Monday, 28 June 2010

Blogging, sticky wages, relationships

In case you were worried, I have not been intimidated by Kartik Athreya's "Economics is Hard" into closing down my blog.

I've just been so busy doing stuff and going to things that I haven't had time to write any of it up.

Soon, though. Tomorrow, I hope.

Meanwhile, a couple of thoughts here and in the next posting:

There's an interesting discussion on nominal wage stickiness between Scott Sumner and Bryan Caplan. Scott, as usual, has some good insights into the question: are sticky wages the primary cause of recessions? To save you reading it all, the answer is yes.

This debate exposes a question of economic modelling which I've considered recently. Is the individual transaction the best level to model economic exchange? As a rational agent with no mental processing costs, it is more economically efficient to treat each single exchange as a new decision and re-optimise your choices. But it's not very realistic.

Agents who require time to make a decision are more likely to group exchanges into a continuous series - an economic relationship. Economic relationships include ongoing contracts, employment relationships and brand loyalty. Economic relationships take time to build and once they exist, they have momentum. Where a relationship exists, it may not be efficient to make a trade outside of the relationship, even if preferences and prices alone indicate that it should be. To make this useful will require more formal modelling, but it is an interesting area.

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