Money and Markets: Essays in Honor of Leland B. Yeager

172 Steven Horwitzadjustments is in the nature of a public good, and private incentives to supply publicgoods are notoriously inadequate.” The benefits of going first are dispersed, but thepotential costs are concentrated, thus it is difficult to get the process started. 9 Thelength of time over which no actor is willing to “go first” will also explain the degreeof downward stickiness in prices. What all of these possibilities suggest is that actorsmust begin to search for the appropriate response to the change in demand; they willnot automatically know what the optimal response is.Shah (1997: 52–4) provides a further synthesis of the Yeagerian and Austrianapproaches by offering a market discovery process explanation of why priceseventually fall. By integrating Alchian’s (1969) work on the costs of finding outinformation about prices into an Austrian entrepreneurial framework, Shah arguesthat in the face of the slackening demand generated by an excess demand formoney, firms will first have to decide whether the loss of business is a local or morewidespread phenomenon. This local vs. widespread distinction roughly correlateswith the “real vs. nominal” distinction. Given that changes in demand do not comemarked with their cause, and given that sellers’ interpretation of the cause willaffect the benefits of lowering their prices, sellers may well respond first by makingchanges in the non-price variables relevant to their products as a way to purchaseadditional information about the fall in demand. As sellers buy time in this way, thefull prices of goods (the monetary price plus the non-price factors) become morevariable (Shah 1997: 53), and this leads to buyers engaging in more informationacquisition and searching for better options. This puts more downward pressure onmoney prices. Eventually,Sellers find that they are unable to maintain their customers and profits bysimply adjusting non-price variables. In the face of a monetary contraction,delivery lags cannot be shortened or auxiliary services cannot be increasedwithout limits in order to sell more products. Ultimately prices have to belowered.(Shah 1997: 53, emphasis in original)Shah later notes that this process is simply a Hayek–Kirzner entrepreneurialdiscovery process expanded to include non-price factors.This search process will take time and will not happen smoothly across actors.Even after they unstick, prices, therefore, will not immediately fall to the appropriatelevel given the excess demand for money. In addition, the ragged nature of thedecline in prices will involve wealth redistributions among actors. All of this is incontrast to the perfectly competitive model in which prices react quickly andsmoothly to external changes. Modeling human actors realistically leads to adifferent result.One element that is missing from the Yeager monetary disequilibrium story isthe capital–interest rate process. One of Yeager’s significant disagreements withthe Austrians is over these very issues. However, the injection of some Austriancapital-theoretic insights into the process explored above provides some helpfulnew insights. In the next section, we will take a look at the Austrian inflationary