A home for economists who believe macroeconomics can be both coherent and stabilization-policy relevant
The GEM website is a home for economists who believe that mainstream macroeconomics cannot usefully explain the costly instability that periodically rocks modern economies.
In particular, consensus thinking failed to guide policymakers' efforts to deal with the enormous welfare costs of the 2007-09 Great Recession – especially six million involuntarily lost jobs.
That failure is not surprising. Forced unemployment is beyond the reach of coherent market-centric theory that today dominates macro research.
The GEM Project offers an alternative approach that intuitively explains instability while maintaining both coherence and stabilization-relevance. In its central innovation, the Project generalizes rational exchange from the marketplace to the large-firm workplace, crucially microfounding meaningful wage rigidities – the key to policy-useful modeling.
Generalization of price-mediated exchange is offered as the next big idea in macroeconomics. We invite economists dissatisfied with the stabilization-policy limitations of mainstream theory to join us in constructing a better model.
The interactive GEM website provides a variety of ways to contribute:
Last week’s post reviewed a number of consequential innovations of the GEM Project. This week provides a companion piece, a bare-bones summary the generalized-exchange narrative. Good theories accommodate compact descriptions. What follows outlines, in just over 400 words, the GEM Project’s micro-coherent general-equilibrium workplace-marketplace synthesis that is the wellspring of those useful innovations.
Generalized-exchange modeling bifurcates both households and firms, each of which rationally pursues self-interests governed by axiomatic preferences and technology. Households are constrained by heterogeneous endowments of financial assets. For the largest class, earnings from wealth do not contribute to household income; in the much smaller share of households, financial assets are the source of income. More crucially, firms are separated into two venues that reflect size-related heterogeneity, arising from specialization, the nature of workplace information, and routinized jobs. Organizational diversity in the modern production of goods and services is fundamental.
Labor is point-of-hire homogeneous; Harris-Todaro transfer governs inter-venue worker flows. Generalized exchange locates large-establishment-venue (LEV) labor pricing in the workplace, where profit-maximizing firms construct exchange mechanisms and must pay the continuous-equilibrium efficiency wage (WnJ) that equals rational employees’ reference wage (WńJ). The fundamental equality notably microfounds meaningful wage rigidity (MWR), which uniquely induces rational causation from aggregate nominal-demand disturbances to involuntary job loss and recognizably-sized movement in employment, output, and income. Meanwhile, small-establishment-venue (SEV) firms can do no better than paying workers’ opportunity cost, i.e., the market wage (Wm).
Macrodynamics are crucially enriched by rational MWR, which suppresses wage recontracting and pushes workers off their labor-supply schedule. Keynes’s Second Classical Postulate and Wicksell-Wicksteed income distribution are both scrapped in LEV modeling. Income and wealth become the primary determinants of consumption, and expectations of pure profit principally influence investment. Interest rates play secondary roles in each, while coherent hold-up problems are critically introduced into production-capacity management. Stationary spending disturbances are associated with temporary layoffs, while persisting nonstationary demand shocks generate, after substantial lags, permanent job downsizing as well as rationally recalibrated worker reference standards and...