Wednesday, April 16, 2008

Best Line I Have Read Today

In general, I think that the economy's fate hinges on its ability to adapt to changes in relative prices. If there are few large shocks, then full employment will not be disturbed. With large shocks, then people need to respond to incentives to exit some occupations and industries in order to enter others.

Here's more from Arnold Kling.

My hunch is that with large shocks to the economy, people start to panic as uncertainty looms. Instead of figuring out ways to respond to massive shifts in relative prices (that's what large shocks mean to me anyway), people's brain is hardwired (a legacy of our tribal past as Hayek has argued in Fatal Conceit) to immediately seek help from some saviour, God may be, government definitely (as a surrogate God?). And that's what makes Keynesian economics so appealing I think.

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