The post inaugurates a new, sure to be fun, GEM-Project parlor game. Each iteration of the amusement reimagines an important innovation in economic theory as if the theorist in question had the generalized-exchange theory to help guide his/her model-building endeavor. The great idea would then be informed by microfounded meaningful wage rigidity (MWR), especially its downward nominal labor-price rigidity over stationary business cycles, its chronic time-varying wage rent, and the long-lagged rational macrodynamic process (rooted in the interaction of wage rent and permanent job loss) that restores wage flexibility. After having good time working through how the profession’s great ideas are substantially enhanced by microfounded MWR (complete with commentary that makes mock of mainstream macro theorists who have abandoned the research topic), we will come away with an ever-improving grasp of the power and consequence of generalizing rational exchange from the marketplace to information-challenged workplaces. The best games are educational.
Each great idea will be chosen by me but suggestions are welcome. Recognizing that the game is new, our first two (Nobel-honored) innovations are selected because they easily and effectively incorporate microfounded MWR: Arthur Lewis’s and Robert Solow’s growth theories.
More about the Game
Introductory definitions. In generalized-exchange macroeconomics, labor productivity (X/H) is more insightfully powerful than the variant used mainstream market-centric, general-equilibrium modeling:
X(t)/H(t)=(Έ(t)/H(t))(X(t)/Έ(t))=Ź(t)(X(t)/Έ(t)).
X denotes output, H is total labor hours at work, Έ measures cooperative labor input that is always in 1-1 technical correspondence with X, and t denotes time. In the GEM theory, Ź(t) by definition equals Έ(t)/H(t). Labor productivity now has two distinct components:
- The technical efficiency of labor (X/Έ) is rooted in capital intensity, input specialization, returns to scale, and broadly defined technical change. Those determinants are familiar from the growth literature that has been accumulating since before Adam Smith.
- The behavioral efficiency of labor (Έ/H) results from rational exchange in workplaces constrained by costly, asymmetric employer-employee information. It is simultaneously determined with the optimizing wage paid. The Ź component of productivity has been shown to be influenced by axiomatic preferences, the structure of workplace information, the nature of jobs, and reference-wage It is the powerful wellspring of continuous-equilibrium nominal wage rigidities, involuntary job loss, and the periodic macro instability that is so costly in specialized economies. In contrast to its importance to practitioners, Ź is always suppressed in NK model-building.
The transformation of labor hours (H) into cooperative input (Έ) and the determinants of trend behavior of X/Έ are elemental economic activity sets that were greatly altered by the Second Industrial Revolution and the advent of large bureaucratic corporations.
Future posts. Next week, that simple analytic framework will be used to extend a helping hand to Sir Arthur Lewis’s two-sector growth model, which many development specialists believe has been, since its inception, our most powerful description of the transition from near-subsistence economies to high-specialization, high-income economies. The great contribution of the GEM model with respect to Sir Arthur’s seminal work is the generalization of his analysis to the macrodynamics of advanced, high-productivity economies.
The following week conducts a similar exercise for the famous Solow neoclassical growth model. The generalization of rational exchange from the marketplace to information-challenged workplaces significantly expands Bob Solow’s macrodynamics to accommodate cyclical as well as trend analysis. The more powerful synthesis is achieved without compromising the neoclassical underpinnings (optimization and equilibrium), of the original formulation and greatly contributes to clearing up damaging confusion on how to interpret the Solow estimating residual.
After the two growth essays, the Blog will periodically provide posts extending a helping hand to a range of great ideas that have marked the development of economic theory. Each will explore how exchange generalization could have enhanced the innovation.
Is the Game Worth the Candle?
A reiteration of a point made in the post two weeks ago is useful here. The most frequent criticism of the GEM Project is that adding a second workplace venue of rational exchange to NK macro modeling would be a lot of work. The effort is condemned as more of an upheaval than an incremental improvement, doing damage to existing NK human capital and hard-won professional reputations. Ultimately, figuring out whether exchange generalization from the marketplace to information-challenged workplaces is worth the effort is what the Helping a Great Economist game is all about. Keeping score on how many of the profession’s great ideas are substantially improved by the GEM analysis builds the case, important innovation by important innovation, that the second venue is worth it.
Blog Type: New Keynesians San Miguel de Allende, Mexico
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