EFA (39): The long and the short of it

In economics, one often comes across terms like "in the short run" or "in the long run". But what do they mean exactly? This is the subject of the 39th item in our regular Monday series, Economics for Amateurs.

Before we talk about that, however, let's look at the title of today's post, which is an idiomatic expression in Engliish.

According to the Oxford Dictionary of English, "the long and the short of it" means "all that can or need be said" — in other words, the most important thing. You might say, "The long and the short of it is that we need a new marketing strategy."

In the same dictionary, "in the long run" is defined as "over or after a long period of time; eventually". "In the short run" is defined as "in the near future". (Note: sometimes, we talk about the short or long "term" rather than "run".)

But back to economics. For individual firms, the short run is defined as the period in which companies have only limited ability to alter their production inputs in response to changes in economic conditions (demand, input prices, etc.).

For example, although firms can easily alter the amount of labour input via working hours — overtime or short-time working — a new factory takes time to be built. The long run is defined as the period in which firms can change all their production inputs if necessary.

In other words, the short run and long run are not defined as a specific number of months or years, but in terms of the process of economic adjustment. Much of the economic theory of pricing and costs is based on the distinction between the short run and the long run.

Also, at the macroeconomic level, the long run is the period necessary for wages and prices to find the right level to bring aggregate supply and demand into line and thus ensure full employment.

One of the major controversies in macroeconomics has been about how quickly wages and prices do change in practice and about whether high levels of unemployment can persist for long periods.

The most famous quote about the long run is from the British economist John Maynard Keynes (1883–1946). In his book, A Tract on Monetary Reform, he criticized economists who concentrated purely on the theoretical long-run effect of changes — such as an increase in the amount of money in a economy — and ignored the short-run effects:

• "In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past, the ocean is flat again."