How Long is the Short Run?

• A Very Short Short Run: At one end of the controversy are those who contend, for all practical purposes, that there is NO short run; that wages and prices adjust almost instantaneously; or at least that they adjust more quickly than any intervention by government. This viewpoint, consistent with that of many political conservatives, suggests that government policies aimed at correcting business-cycle instability are largely unneeded. The economy quickly and automatically adjusts to equilibrium, eliminating any business-cycle problems such as inflation and unemployment. This view further contends that any government attempts to address business-cycle instability are very likely to worsen the situation.


• A Very Long Short Run: At the other end of the controversy are those who contend, for all practical purposes, that the short run lasts a long, long time, perhaps indefinitely; that wages and prices adjust very, very slowly; or that government intervention works more quickly than the automatic adjustment. This viewpoint, consistent with that of many political liberals, suggests that government policies aimed at correcting business-cycle instability are the best way to promote the economy's health. While markets might adjust to equilibrium, eventually, in the meantime, people suffer the hardships of unemployment and inflation.

It Depends

• Size of Disruption: One factor is the extent of the disruption. A big disruption takes longer to adjust than a smaller one. The Great Depression of the 1930s was an enormous disruption that took a long time to adjust. The short run lasted over a decade. In contrast, most "normal" business-cycle contractions are smaller disruptions and the resulting adjustment is much quicker, in the range of 6-18 months.
  
  In essence, the short run is analogous to the time it takes Duncan Thurly to walk from his house to his job at the Ambling Institute of Technology. If he lives a few blocks away, the trip is a short one. If, however, his residence is on the other side of town, his trip is longer.


• Structure of Economy: Another factor is the underlying structure of the economy. A given disruption in the economy takes shorter to adjust if the underlying structure of the economy is healthy and efficient than if it is besieged with other problems. An economy that is exceedingly complex, with low worker productivity, stifling government regulation, limited technological innovation, political turmoil, crumbling transportation infrastructure, and low consumer confidence, remains in the short run longer than an economy that fares better in each of these areas.
  
  In essence, Duncan's short run trip from home to school also depends on health (does he have a broken leg? is he a world class athlete?), the condition of the terrain (is his way blocked by jagged cliffs or raging rivers? does he have access to a smooth sidewalk? is it downhill all of the way?), and even access to transportation (does he have a bicycle? how about a car?)

The Long-Run Aggregate Supply Curve

Long-Run Aggregate Supply Curve

Moreover, because flexible prices ensures that resource markets are in equilibrium, the quantity of real production supplied is that achieved at full employment--that is, full-employment real production. In the long run, prices can rise or fall, but full employment is maintained and full-employment real production is supplied.

A Word About Business Cycles

Both Runs Together