Which of the following impediments to economic adjustment do you believe to be the most important?
a) the cost of establishing a new enterprise
b) the cost of integrating new workers and equipment into an existing enterprise
c) the cost of adapting physical and human capital to new circumstances
d) the cost of whiting out an old price list (menu) and updating it with new prices
If you answered (d), then congratulations–you have shown your New Keynesian bona fides.
Arnold, by the way, does not answer (d). The link is here. Elsewhere at EconLog, here is a very good Bryan Caplan post on the evolution on punditry and the political spectrum.
Talk about missing the point of New Keynesian models. Reminds me of the standard anti-RBC argument of how insane it is to assume people 'forgot' how to make goods. As if we don't have other plausible mechanisms that are mathematically equivalent to menu costs or productivity shocks in these models.
No, those are Keynesians. New Keynesians talk up price rigidities.
(including real price rigidities, for the benefit of Mr. Kling)
Which of the following impediments to housing adjustment do you believe to be the most important?
a) the cost of building a new house
b) the cost of placing new residents into an existing house
c) the cost of renovating a house
d) the cost of whiting out an old house price and updating it with a new price
Hey! This is fun!
Also notice that Kling considers (c) different than (d). Yet, pricing changes within an organization often involve "adapting physical and human capital to new circumstances"–not just within the organization, but also outside of it, in the distribution chain.
Why don't people view these as empirical questions, rather than as battles over Keynesian dynamics and stories about price rigidity.
Here is an abstract of the points I made above about organizational costs of price changes:
"We use qualitative data to analyze the key elements of the price adjustment processes
used at a large industrial manufacturer and several of its major customers. We focus on a
specific episode, a price cut, which most vividly exemplifies the themes that emerge from
our data. In the specific episode, market forces clearly dictate that the firm should cut
prices, and everyone in the firm agrees with this assessment, suggesting a fairly
straightforward decision where the organizational price adjustment costs ought to be low.
Yet when we look deeper, and dissect how the firm implemented the price cut, we
uncover a rich tapestry of frictions hidden within the organization. We document four
specific organizational themes that emerge from the analyses of the data. (1) Each
manager or each group within the firm handles only a part of the economic complexities
of a given problem, using partial (albeit coherent) models of the marketplace. (2) Yet,
when viewing the organization as a whole, across the different managers and groups,
most of the economic complexities are dealt with. Thus, economics is not being done by
individuals; rather it is an organizational issue. (3) The partial models used by managers
may compete, conflict or collide creating organizational costs of price adjustment. (4)
These frictions raise deep organizational issues which need to be resolved, suggesting an
additional source of adjustment costs."
Here is the link to the paper: http://www.biu.ac.il/SOC/ec/events/Phd_workshop/2…
Which would Kilng rather do?
(a) Put off hiring one teaching assistant he otherwise would have hired, or
(b) talk to every teaching assistant, janitor, secreatary, etc. in his department and tell each of them that they're getting a pay cut and are going to need to cut back on the cable bill?
See how I translated from business to academia? That was for the benefit of ivory-tower economists (*ahem*) who have very clearly never tried going to all their business-to-business customers and telling them that they need to re-negotiate contract terms.
a, b, and c all assume that productive capacity needs to be repurposed from one product to another — but the data show that the recession cuts across all sectors. (On the other hand, if you deny that there could be such a general slump without looking at the data, then you have shown your anti-Keynesian bona fides. If that's the right term.) People are out of work not because they have been trained to do the wrong thing, but because the people who need them to do the thing they do don't have the money to *pay* them to do the thing they do. Without the ability to pay, there is no "demand" — which does not signify a lack of interest in the product in question.
Chris,
About what date do you expect all the constructions workers from 2006 to be fully employed again? My guess is the year 2713.
Anyone,
You know when a buyer and seller shake hands and smile, they are both better off, what is the name for that?
@Andrew, I can't remember but if they are smiling I assume human resources wasn't involved.
In a case where inflation expectations have suddenly changed, aren't b & c a function of d?
Lord, You might want to look at the paper I cited for the answer to your question.
