Conumbrum Economics III

Generalized-Exchange Macroeconomics, the e-book featured on this website, has two objectives that unravel conundrum economics. First is to properly microfound meaningful wage rigidity, which it shows to be essential to practical, rational-behavior macro theory. MWR was the elusive holy grail of Early Keynesian labor research; and, despite modern inattention, remains crucially important to useful macro theory. It is good news that the book has finally made MWR consistent with optimizing behavior organized by continuous general decision-rule equilibrium. Inclusion of GEM research in mainstream debate and dissemination provides consensus thinking a path to stabilization-policy relevance as well as an enriched understanding of economic growth. It is a big deal

Second, the book systematically works through the powerful implications of MWR, largely enabled by its twin derivations of downward labor-price rigidity and chronic wage rent. The far-reaching exercise demonstrates MWR criticality in understanding highly specialized economies that feature workplaces inherently restricted by costly, asymmetric information. Centrally supporting the claim of consequence begins with the fundamental role of MWR in the rational-behavior causality from nominal demand disturbances to involuntary job loss and proportional movements in total output, employment, and income.

The power of the two-venue reworking of macro theory may be most serendipitous in its capacity to revive insightful theories that, as a result of their poor fit in the mainstream market-centric framework, are largely ignored. Sir Arthur Lewis’s two-venue growth theory that assigns a central role to labor flows between low- and high-productivity sectors is an obvious example. The fixed-wage general-equilibrium microfounding of Keynesian consumption, elegantly modeled by Robert Barro and Hershel Grossman, is another critical revival. Generalized-exchange modeling makes the primacy of income, and the associated diminution of interest rates, in consumption spending consistent with continuous general decision-rule equilibrium, correcting a longstanding misalignment of mainstream theory with well-known facts.

David Ricardo’s residual-surplus approach to factor-income distribution, reinterpreted for highly specialized economies by Michael Jensen (2000), is also restored to prominence in modern modeling, further helping to recalibrate the outsized consensus role of interest rates. Replacing the textbook market-centric analysis of Wicksteed and Wicksell allows pure profit to assume primacy in investment decisions after its long, embarrassing banishment from macro thinking. Finally, in this incomplete introductory list, is the revival of the large-firm workplace modeling by the original Internal-Labor-Market (ILM) theorists who dominated American labor economics in the middle 20^th-century. The work of Clark Kerr, John Dunlop, and their colleagues, ignored in modern macroeconomics, provides a powerful roadmap for the intuitive generalization of rational exchange from the marketplace to the highly specialized workplace. Using their neoclassical training, they pioneered the economic analysis of workplace behavior in the circumstances of costly, asymmetric information.

Involuntary job loss is at the heart of the mainstream stabilization-theory conundrum. For policymakers, the socioeconomic problems of employment and income loss are central to business-cycle pathology. The e-book shows, contrary to many critics of modern modeling, that limitations on the NK capacity to accommodate actual joblessness do not result from modeling rules of engagement that mandate rationality. The germane problem is much less profound, grounded in the arbitrary restriction of optimizing exchange to the marketplace, and is more readily corrected. Solving that fundamental problem microfounds intuitive stabilization policy while preserving the formal economic method rooted in optimization and equilibrium.

Blog Type: New Keynesian