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  Black-Box Firms

  By James Annable | May 18, 2018

   

   The GEM Project generalizes rational exchange from the marketplace to highly specialized workplaces that are restricted by costly asymmetric employer-employee information. Economists know that in such circumstances markets cannot efficiently price labor. That is why large complex establishments price labor inside the firm rather than relying on external markets. It is why those wages are downward inflexible over stationary business cycles and reflect chronic labor rent. The Project has demonstrated that rigorous general-equilibrium modeling of that second venue solves the chronic stabilization-irrelevancy problem of mainstream market-centric macro theory.

  The crucial roadblock to micro-coherent, stabilization-relevant macroeconomics is resistance to looking inside bureaucratic firms. Mainstream macro theorists proactively suppress the consequential nature of large firms engaged in specialized production. Suppression was originally inspired by Walras, Jevons, Menger, and other authors of the marginalist revolution, who conceptualized economies as market systems in search of general equilibrium. To focus and simplify their analysis, they posited a single (marketplace) venue of economic exchange. The Continental-tradition economists worked during, but were able to contain their interest in, the onset of the global economic transformation to large-scale, specialized production.

  Today, the rigorous analysis that occupies the economic mainstream remains proudly coterminous with the study of market exchange. Modern consensus preference for restricting coherent analysis to the marketplace is proudly illustrated by the otherwise admirable micro textbook by Mas-Colell, Whinston, and Green (1995, p.127): “Many aspects enter a full description of a firm: Who owns it? Who manages it? How is it managed? How is it organized? What can it do?  Of all these questions, we concentrate on the last one. Our justification is not that the other questions are not interesting (indeed, they are), but that we want to arrive as quickly as possible at a minimal conceptual apparatus that allows us to analyze market behavior. Thus, our model of production possibilities is going to be very parsimonious: The firm is viewed merely as a ‘black box’, able to transform inputs into outputs.”...

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