The last two week’s blogs lamented mainstream macroeconomists’ complacency about simply ignoring involuntary unemployment. Some friends of the Project worry about my being intemperate about the profession’s leaders pretending to be stabilization relevant. I think that more outrage, not less, is called for. The profession may need the kind of wake-up anger demonstrated by Albert Rees, a wonderful teacher of mine at Princeton. He got really upset with reputable theorists who, in pursuit of neoclassical versus early-Keynesian business-cycle modeling, would cavalierly substitute voluntary for involuntary joblessness. Al Rees stood out at beginning of that fundamental debate simply because he was an excellent economist who had a conscience. Surely the subset of good economic theorists who also have functioning consciences will become, along with students (featured last week), a potent source of rejection of stabilization-irrelevant mainstream macro theory.
I always thought that Albert Rees knew more about labor pricing and unemployment that any contemporary mainstream theorist. He is credited in the GEM Project as one of the earliest proponents of the necessity of employer refusal to cut wages in any explanation of involuntary job loss. His formidable human capital helped spark a confrontation with Robert Lucas (speaking of formidable human capital) early in the anti-Keynesian revolution. Their quarrel was later misunderstood to turn on rational behavior as a proper guide for useful macro narratives.
The quarrel. Rees refereed the 1969 Lucas-Rapping JPE paper that became foundational in the successful methodological revolution to require the modeling of joblessness to satisfy conditions of continuous market-centric general equilibrium. He (1970, p.308) published a comment in which he did not disguise his disgust: “Though scientific discussion is supposed to be dispassionate, it is hard for one old enough to remember the Great Depression not to regard as monstrous the implication that the unemployment of that period could have been eliminated if only all the unemployed had been more willing to sell apples or to shine shoes.” While Lucas was too clever to engage Rees on the existence of involuntary joblessness, his views (i.e., that the phenomenon is properly ignored by macro theorists) are well known and have been examined in the GEM blog.
A pleasing feature of the GEM Project is its capacity to prevent fights among good economists, peacemaking that is accomplished by reconciling the general decision-rule equilibrium rooted in rational exchange with the existence involuntary job loss that results from nominal demand disturbances. Generalized exchange, surely in itself a good thing, accommodates the rigor of Lucas and the conscience of Rees.
The stabilization-relevant response to Barro’s famous critique cannot be to simply ignore the, albeit difficult, fact that the existence of involuntary job loss requires suppression of wage recontracting. Useful coherent modeling must answer questions that have mattered since before Keynes. Asking how seriously to take Lucas’s labor supply is ultimately asking how to do macroeconomics. Generalized exchange, carefully constructed on axiomatic preferences and technical constraints, uniquely captures the rational suppression of wage recontracting and consequent broad breakdown, in response to nominal disturbances, in market efficiency producing continuous-equilibrium forced job separation. Understanding the rationally frustrated gains from trade requires understanding Rees’s problem of why employers’ interests are damaged by wage cuts. That narrower problem set leads first to the voluminous literature, assembled largely outside the economics academy, on workplace best practices, then to the modeling done by original efficiency-wage theorists, and finally to the bedrock GEM extension of optimal exchange from the marketplace to the workplace. Mainstream macro theorists continue to insufficiently trust the explanatory power of rational behavior to be fully alert to optimizing exchange that occurs outside their marketplace comfort zone.
Robert Lucas postscript. In a 1996 interview with John Cassidy (2010, p.192), Lucas admitted that: “I write down a bunch of equations, and I say this equation has to do with people’s preferences and this equation is a description of the technology. But that doesn’t make it so. Maybe I’m right, maybe I’m wrong. That has to be a matter of evidence.” Maybe that modesty a year after accepting the Nobel Prize was a hint to policymakers not take his macroeconomics too seriously. But his humility is empty without public recognition that the “matter of evidence” is a done deal. The data have, for a long time, clearly showed that his neoclassical labor market is stabilization-irrelevant. Such recognition by the mainstream leadership in the macro academy is needed to help clear the decks for the GEM Project’s superior stabilization analysis. It is what good economists with an inner sense of what is right or wrong, i.e. a conscience, would do.
Blog Type: New Keynesians South of France