A Landmark Achievement

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In a recent review, Michael Woodford praised Stephen Marglin’s Raising Keynes: A Twenty-First Century General Theory (2021) as a “landmark achievement” in market-centric macroeconomics. Discounting some hyperbole, I concur. His contribution, i.e., the close analysis of the speed of wage and price out-of-equilibrium adjustments, is indeed praiseworthy. What follows looks more closely at his achievement in the context provided by the generalization of rational exchange from the marketplace to workplaces restricted by asymmetric information. It focuses on labor pricing, which is more integral than product pricing to the interests of the GEM Project – especially including mass involuntary unemployment.

Marglin’s contribution is most praiseworthy in the confines of mainstream friction-augmented general market equilibrium (FGME). Away from those familiar surroundings, Raising Keynes fails to provide state-of-the-art guidance for useful macro model-building. The book suffers from Marglin’s unfamiliarity with nonconvex WERs and other economic tools developed in the Project’s rational-behavior analysis of information-challenged workplaces. Marglin’s modeling is innocent of cost-cutting strategies, seniority, free riders, worker reference standards, pure profit, chronic wage rent, the hold-up problem, and other phenomena rooted in optimization and equilibrium that are featured in the GEM theory’s own modeling of the speed of wage adjustment to cumulating noncyclical weakness in product demand – a more instructive circumstance than market disequilibrium. (Recall the Project’s demonstration that such disequilibrium is a universal characteristic of modern highly specialized economies.) The Marglin analysis of the speed and nature of wage adjustment provides much less useful model-building guidance than does workplace-equilibrium. It is not close.

Marglin’s central equation posits a positive constant (θw) representing the speed of wage adjustment in response to an imbalance between the supply of and demand for labor. The reasonable idea is  that the adjustment takes time. In market-centric analysis, analytic detail of the dynamics at work is limited to rehashing the familiar market frictions produced by search/ matching activities in the labor market. The time-intensive wage adjustment, however sketchy, does the heavy lifting in the Marglin model, replacing the assumption of downward rigid labor pricing in generating involuntary job loss in the circumstances of weakening demand. It is an obviously inadequate substitute – leaving a great deal of GEM analytic detail critical to the processes at work on the table. The difference is consequential. The rational wage rigidity produced in the workplace-marketplace synthesis provides powerful guidance to effective stability policymaking; Marglin’s vague speed-of -wage adjustment analysis does not. 

There is an important point of agreement between the two models: There are no market forces that break highly specialized economies out of depression, most critically characterized by long-term (chronic) unemployment. Aggressive management of aggregate nominal demand is necessary.

There are more points of disagreement:

  • Miglin features the speed of adjustment of product prices and wages. GEM modeling focuses on the prolonged lack of adjustment of LEV wages, resulting in the robust relationship between labor pricing and involuntary job loss in the context of contracting aggregate demand.
  • Marglin downplays (unnecessarily and with harm to his analysis) rational downward wage rigidity and his suppression of profit-seeking wage recontracting as well as the rational analysis of wage givebacks.
  • Marglin is also unaware that two-venue rational wage rigidity is in decision-rule equilibrium, a product of profit- and utility-maximization. As a result, wage reduction is not eligible to be a solution for unemployment.
  • Marglin’s relatively casual dismissal of the significance of rational wage rigidity is fundamentally misaligned with generalized-exchanged macro theory. Here Marglin is simply wrong. Modigliani got it right. Wage rigidity is necessary to engineer the rational suppression of wage recontracting needed for the existence of Keynes’s central issue: mass involuntary unemployment,.     

The rich description of highly specialized economies provided by the workplace-marketplace synthesis has come into focus. Residual rents (Π) are consistent with both optimizing continuous decision-rule equilibrium and factor-income shares that always exhaust the available product. GEM modeling then demonstrates that highly specialized production, worker investment in workplace reference standards, and firm investment in sunk capital are intrinsically related macro phenomena. Nonmarket labor pricing is activated by workplace information asymmetries and job routinization rooted in scale and input specificities, the same circumstances that produce robust productivity gains, economic rents, and hold-up problems. The intertwined phenomena, poorly understood in isolation, are ignored by mainstream market-centric macro theorists. Inattention is rooted in their lack of LEV workplace tools needed to model rational behavior inside highly specialized, bureaucratic firms that became ubiquitous after the Second Industrial Revolution.  

Blog Type: New Keynesianism

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