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:
This post continues last week’s admiration of Michel De Vroey. He understands, and confidently champions, the EK emphasis on involuntary unemployment and, consequently, the analytic centrality assigned in stabilization-relevant macro theory to meaningful wage rigidity (MWR) and the discretionary management of aggregate demand.
De Vroey’s essential 2016 book (A History of Macroeconomics from Keynes to Lucas and Beyond) chronicles the famous macro wars that began in the late 1960s when EK mainstream thinking was challenged by a new generation of theorists. The latter could not tolerate the absence of micro-coherence in Paul Samuelson’s Neoclassical Synthesis. In particular, they objected to the EK failure to microfound their keystone assumption of short-term downward wage rigidity. As readers of this Blog know, MWR is defined by its capacity to suppress wage recontracting, uniquely enabling causality from nominal demand disturbances to involuntary job loss and evidence-consistent movement in employment, output, and income. The Early Keynesians, including Modigliani, Patinkin, Samuelson, Tobin, Klein, Solow, et al., believed that the MWR assumption was necessary to provide stabilization relevance during the interim needed to ground wage rigidity in optimization and equilibrium, the fundamental tenets of economic theory.
I have been around long enough to have known the great Keynesians and believe, both then and now, that their short-cut to stabilization-relevance was justified. But the new neoclassical theorists simply weren’t buying it. I also remember the take-no-prisoners fervor of that rejection. They insisted that macroeconomics be immediately microfounded, harshly attacking any modeling that relied on free parameters. As the war over the nature and use of nominal wage rigidity ground on, the MWR assumption increasingly isolated EK theorists.
The primary source of my admiration for De Vroey is that he never abandoned the centrality of MWR. In his fine book, he instructs modern theorists on what it means to be Keynesian: "The question to address is what explains that Keynes could introduce an involuntary unemployment (rationing) result in a model that was a mere extension of...