Here is an example: Organizations develop rules of thumb for incremental changes. Sales and marketing negotiate "treaties" so there is no conflict during periods of normalcy. But, when big changes have to occur, suddenly sales and marketing have to renegotiate: sales is reluctant to increase price, because they are at risk based on a commission system; similarly with price decreases of large magnitudes, since they are awarded on total sales, not volume. Marketing is removed from the customer, and sales voices the likely customer complaint, and has an incentive to drag their heals. Things get sent up to higher management for review, and sent back down again or ignored. Commission schedules have to be readjusted. That's all within the organization….now you have to implement the change in the field and talk to the customer….and so on and so on. On top of it all, status within the organization may be threatened depending on who wins, reporting and oversight may have to change with the changes if they are resisted, etc.
But, you don't have to rely on the two year empirical study I cited: if you are a member of a large organization, ask yourself how quickly lumbering organizations change and how people can slow it down, mislead, etc.
But, I like Andrew Edwards post above the best: hire a new TA, or renegotiate with your secretary, janitor, etc. Guess what happens.
Greg wins!
Greg,
I would recommend you try to read the earlier posts in the thread. Note also your boy Hayek had nothing against mathematical modeling. Stop pwning yourself repeatedly all over the web because you are innumerate.
How much has the econ department at GMU cut wages for support staff, admin assistants, RAs and TAs since the recession began? Wait, what? You mean that in the one little corner of the economy where you actually make decisions, wages are not downwardly flexible even with long queues of qualified applicants available?
"Last month the owner of the construction firm my neighbor works for in OC, California walked in and announced that everyone was getting their salary cut in half.
I'm not sure how much it cost to change this "menu", but in didn't take much time at all. The change was put into place almost immediately."
Well, that proves it then.
Bill, can you provide the reference?
This is exactly the sort of thing economists need to do if they are to become more like actual scientists — imitate the field research of the biologists, rather than attempt to imitate a parodical image of "science" taken from the preface of a freshman chemistry textbook or from 4th grade science class.
Bill writes,
"Kling is obviously unaware of the empirical work on menu costs, but more importantly, internal organiation costs from introducing price changes. Some economist recently implanted themselves within a large drug company to measure the time and costs of price changes–not just negotiating the changes between sales and marketing, but also introducing the changes to the distribution system. "
Greg,
Here is one of the papers, an empirical work on the organizational costs of imposing a price change in a manufacturing setting: http://www.biu.ac.il/SOC/ec/events/Phd_workshop/2… They go inside the corporation, and, like a fly on the wall, record what is going on.
I thought Bergen and Zbaracki were doing one in a drug setting as well but haven't found it; it may have been the one above which is a study of a midwest manufacturing company. (I still think there is one going on in the drug industry, but you should check with the authors).
Here are some more empirical works by one of the authors, formerly at Wharton and NYU and now at the Ivey School:
Zbaracki, Mark J., and Mark Bergen, 2010, “When Truces Collapse: A longitudinal study of price adjustment routines,†Organization Science 21(5): 955-972.
Zbaracki, Mark J., 2007, “A sociological view of costs of price adjustment: Contributions from grounded theory methods,†Managerial and Decision Economics 28: 553-567.
Zbaracki, Mark J., and Mark Ritson, Daniel Levy, Shantanu Dutta, Mark Bergen, 2004, “Managerial and Customer Dimensions of the Costs of Price Adjustment: Direct Evidence From Industrial Markets,†Review of Economics and Statistics 86(2): 514-533.
Ritson, Mark, Mark Bergen, Shantanu Dutta, Daniel Levy and Mark J. Zbaracki, 2003, “Shattering the Myth of Costless Price Changes,†European Management Journal 21 (6): 663-669.
What is also interesting about some of this work is how it firms let them sit in on these discussions and internal negotiations, like a fly on the wall, and the internal battles that took place. There are more papers in the works.
I might be more sympathetic if I didn't suspect that TheFed and government made prices unstable on purpose in order to abuse the people with greater price change transaction costs.
"Why don't people view these as empirical questions, rather than as battles over Keynesian dynamics and stories about price rigidity."
For me, I'm talking about price levels and money supply and velocity. If there are even empirics existing on this, they are going to suck.
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