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:
This post acknowledges another patron saint of the GEM Project. In 1992, Gary Becker of the University of Chicago was awarded the 1992 Nobel Prize “for having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction.” Becker argued that the “combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach as I see it.” To him, rationality is not a controversial concept: “Everyone more or less agrees that rational behavior simply implies consistent maximization of a well-ordered function, such as a utility or profit function.” His insightful, broadly admired body of work has made it easier for the GEM Project to construct its generalized-exchange theory on rational-behavior foundations.
Becker pulled his wide-ranging research together in one of my favorite books, The Economic Approach to Human Behavior. (The quotes are from that book.) This post looks at a puzzling curiosity in Becker’s important text. Chapter 8, entitled “Irrational Behavior and Economic Theory”, is an abrupt diversion into examples of irrationality that are supported by the evidence. I have always thought that the chapter needlessly weakens his signature message, i.e., the generality of rationality in economic analysis. From the perspective of the GEM Project, limitations in his mainstream analytic tools caused him either to ignore swaths of crucial economic behavior or unnecessarily accept that some important phenomena are irrational (but still vaguely governed by economic principles). The remainder of this post illustrates each strategy.
Ignored Economic Behavior
The most consequential, ubiquitous economic activity that Becker simply ignores is on-the-job behavior (OJB) in circumstances of costly asymmetric workplace information. Becker’s blind eye to that crucial nonmarket venue of price-mediated exchange results from a flaw in his identification of fundamental tenets of economic theory. As indicated above, he believed (along with almost all mainstream theorists) in the centrality of the marketplace in economic analysis. He had no problem restricting rational exchange to markets, despite...