ȀȂȃ Partʺ: EconomicsWhen major economywide disruptions occur, however, it is not sur-
prising that the many necessary interlocking adjustments should stretch
out painfully over time. Much besides prices and wages must change, for
even a purely monetary shock (whatever one might be) has “real” con-
sequences. Knowledge must be transmitted and received, risk allowed
for, combinations of factors and products in production and consumption
revised, search conducted, trading partners contacted, and new quantities
of goods produced and exchanged. Stickiness of prices and wages delays
the transmission of appropriate signals and incentives. (“Price stickiness”
may serve as a convenient term alluding to myriad obstacles to prompt
and painless adjustment. It is a shorthand label for a wide range of cir-
cumstances.)
By adopting the fashionable assumption of rational expectations, New
Classicals and subsequently even the New Keynesians tacitly assumed
away central aspects of the economywide coordination problem. Ļey
replaced a vision of people trying to set prices and quantities and strike
bargains in a world of fragmentary and dispersed information with an
unrealistic vision of remarkably well-informed people—informed, to be
sure, not of specific future quantities and prices but well informed on
average about probability distributions. To assume rational expectations
oversimplifies problems of coordinating people’s beliefs: “No one makes
systematic errors in guessing the values of variables that depend in turn
upon others’ guesses” (HowittȀȈȈǿ, pp.Ȁȁ–ȀȂ).
“ŕřŜőŞŒőŏŠŕśŚş”śŒ ŞőōŘ੻
In using their word, I am defying theorists who judge reality “imperfect” in
comparison with textbook chapters on equilibrium under pure and perfect
competition and who thereby damn reality for being real. Of course no
“Walrasian” auctioneer is at work achieving ideal outcomes. Of course not
all imaginable intertemporal markets and contingent-state markets exist.
Of course full coordination is never achieved; and it is approached, to the
extent that it is, through the piecemeal, asynchronous gropings of myriads
of entrepreneurs. Ļeory relevant to the real world cannot confine itself to
equilibrium analysis and comparative statics. Instead of a state of affairs,
competition is a process. Except perhaps for organized exchanges for
standardized commodities and securities, no impersonal “market” adjusts
prices to changed conditions.Peoplechange prices, and only after they
have perceivedreasonsto do so. Reasons include opportunities offered