Monday, February 09, 2004

Recently I posted on why people consider many economic exchanges to be zero-sum games, rather than exchanges where many parties benefit. Here's a paragraph related to that thought, as applied to inflation and wages:
Economists should not be surprised that individuals underestimate the effect of inflation on the demand for their own services. One of the most significant differences between trained economists and the lay public is economists’ greater appreciation of general equilibrium. The cognitive difficulty of general equilibrium has been indicated by the fact, noted by the Commission on Graduate Education, that even economics graduate students do not give the correct explanation for why barbers’ wages, in the technically-stagnant hair-cutting industry,
have risen over the past century [Krueger, 1991, p. 1044]. If economics graduate students fail to appreciate the effects on barbers’ opportunity costs from wage increases due to productivity change outside the hair-cutting industry, it would be a stretch to expect the lay public to see that as inflation rises the demand for their services (in nominal dollars) will similarly rise with it.
That's from a Akerlof paper on appropriate levels of inflation.

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