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  Neil Irwin’s Shame, Part III

  By James Annable | Dec 3, 2021

   

   

  This post is the third installment bashing Neil Irwin’s hobby-horse that the economy is too complicated for human comprehension. He has been mounting his soapbox and arguing that economists are fooling themselves and trying to fool everybody else. In so doing, he has been misusing  the New York Times to open the door to crackpot ideas. He should be ashamed.

  Readers of this Blog know that the true problem is less know-nothing. Mainstream macro theories about which Irwin makes fun are constructed for an earlier age, prior to the Second Industrial Revolution. They are not up to the task of explaining modern, highly specialized economies. Thankfully other, readily available models powerfully explain Irwin’s “incomprehensible” macro-problem agenda, focusing on the interrelated phenomena of wages, inflation, and unemployment. The NYT failure is simply that Irwin, who should be finding out if better models exist, would rather preach than do his job.

  If Irwin decided to do some reporting, he could discover that the debilitating problem with mainstream thinking is paying exclusive attention to decisionmaking in the marketplace. Especially since the Second Industrial Revolution, a great deal of consequential economic decisionmaking occurs inside large, bureaucratic firms. Once that second venue is included in macro analysis, Irwin’s incomprehensible economy becomes comprehensible. What follows outlines the basics of the two-sector modeling capable of usefully explaining wages, inflation, and unemployment.

  Market Venue

  Firms in the market venue are characterized by effective direct supervision of worker on-the-job behavior, i.e., Ź_K=Ź^m_K. (The notation is defined in the previous posts.) These businesses populate mainstream macro theory. Rational worker choice is restricted to the marketplace; workers cannot influence their own behavior on the job. Profit-seeking firms must price labor hours to equal employees’ market opportunity costs.

  The market-wage-taking venue recalls Lloyd Fisher’s “structureless labor markets”, to which he assigned four characteristics. There are no unions; there are no formal or informal work rules; workers tend to be unskilled; and relatively little capital or...

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