Generalizing price-mediated exchange from the marketplace to information-challenged workplaces is the most significant extension of the economic reach of the rational modeling of human behavior since the heyday of the marginalists more than a century ago. It interests me that the GEM Project has substantially advanced the self-described “imperialist agenda” of the Chicago School, already famous for its analytic intrusion into a variety of human endeavors generally thought to be noneconomic in nature.
The important difference between the Chicago School and the GEM Project is the former’s reliance on market-centric modeling and while the latter is organized around a marketplace-workplace synthesis. The second venue turns out to be necessary for macro theory to be stabilization relevant. General-market-equilibrium theorists, including those attached to the Chicago School, who seek to explain important cyclical evidence frequently resort to quietly assuming irrational behavior with respect to wage determination. By contrast, the Project’s microfounding of meaningful wage rigidity allows its evidence-consistent macro modeling to be consistently motivated by rational behavior.
The Chicago-School credo is that people are best understood as acting in their own self-interest and economies are best understood as being populated by such rational actors. George Stigler (1982, pp.11-12) elaborates: “The basis of the credo is simply the fact that an economic actor knows better the environment in which he is acting and the probable consequences of his actions than an outsider, no matter how clever the outsider may be.” Two-venue modeling powerfully extends Stigler’s observation to workplaces restricted by costly, asymmetric information and routinized jobs and, in so doing, champions the Chicago School’s raison d’etre: the aggressive expansion of the reach of rationality in the analysis human activity. Ubiquitous highly specialized, bureaucratic workplaces is surely the School’s most consequential acquisition since the Walrasian revolution.
The acceptance of original Solow/Annable efficiency-wage theory within the corpus of Chicago-school thinking has been long-delayed by EWT theorists’ failure to derive the rational shape of the fundamental Workplace-Exchange Relationship from axiomatic model primitives. (Recall Figures 1.1 and 2.1. in the website’s text.) Now that the Project has properly derived sufficiently nonconvex WER, the integration of marketplace and workplace rational-behavior exchange can move forward to microfound a much more powerful macroeconomics.
Moreover, generalized-exchange modeling better satisfies the other critical, but today usually ignored, Chicago-School characteristic that was emphasized by Milton Friedman (1974, p.11): “In discussions of economic science, ‘Chicago’ stands for an approach that takes seriously the use of economic theory as a tool for analyzing a startlingly wide range of concrete problems, rather than as an abstract mathematical structure of great beauty and little power; for an approach that insists on empirical testing of theoretical generalizations and rejects alike facts without theory and theory without facts.” Simply put, mainstream friction-augmented general-market-equilibrium modeling cannot accommodate crucial facts and is not fit for practical use. By contrast, the Workplace-Marketplace Synthesis easily explains a remarkably broad array of facts and, as a result, uniquely captures the richness of macro behavior in modern economies.
Blog Type: New Keynesians Saint Joseph, Michigan