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  Fundamental Choice

  By James Annable | Nov 15, 2019

  Core neoclassical principles that govern macro modeling are optimization, general equilibrium, and market centricity. The GEM Project argues that the third tenet, the restriction of rational exchange to the marketplace, long ago outlived its usefulness. The emergent ubiquity of complex, bureaucratic corporations fundamentally altered the nature of rational price-mediated exchange, badly damaging the capacity of textbook market-centric macroeconomics to explain critical evidence. The Project demonstrates that, in order to be stabilization-relevant, consensus macro thinking must accept the generalization of optimizing exchange from the marketplace to information-challenged workplaces.

  Market exchange versus production. Joan Robinson (1977, p.1321), perhaps even more than her Cambridge colleague John Maynard Keynes, anticipated the GEM Project: “There are various brands of micro theory; …but all share the characteristic of stressing exchange and neglecting production.” She cites Nikolay Bukharin as an economist who got it right. In 1919, he lamented that “there is almost no [mainstream] discussion of how scarce means are organized to yield outputs; the whole emphasis is on exchanges of ready-made goods.”

  She then cites the estimable Robert Clower as an example of getting it wrong. From Clower: “An ongoing exchange economy with specialist traders is a production economy since there is no bar to any merchant capitalist acquiring labor services and transforming them (repackaging, processing into new forms, etc.) into outputs that are unlike the original inputs and are ‘sold’ accordingly as are commodities that undergo no such transformation. In short, a production unit is a particular type of middleman or trading specialist.”

  Robinson’s step-back perspective on the fundamental macro debate is insightful: “We cannot help trying to understand the world we are living in, and we need to construct some kind of picture of an economy from which  to draw hypotheses about its mode of operation. We cannot hope to get neat and precise answers to the questions that hypotheses raise, but we can discriminate among the pictures of reality that are offered and choose the least implausible ones to...

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