Richard Thaler Confused On Microeconomics

Richard Thaler espouses an incorrect imperfectionist viewpoint. If only all markets were competitive, agents did not suffer from limitations in calculating and lack of information, etc., all markets would clear. Or so he says, at least when it comes to the labor market:

Perceptions of fairness ... help explain a long-standing puzzle in economics: in recessions, why don't wages fall enough to keep everyone employed? In a land of Econs, when the economy goes into a recession and firms face a drop in the demand for their goods and services, their first reaction would not be to simply lay off employees. The theory of equilibrium says that when demand for something falls, in this case labor, prices should also fall enough for supply to equal demand. So we should expect to see that firms would reduce wages when the economy tanks, allowing them to also cut the price of their products and still make a profit. But this is not what we see: wages and salaries appear to be sticky. When a recession hits, either wages do not fall at all or they fall too little to keep everyone employed. -- Richard H. Thaler, Misbehaving: The Making of Behavioral Economics

Of course, equilibrium theory says no such thing. It is weird that I should know more about some bits of price theory than a Nobel laureate. (By the way, I take the term imperfectionist from John Eatwell and Murray Milgate.)

The book from which this quote is from is very much an intellectual memoir. We do not see Thaler getting married, raising children, or having cultural interests, except as it impacts on the development of his research. So I do not know whether he thinks the Distillery is a fine place to hang out in Rochester, whether he enjoyed listening to the Rochester Philharmonic in Highland Park Bowl, what his favorite wine from the Finger Lakes region is (presumably a white, maybe riesling), or whether he's ever played chess outside in that mall in downtown Ithaca. I did learn that Buffalo once had a professional basketball team - I knew that Syracuse had. And there's quite a bit about Greek Peak, a small ski resort that Thayer tried to help promote season tickets before he had his ideas fully worked out.

Thaler, in this book, is very aware of the challenges in getting mainstream economists to accept new ideas. How people say they will react to a choice is not counted as evidence. I think of the Allais paradox, for example. Thaler has an example of a friend and him deciding not to drive during a blizzard to Buffalo to see a basketball game. The friend says, "If we had not got these tickets for free, we would go." Likewise, surveys are also not counted as evidence. Nor are anecdotes. So he spent a lot of time in devising experiments, with real money at stake.