For both firms and individuals, resistance to downward price adjustment is often rational, even when at a macroeconomic level universal downward adjustment would be desirable (perhaps because the central bank and/or state have failed to accommodate the expected path of nominal incomes, perhaps because nominal exchange rates are rigidly misaligned). If we could wave a magic wand and have wages, prices, and especially debts all simultaneously scale downward, that might be awesome. But, unfortunately, we can’t.
I think both Tyler Cowen and Mark Thoma pointed to this post. Read the whole thing.
The problem with the macroeconomic perspective is that when you think of the economy as a GDP factory, then the only reason you can think of for it not to operate at capacity is that the ratio of M to P is too low. Instead, if you think in terms of PSST, you can think of all sorts of reasons for coordination failure.
The chains of production are really long and complex. Somebody has a job doing “business development” for a company trying to make money out of an app. That job is so far from producing widgets that it is ridiculous.
In addition, pretty much everything we buy is discretionary. The seller of almost any product or service could wake up tomorrow and find the demand for that product or service poised to fall off. Need I cite landline telephones, retail music stores, or taxi drivers?
In the PSST story, the rigidities that matter are the burdens of trying to start a new business and the reluctance of people to relocate and to change occupations. The ratio of M to P just doesn’t amount to a hill of beans in an economy that depends on deep, complex coordination in the market process.