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So you're saying that people don't consume like rational economic actors...
by nanne (zwaerdenmaecker@gmail.com) on Wed Jun 20th, 2007 at 07:39:59 AM EST
[ Parent ]
Economic actors act, at best, on expectations. So it's all about managing the expectations. Psychological barriers like $100/barrel tend to be repellers: prices will "resist" approaching them from below and then race away once they are above.

And I don't think Jerome's point implies people are not rational. What he's saying is that it's the rate of change of the price that matters, not the price. And that makes sense. If you're going to buy a car that you'll have to fuel for the next 10 years, it probably matters more what the rate of inflation for fuel is than the absolute price level. Again, expectations.

Because, despite textbook economics always happening at a single point in time, or at equilibrium (which is just a single point in time, too, the point at infinity), time considerations at various time scales are essential to economic actions. And economic games are not only played once, but are repeated over and over again, which also changes the optimal strategies.

Can the last politician to go out the revolving door please turn the lights off?

by Migeru (migeru at eurotrib dot com) on Wed Jun 20th, 2007 at 08:39:17 AM EST
[ Parent ]
 
Economic actors act, at best, on expectations

Now there's a good point.

We are led to believe that Joe Public, suppliers and all the rest work (or rather make their wage claims) on expectations of FUTURE inflation.

My view of the real world is that most people are interested in the rises in prices they have recently experienced as opposed to those they EXPECT to happen ion the future...

But what do I know....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Jun 20th, 2007 at 03:13:21 PM EST
[ Parent ]
Well, yes.

The simplest (zeroth-order) expectation one can have is that things will remains as they are.

The first-order approximation is that trends will stay as they are. But what trends are today depends on what the state of affairs has been in the (recent) past.

Anything more sophisticated is too complex, and probably not worth the extra effort.

So, if people have experienced inflation recently, they will assume inflation will stay constant. They can't assume both that prices and inflation will stay the same, and they choose the assumption that the trend will stay constant. And their expectation is based on recent past experience.

But expectations it is. People don't buy houses because they are more expensive now than a year ago. They buy houses because they expect them to be more expensive a year from now than they are now. And they expect them to be more expensive next year because they were cheaper last year.

Can the last politician to go out the revolving door please turn the lights off?

by Migeru (migeru at eurotrib dot com) on Wed Jun 20th, 2007 at 03:21:47 PM EST
[ Parent ]
Sure people buy assets because they see prices going up.

But do people ask for wage increases because they see prices increasing in the future or because their purchasing power has been reduced by x% this past year because energy prices went up, food got more expensive etc etc.

I think we are looking at chalk and cheese here (as between capital and revenue expenditure), not for the first time.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Jun 20th, 2007 at 03:59:11 PM EST
[ Parent ]

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