Richard Serlin, in a comment on a Stephen Williamson post, explains why he thinks prices are sticky. What Richard says sounds plausible. And it's based on his real-world experience. He may very well be right. But it doesn't constitute a satisfactory explanation of sticky prices, in my eyes.
I'm really just using Richard as an example to illustrate my views on what would count as a satisfactory explanation of sticky prices. His is a good example for my purposes, just because it's simple, and plausible, and it's accessible. I hope Richard doesn't mind my picking on him to make a point.
This is also an example for me to explain why economists want theories, and what "theory" means to an economist.
To oversimplify, Richard says that firms have sticky prices because their customers want sticky prices, and firms want to give their customers what they want.
What's wrong with that?
Suppose Richard is 100% right. Why don't I think it counts as an economic explanation? What more do I need? (To be fair to Richard, I have oversimplified his explanation, and he does start to go into these things).
This is what more I need:
1. I want some sort of explanation of why customers want sticky prices. Why, for example, would customers prefer prices that move in discrete jumps, like a staircase, rather than smoothly, like the banister? (Only assume the banister is at the same average height as the stairs, because I can't think of a better metaphor).
Why do I want an explanation of why customers want sticky prices? Why can't I just be satisfied with the statement that they do? I don't ask why customers want to consume apples.
Partly it's just that sticky prices, unlike apples, strike me as a peculiar sort of thing to want. So if I did understand why customers like sticky prices, it would make the assumption that they did like sticky prices more plausible. But mostly, it's because if I had an explanation of why customers like sticky prices, it would help me answer the following questions.
2. I want to know what exactly is the type of stickiness that customers like? What does "stickiness" mean, precisely? There are lots of different models of sticky prices that give different sorts of stickiness, and they can have very different macroeconomic implications, both for the data they predict, and for the macroeconomic policies they would recommend.
There can be models with fixed costs of changing prices, which don't depend on how big a change is made. Or quadratic costs, which do. (The first has prices jumping in steps; the second has prices moving smoothly.) Or models where firms can change prices every d periods. Or where firms have a 1/d probability of being allowed to change price every period. (That apparently trivial difference alone makes the difference between whether there is inflation inertia or just price level inertia in the Phillips Curve.) Or models where firms' price changes are bunched at the same time, or staggered. Or "s,S" models where firms change prices whenever they get too far away from the optimum. (Which can sometimes make average prices perfectly flexible even if each individual price is sticky.) And so on.
If I could understand why customers like sticky prices, that would help me understand precisely what "sticky" means in this context. And different meanings of stickiness would have very different consequences.
Knowing those consequences would help us test that theory, by seeing if the predicted consequences match the data. And let us predict the effects of different policies, and which policies would make people better off.
3. I want to know why some prices seem to be stickier than others, and why some prices don't seem to be sticky at all. If I understood why customers liked sticky prices, this should help me understand these differences in price stickiness. Perhaps customers for crude oil are different from customers for groceries, and don't care about price stickiness. An explanation of why some customers in some circumstances like price stickiness could help me test the theory. It could also have policy implications, if a change in some policy would make prices more sticky or less sticky, that's something I need to know when recommending policy.
4. This is the most important bit. I want to know why customers like sticky prices because this will help me understand whether and how their preference for sticky prices will affect their demand for goods. We can't just assume that customers have a preference for sticky prices, and at the same time model their demands for goods by maximising U(X,Y) subject to the budget constraint, ignoring the fact that we have just assumed their preferences don't look as simple as that. Or, at least, it might be dangerous to do that. The predictions of a model of the demand for goods which ignored a preference for sticky prices might look the same as a model which included it, but it might not. We don't know, until we know a bit more about that preference for sticky prices.
And look, there's no way it can be exactly the same, if we also assume that firms want to cater to their customers' preference for sticky prices. Firms presumably don't just cater to their customers' whims for the sake of it. They cater to their customers' whims because they believe they will lose customers and sales and profits if they don't. Which means the customers' preference for sticky prices must have some sort of effect on their demand functions, if Richard's theory is correct.
It's that last point, point 4, that is at the heart of what David Andolfatto, for example, means by saying that sticky price macroeconomics is "incoherent". If we had a good explanation of sticky prices, for why customers prefer sticky prices, and how their demands for goods reflect that preference, we would have a better and a consistent theory of what determines quantities with sticky prices, and which monetary policies could improve people's well-being. As it is we have a theory of the effects of monetary policy under sticky prices that might be inconsistent with our assumption that prices are sticky.
So that's what I think would count as a satisfactory explanation of sticky prices. And why a satisfactory explanation matters. And why sticky price macroeconomists should keep looking for an explanation, as they have been. Though that shouldn't stop us from doing the best we can with what we've got. Unsatisfactory though it is, it's better than ignoring the evidence for sticky prices.