The phenomena of ‘Sticky Prices’ (known also as ‘nominal rigidity’, ‘wage-stickiness’ and ‘price-stickiness’) is important in Keynesian thought and macroeconomic thought more broadly. Prices are referred to as being ‘sticky’ or being ‘rigid’ when they are less responsive to change over time. Keynes examined nominal rigidity as an explanatory factor for severe unemployment during the Great Depression; he argued that nominal wages display downward rigidity because of workers’ psychological aversion to accept cuts in nominal wages and that, therefore, since wages and other prices are essentially rigid (i.e relatively inflexible), this would exacerbate involuntary unemployment since prices would not adjust quickly enough for the labour markets to clear and would exacerbate unemployment as a result.
However, the issue is that explaining away ‘Sticky Prices’ as being ‘psychological’ or ‘behavioural’ facts is a convenient recipe for various interventionist measures. Here, I aim to briefly explain how the most significant root cause of Sticky Prices is probably Monetary Policy and that it is actually the imposed, monetary monopoly that can explain these ‘behavioural facts’ and that, on this view, those who subscribe to and agree with Keynesian thought should agree that a Free Market Monetary Arrangement would be optimal.
Spillovers onto other markets
If prices are ‘sticky’ or not fully flexible in one sector of the economy, this can lead to prices being less flexible in another sector of the economy; this effect works through various channels. For example, if the inputs in one industry are derived from the output of another industry and the latter’s output has sticky prices, the former’s output will also be relatively ‘sticky’ in proportion to the price-stickiness of the latter’s output.
Furthermore, the price-stickiness of goods and services in one industry (and, therefore, anticipated, future price-stickiness) also implies that agents will consider this when deciding whether or not to alter the prices they set (and the degree of these alterations) especially if that industry is related to them not just directly to their industry but also indirectly to their industry through other industries they serve. After all, the entire economy is an inter-connected, complex network.
Consider, conceptually, the impact of an imposed, monetary monopoly
Following on from the logically-plausible and empirically-supported argument that price-stickiness in some sectors will lead to price-stickiness in others, one may readily see why contemporary Monetary Policy in terms of an imposed, monetary monopoly via a Central Banking regime makes prices far less flexible throughout the economy.
To begin with, when there is only one money that artificially dominates an economy (whether that be through the institutions of legal tender, taxation laws and rules which de jure and/or de facto privilege that money, the intention of banking cartels to reap supernormal profits through access, information and influence, or otherwise) since money is a medium of exchange, unit of account and store of value as far as contemporary, general macroeconomic consensus is concerned, this will inevitably lead to severe distortions across the economy.
Having simply one money means that agents of varying sizes, preferences and constraints will be subjected to the monetary policy of the monopolist (in this case, the Central Bank in conjunction with the Government) whether that be through aiming to fix interest rates, price-level growth, output-level growth etc.
The impact of different monetary policies on price-stickiness across the economy
Most obviously, inflation-targeting across various economies works as an explicit, general control on the rate of increase of the predefined aggregate price-level across an economy. Given the aforementioned theoretical and empirical observations that, as prices become more sticky in one sector, they will influence prices in other sectors to become more sticky, an explicit attempt to reinforce price-stickiness across an economy will inevitably ingrain price-stickiness more deeply (at a micro-level) into an economy.
Similarly, interest rates are price controls on credit and, therefore, they significantly determine the flow of money in terms of borrowings, savings and investment. As Central Banks across the world work either with their main, specific interest rates (or a range of them) accordingly that they pay on deposits or that they lend to their clients at, yet again, this will lead to relative inflexibility of prices in the credit markets and general price-stickiness more broadly (since the entire global economy runs, particularly, on credit).
Additionally, employment- or output-targeting through manipulating the money supply, interest rates and other instruments of monetary and/or financial policy to increase employment or output in an economy (mostly through credit market channels) creates general expectations amongst agents for a set of policies to be enacted to meet that objective.
These revised expectations will continuously feedback into current prices in the economy; one example includes when workers expect a higher future employment rate to prevail, they may be less likely to reduce their current nominal wages (wage-stickiness) because of an expectation of increased, future bargaining power. Alternatively, expectations of poor monetary policy could reinforce expectations of lower future employment and, therefore, workers will be unwilling to take wage cuts again because of the fear of a self-defeating, downward spiral. Since labour is involved in all other economic production, this works to further reinforce general price-stickiness.
If price-stickiness causes unemployment, then imposed Monetary Monopolies exacerbate it
As such, if Keynes himself and his intellectual descendants concede price-stickiness as being a major, causal factor for the excessively high unemployment during the Great Depression (and during business-cycle slumps in general), this means that they should also concede that Monetary Policy has, historically and contemporarily, worked tor reinforce price-stickiness across economies.
A Free(r) Banking system is optimal and necessary through multiple, freely competing (and/or cooperating) currencies that agents can freely use (a mixture of) according to their diverse preferences. Therefore, although Keynes argued that fiscal stimulus is more effective alongside lower interest rates or relatively ‘loose’ monetary policy, his own logic of presuming nominal price-rigidity might lead us to believe that, actually, if we were to have free market monetary arrangements, this could wondrously tackle unemployment and enable greater price-flexibility and market-clearing across economies.
Indeed, even the reduction of some tariffs, particular tax cuts and/or selective liberalisations of restrictions and price-controls would have far greater, more effective and more convincing effects on ensuring efficient, welfare-maximising markets if they were implemented within a system of Free Market Monies where agents have a genuine choice of multiple monies.
With Monetary Freedom, agents would not be implicitly coerced into subscribing to the preferences of the Government or Central Bank of the day (whether that be for particular interest rates, inflation rates, employment levels or otherwise) and the increasing prominence and progress of financial technologies would help ensure that agents could freely, efficiently and effectively switch between these multiple monies for various purposes.
The ‘behavioural facts’ or ‘psychology’ that reinforce and lead to price-stickiness are actually formed, quite rationally and significantly, from Monetary Policy as it is currently imposed. Finally, any short-term pain from ‘free market policies’ as they are currently implemented would be severely diminished if there was true Monetary Freedom since prices could simply adjust more quickly.