Knowing and Making

Paul Krugman (via Niklas Blanchard ) is among many people asserting that: ...when the music stopped, Greece found itself with costs and prices way out of line with Europe’s big economies. (Niklas says this violates the law of one price - but the law of one price applies only when there is one good. In fact, hardly any goods are the same between Germany and Greece - labour is not as productive in Greece, the local tastes are for different products, and many services are non-tradable and not subject to the law of one price. An important example of this is that retailing is a service. Both the cost of retailing and the demand for it (which in Greece is strongly derived from tourism) affect the price of goods sold in shops. So the existence of the euro doesn't by itself imply that wages and prices should equalise quickly.) But that is an aside. In fact, I am unconvinced that Krugman's statement is true at all. According to  this report , Greek unit labour costs last year...

This BBC article asserts that... Productivity, as measured by output per hour of work, rose at an annual rate of 9.5% between July and September. The data suggests that firms, which have cut jobs in the downturn, are now increasing their output, which may in turn lead to them needing more staff. This is truly a paradox. Greater productivity normally means firms need fewer staff - until, eventually, rising income increases aggregate demand, and then the laid-off people are employed in other sectors. The article seems to be another example of the equilibrium fallacy *, where a reversion to equilibrium is mistaken for a first-order effect. That is, firms cut staff because they had insufficient demand for their products - naturally, getting rid of the least productive staff. The remaining workers are more productive on average, and the reduction in output is less than the reduction in staff. This doesn't imply at all that either demand or output is increasing . If productivity had in...