices" were set largely by tradition, and modern society, where they are set by supply and demand on a market. The medieval guild worker, for instance, had a wage that he "knew" that someone in his position "ought" to get, and that would enable him to live the life someone in his station in society and place in the great chain of being was entitled to live.

Then, in macro, I was talking about sticky prices, and I suddenly realized that a major cause of sticky prices is that the medieval mindset was not totally obliterated by the onset of the market mindset. (Note: I am not saying it should have been! I'm inclined to think it is not even possible to eliminate these "atavistic" attitudes: they are the foundation of what has been erected atop them, and eliminating them would cause the whole structure to come tumbling down.)

A worker, faced with an employer trying to reduce his nominal wage, feels personally insulted. The same worker, faced with inflation impersonally reducing his real but not his nominal wage, shrugs and says, "That's how life goes!" The restaurant customer, faced with a sudden price rise on the menu in the summer when the restaurant gets busy, feels the restaurant is gouging him. But if the restaurant simply offers lots of "buy two, get one free" deals in the winter but not in the summer, he feels lucky to have gotten such great deals in the winter.

Yes, in our models the worker and the customer are being "irrational."

If the real world does not fit the model, don't change the model: call the real world insulting names!

4 comments:

  1. This gets another of my occasional "this was a good piece" comments. It's not an idea I'd have ever had on my own.

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  2. I think signalling and (preserving) standing gets you a bit further. "Set by tradition" does not work for me as an explanation of medieval pricing. There was a lot of regulation within boroughs and manorial obligations were inheritable life-time "contracts". So, a lot of "embedded" transactions. The shift to the post-medieval was more about the growth of non-embedded transactions.

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    Replies
    1. "I think signalling and (preserving) standing gets you a bit further. "Set by tradition" does not work for me as an explanation of medieval pricing. There was a lot of regulation within boroughs and manorial obligations were inheritable life-time "contracts"."

      But Lorenzo, these ARE the traditions!

      Look, the traditional nature of medieval economic life is not something I just made up. It is the conclusion of every economic historian studying the period whom I have read.

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    2. Tradition is a description, not an explanation. Yes, there was a powerful amount of "stickiness"; but for perfectly explicable reasons.

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