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  Two-Venue Theorem

  By James Annable | May 13, 2022

   

  Involuntary job loss is at the heart of the mainstream stabilization-theory muddle. For policymakers, the socioeconomic problems of employment and income loss are central to business-cycle pathology. Many critics of modern macro modeling argue the failure of New Keynesians (NK) to accommodate forced joblessness results from rules of engagement that mandate rational behavior. The critic with the biggest megaphone is Paul Krugman: “… economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic ‘theory of everything’ is a long way off.”

  Krugman is wrong. The GEM Project has shown that limitations on the NK capacity to accommodate actual joblessness do not result from the commitment to rationality. The germane problem is much less profound, grounded in the arbitrary restriction of optimizing exchange to the marketplace. Solving that fundamental problem microfounds intuitive stabilization policy while preserving the formal economic method rooted in optimization and equilibrium..

  The two-venue theorem. In the necessary analysis, the central organizing proposition is named the Two-Venue Theorem:

  The existence of continuous optimizing macroeconomic equilibrium providing both analytic coherence and wage rigidity sufficient to support involuntary job loss implies the coexistence of market and nonmarket equilibria, with the latter governing the dominant subset of labor pricing.

  The cards are now on the table. Venues of price-mediated exchange are defined by fundamental heterogeneities in optimizing decision rules, constraints, and exchange mechanisms that impose boundaries on meaningful aggregation. The venue concept is at the core of the GEM Project, used to construct the workplace-marketplace general-equilibrium synthesis. The theorem may be best understood in conjunction with Barro’s well-known wage-recontracting critique. It is offered, not modestly, as the most consequential labor theorem in macroeconomics, mostly because it facilitates the construction of the first modern theory of wage determination. Pulling the profession’s understanding of labor pricing out of the 19^th...

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