Skip to content

Unemployed Resources

June 22, 2011

“Real-world market prices do not perfectly contain all of the relevant information required for competitive equilibrium; if such information were known already, there would be no need for economic activity in the first place. Under disequilibrium conditions, however, the active bidding up of prices when demand exceeds supply, and their bidding down when supply exceeds demand, generates the incentives and information necessary to coordinate economic decisions. The discrepancy between the current array of prices and the anticipated future array of prices provides the incentive for entrepreneurs to discover hitherto unknown opportunities for economic profit.” – Peter Boettke

I don’t like the metaphor of unemployed resources. A resource is unemployed because of a lack of information. There is always a tradeoff between allocating something quickly and allocating it to the right place. Capitalism is a gigantic calculation machine. People are constantly trying to figure out the best use for their resources (including their labor), but they need the price mechanism to provide the incentives and information to properly act. The monetary authority can either make the calculation easier by providing a stable environment, or more difficult by creating monetary shocks.

Price adjustments are the “escape valve” of misallocated resources. As prices fall, the good becomes more attractive to buyers and people substitute it for other things. As prices rise, the good becomes less attractive and people substitute away from it. When the price is a wage, it can be very painful to those whose wages drop. Loss aversion causes people to avoid wage cuts even at the cost of unemployment either to themselves or others. People don’t want to sell their houses for less than they paid for them. Nominal price stickiness causes resources to look unemployed when really the owners of those resources are just trying to figure out better uses for them. It is not an easy task to allocate economic resources efficiently. By hamhandedly forcing a resource into a low value use, people may hurt the economy rather than help it.

Advertisements
4 Comments leave one →
  1. June 22, 2011 8:17 pm

    You say: “Loss aversion causes people to avoid wage cuts even at the cost of unemployment either to themselves or others. People don’t want to sell their houses for less than they paid for them.”

    Do you think that people should learn to not be like that, in order for prices to more better adjust; or do you think that people should learn that people act that way, and not complain (too much) about “unemployed resources”?

    • June 22, 2011 8:57 pm

      Individually – if you lose your job and you can’t a new one except at 10% lower wages, suck it up and deal. It’s better to be employed at a lower wage than not employed at all. At least you’ll be building new skills.

      Politically – If politicans see one sector that is booming and another that is failing, it is tempting to intervene on behalf of the failing sector.There are good ways and bad ways to do this. Good ways might include trying to get the workers new skills, make hiring laws more flexible, lower minimum wage and providing tax credits to firms that hire more workers. Bad ways might be bailouts, subsidies, trade barriers, and fiscal stimulus. Fiscal stimulus which hires the workers to do their old thing at the old prices only prolongs the adjustment process and wastes the resources that might be more efficiently allocated.

      Societally, I would like to see monetary policy become stable enough to eliminate demand side recessions.

      • June 23, 2011 12:10 pm

        “Societally, I would like to see monetary policy become stable enough to eliminate demand side recessions.”

        Is that even theoretically possible?

  2. June 23, 2011 2:43 pm

    @Brian: The monetary authority can hit any single nominal target, theoretically. In practice, it can be difficult to do that in real time. That’s why quasi-monetarists recommend targetting expectations. You might not be able to get the level of GDP exactly right today, but you can fine tune policy until people expect it to be right in a quarter or so. If you use level targetting, any past mistakes are automatically corrected in the future, so there will be no trend of error, even if the market is baised one way or the other.

    If you keep the level of spending constant, any decline in one sector must be matched by an increase in another sector, so there will be no demand side recessions.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: