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 elaborated on consequences produced by the mainstream macro theory’s absence of rational meaningful wage rigidity (MWR). Overall, the greatest damage has come from model-builders being deprived of crucial guidance in their attempts to construct stabilization-relevant macroeconomics. Surely we have by now learned that an accurate roadmap is a must. Useful macro analysis became much more complex after the industrial revolutions, diverting theorists into a multiple wrong turns.
This post looks at what might have been had the mainstream roadmap been more accurate. The analysis draws on the history of efficiency-wage theory, a promising approach to microfounding MWR that made great strides in the late 1970s and early 1980s before going badly astray.
Promising theory. Original efficiency wages (OEW), i.e. the morale-centric formulation that Michael Piore, Robert Solow and I pioneered, indicate how theorists could have gone about rationally disabling Keynes’s Second Classical Postulate. In the circumstances of costly, asymmetric workplace information, OEW moved labor pricing from the market to inside the profit-seeking firm. Building on that transfer, OEW theory informs a powerful framework for stabilization-relevant macro theory that is consistent with both optimization and equilibrium. After the original articles, Solow’s most complete EW statement was his Royer Lectures, published as The Labor Market as a Social Institution (1990); mine was The Price of Industrial Labor (1984). Piore moved on to other research interests. All three notably failed to microfound MWR.
The development and impact of efficiency-wage theory were damaged by that failure. Today, OEW is badly misunderstood by economists. In their otherwise exemplary history of economic thought, Scepanti and Zamagni (2005, p.369), hereafter S&Z, provide an illustratively misleading description of useful efficiency wages: “The theory of efficiency wages is based on three principal ideas. The first is that the intensity of work effort of each employee, and therefore the marginal productivity of labour, increases with an increase in wages. The second is that the workers’ effort is also influenced by the level of unemployment,...