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:
Last week’s post summarized Michael Woodford’s five key elements of the 21st-century consensus among macro theorists. He celebrates the general acceptance of the friction-augmented general-market-equilibrium (FGME) framework in modern analysis: “… the study of business fluctuations is no longer driven by the kind of disagreements about the foundations of macroeconomic analysis that characterized the decades following World War II.” The post dismantled that claim, focusing on debilitating shortcomings of consensus theory in economies that are dependent on workplaces restricted by costly asymmetric employer-employee information. It laid bare the folly of Woodford’s choice to ignore the neoclassical maxim that market-centric modeling must not be relied upon in the context of unbalanced information.
Does Woodford worry, at least in private, about the damage caused by pushing aside that sensible maxim? Isn’t it obvious that dogmatic commitment to market-centric modeling badly constricts theorists’ capacity to account for consequential intra-firm features of modern economies? Ignored or misrepresented phenomena in Woodford’s world include involuntary job loss, persistent cyclical joblessness, continuous-equilibrium unemployment, the nature of good and bad jobs, the distribution of firm revenues among factors of production, the existence and role of pure profit, the determinants of capital spending, the determinants of household consumption (ignoring the GEM revival of the insightful 1971 analysis of Barro & Grossman), job tenure, worker reference standards, wage givebacks, firm downsizing, Harris-Todaro rational job transfer, the centrality of nominal-demand management in stabilization policymaking, the relative importance of the Federal Reserve’s real-side objective, the existence and importance of large human-resource departments in firms that account for a substantial share of total employment, the criticality of Herbert Simon’s maxim that profit-seeking management must invest in convincing employees to adopt the firm’s objectives as their own, management recognition of the importance of equitable treatment in employee satisfaction, and the endogeneity of effective worker supervision. That’s a lot of damage.
This week looks at what, in the same piece, Woodford identifies as the most significant remaining disagreement among macroeconomists: “… important...