Sticky Prices and Wages - Philosophical Concept | Alexandria
Sticky Prices and Wages, a cornerstone of Keynesian economics, refers to the phenomenon where prices and wages do not adjust rapidly to changes in economic conditions, particularly shifts in aggregate demand. This stickiness prevents markets from quickly reaching equilibrium, leading to prolonged periods of underemployment or inflation - a deviation from the classical notion of self-correcting markets. Often misconstrued as mere market imperfections, sticky prices and wages hint at deeper complexities in economic behavior.
Early seeds of the concept can be traced back to the writings of John Maynard Keynes in the 1930s. While not explicitly labeled "sticky prices," his General Theory of Employment, Interest, and Money (1936) implicitly argues that wages are downwardly rigid. Drawing from the Great Depression, Keynes observed that workers resist wage cuts even in the face of widespread unemployment, challenging classical economists assumptions. Letters from contemporary economists to Keynes reveal a vigorous debate about the relative roles of government intervention versus market forces in stabilizing economies, controversies that continue to reverberate today.
Over time, interpretations of sticky prices and wages have evolved significantly. In the latter half of the 20th century, economists like Gregory Mankiw further developed microfoundations for this stickiness, exploring menu costs (the cost of changing prices) and coordination failures. These explanations delved into firm behavior and the strategic interactions that prevent them from adjusting prices rapidly. Intriguingly, some research even suggests that psychological factors such as fairness perceptions influence wage negotiations, hinting at a connection between economics and behavioral science.
The legacy of sticky prices and wages persists in modern economic policy. Central banks implement monetary policy, in part, to counteract the effects of price stickiness, aiming to stabilize inflation and employment. The concept serves as a reminder that markets are not always perfectly efficient and that interventions may be necessary to navigate economic fluctuations, especially in times of crisis. Are our economic models truly capturing the underlying reasons for stickiness, or are there deeper layers of economic behavior still waiting to be understood?