In a wishy-washy column today on those who are worrying about inflation and those who aren't -- see Daniel Gross for the definitive word on this debate (short answer: don't worry about inflation) -- Robert Samuelson makes the following observation:
The lesson for today: Psychology matters. What economists call "expectations" shape how workers, managers and investors behave. If they fear inflation, they act in ways that bring it about. The converse is also true, as the late 1940s remind. The lesson provides context for today's debate.
But I'm not so sure that workers, managers, or even all investors really have the capacity to worry about inflation. What percentage of people, do you think, would have an answer ready if you found them on the street, told them that inflation would be increasing in the next six months, and asked them what they would do with their personal finances in response? While most people will take action in response to the tangible signs of inflation -- price increases, etc. -- I don't think worries about rising inflation will have the same influence as more straightforward concerns about unemployment that more people understand.
Even those in the financial classes who do have some inflationary strategy aren't hidebound to react the same way -- consider the existence of "bond market vigilantes," who essentially manipulate markets to protest government policy. The thing to remember is that the market isn't acting rationally in response to economic conditions; a bunch of specific investors, with specific interests, are trying to protect their private concerns at the expense of the public good.
All this is to note that I'm currently reading Justin Fox's excellent The Myth of the Rational Market
, which acts as an intellectual history of the misguided idea that markets are rational, one closely aligned with the equally tenuous claim that most people are utility-maximizing rationalists who anticipate market conditions. , which acts as an intellectual history of the misguided idea that markets are rational, one closely aligned with the equally tenuous claim that most people are utility-maximizing rationalists who anticipate market conditions.
-- Tim Fernholz
