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:
Blog readers know that the earliest version of the GEM Project’s generalized-exchange modeling played a seminal, albeit underappreciated, role in the brief period of active research on Efficiency-Wage Theory (EWT). My 1981 article and 1984 book introduced that literature to the nonconvex Workplace-Exchange Relation (WER) that describes rational employer-employee interaction in firms restricted by asymmetric on-the-job information and routinized jobs. After a decades-long hiatus, during which the Shapiro-Stiglitz (1984) market-centric model captured the efficiency-wage name while burying its stabilization relevance, the GEM Project finally figured out how to microfound nonconvex WERs, belatedly producing one of the most consequential economic tools of the Keynesian era.
This post looks past EWT in order to examine another important macro school for which GEM modeling makes a seminal contribution. In his A History of Macroeconomics (2016),Michel De Vroey named this literature, dating from the final third of the 20th century, Non-Walrasian Equilibrium (NWE). A branch of the better known Disequilibrium Macro school, NWE theorists were mostly European, including such leading lights as Jacques Drèze, Edmond Malinvaud, Jean-Pascal Bénassy, and Jean-Michel Grandmont. An instructive overview of NWE thinking was edited by Jacques Drèze: Advances in Macroeconomic Theory (2001).
From De Vroey: “[The NWE] approach displayed three main features. The first was wanting to construct a microfounded (i.e., choice-theoretically based) analysis. Next, the task non-Walrasian equilibrium economists set out for themselves was to construct general equilibrium models based on the assumption of [wage] rigidity and displaying involuntary unemployment as viewed by Patinkin, that is, with trade occurring off the labor supply curve. The justification for this endeavor was the belief that rigidity – or, in a lesser form, sluggishness – and involuntary unemployment were facts of life that could not be set aside [and can properly be assumed]…. The third feature is that, while non-Walrasian equilibrium economists found their inspiration in reading Patinkin, Clower, and Leijonhufvud, the line...