…with Arnold Kling. One example:

Few people appreciate what a profound and disturbing puzzle the Depression posed. The non-economist has no trouble getting her mind around the notion of a shortage of jobs. But for an economist, such a shortage is nonsense. If there is an excess supply of, say, construction workers, then the wage of construction workers should adjust downward. As the wage rate sinks, the demand for construction workers rises, and the supply of people willing to work in construction falls. As the competitive process unfolds, bidding down wage rates, eventually supply and demand will balance.

In theory, at any rate, unemployment — an excess supply of labor — should accordingly be self-correcting. But evidently, as the Great Depression showed, the labor market lacks in practice the adjustment mechanisms that are supposed to work in theory.

There are hundreds of theories that try to explain the apparent inflexibility of labor markets. But I have never forgotten a suggestion made by Robert Solow. He pointed out that you never see an unemployed worker walk up to an employer and say, “If you let me have that guy’s job, I’ll work for 10 percent less money.” There are self-imposed ethical limits on competition.

If you think about it, there are probably countless self-imposed ethical precepts that affect our economic behavior. Chances are, without the habits incorporating these ethical precepts, our market system would collapse altogether. Like the water in which a fish swims, our commercial morality is invisible to us. But it is essential.