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:
The generalized-exchange model’s large-establishment venue (LEV) provides an important role for the active management of labor. Most notably, human-resource departments, universally present in complex, highly specialized firms, are tasked to calibrate firms’ modal workplace-exchange relations. (See last week's post.) GEM research has demonstrated that such WERs are rationally nonconvex, implying the payment of unit-labor-cost minimizing efficiency wages.
In the now familiar story, WER identification was greatly complicated by the Second Industrial Revolution and its scaled-up, highly specialized corporate forms. Making sense of LEV workplace exchange, rooted in axiomatic preferences and manifested in collectively observable on-the-job behavior (OJB), proceeded in fits and starts. Labor management passed through drive-system and scientific-management phases before arriving at the equity-based human-resource paradigm (designed to elicit employee acceptance of employer goals) that now dominates in LEV production throughout the world.
The infamous “drive system” was most characteristic of large-firm labor management in the nineteenth century. At the onset of the systematic exploitation of scale economies, it was typical for foremen to act as self-interested subcontractors: hiring, supervising, and paying their work crews. Firm owners kept scant employment records, dealing only with foremen. The approach featured close worker oversight, arbitrary treatment, bribery, abuse, and the absence of employee rights. From Sanford Jacoby (1994, p.343): “The fear that the drive system aroused ultimately was founded on the threat of dismissal. The foreman was free to utilize the discharge as he saw fit, and discharges were liberally meted out. The threat posed by dismissal depended on labor-market conditions….” The drive system is recognized to have much in common with the Shapiro-Stiglitz (1984) shirking theory, which has become New Keynesian theorists’ default model of worker behavior.
As establishments became larger and work tasks more specialized and integrated, with much faster throughput time, the close supervision of the drive system was more obviously revealed as ineffective. Moreover, the approach was sufficiently maligned to have become a national issue, motivating high-profile Congressional hearings. The drive system, as...