Despite innovations that appear to break substantially with textbook macro theory, generalized-exchange modeling is best understood as incremental. Its debt to the middle-century intrafirm analysis of the Neoclassical-Revisionist labor economists has been emphasized by this Blog. In his take on what’s fatally missing in the NR literature, Clark Kerr (1988, p.21) anticipated the workplace-equilibrium theory: “Perhaps the most serious problem … was that the Revisionists dealt bit by bit with pieces of the puzzle and never assembled them into an integrated statement, let alone into a model or a consistent theory; and it takes a new theory to replace or change an orthodox theory.”
Kerr’s essay appears in Bruce Kaufman, How Labor Markets Work (1988), my favorite introduction to Neoclassical Revisionist research. In correspondence that followed publication of my 1984 book, Kerr encouraged me to extend that analysis to constructing a rational-behavior workplace-equilibrium theory. I deeply regret being unable to do that while Kerr could have experienced, and helped with, the NR revival.
The second venue of rational exchange. As developed in this Blog, the generalized-exchange theory is surely sufficient to reopen discussion on the proper foundations of macroeconomics. The modern absence of such give-and-take is the principal roadblock to attention being paid to rigorous workplace analysis. So far, the mainstream reaction to the two-venue theory is that it is not wrong. The objection is that it is not needed. This Blog recognizes that friction-augmented general-market equilibrium (FGME) has for some time been aggressively pushed by prominent theorists, perhaps scarred by the post-stagflation macro wars, as settled theory. Research on nonmarket exchange is out of step with that ambition and, no matter how much it explains, dismissed as a waste of time.
NR workplace analysis is no waste of time. Clark Kerr and his colleagues deeply understood labor pricing and use in highly specialized economies. No FGME economist, playing with the market-centric half a deck, has ever come close. Their failure raises critical questions. How can theorists who understand and teach Akerlof’s market for lemons believe that rational on-the-job behavior (OJB) in information-challenged workplaces and its corollary wage rigidities are not worthy lines of inquiry? How can theorists who call themselves Keynesian not accept that exchange generalization, finally solving the great theorist’s keystone problem of mass involuntary job loss, has at least as much merit as ubiquitous search/match modeling that inherently focuses on voluntary joblessness? Why are the many macroeconomists who are frustrated by having fallen down the search/match rabbit-hole resistant to the compact power of rational downward wage rigidity (DWR) and pure wage rent (PWR) to explain the forced job loss that dominates recessions and depressions. Indeed, why aren’t they more generally upset about having no rigorous explanation for the Great Depression?
Readers of this Blog are familiar with the conclusion of the late French theorist Edmond Malinvaud (1977, p.vii) on identifying substantial accomplishments in macro modeling:“…the characteristics of great theoretical achievements [are] clear foundations, consistency with many observed facts, unification of theories which previously appeared as fundamentally distinct.” The analysis of LEV workplace equilibrium and its attendant wage rigidities has demonstrated the GEM model’s clear foundations. It has also demonstrated a remarkable capacity to revive a range of once-important theories, the modern usefulness and interconnectivity of which are today unhappily ignored. The number and quality of the excluded models surely trouble mainstream market-centric theorists – so much good, useful work swept under the rug.
Observed facts. Generalized exchange is most powerfully distinguished from consensus FGME theory by its much greater consistency with the range of relevant evidence. Perhaps most egregiously, market-centric theorists treat as radioactive what is known about profit-seeking human-resource departments that are powerful fixtures of highly specialized firms. They must also ignore the ubiquitous empirical tracks of DWR and PWR, including mass downsizing in depression, other variants of involuntary job loss, and that forced layoffs occur almost wholly in information-challenged workplaces. They ignore evidence produced by routinized jobs, by the role of seniority in layoff/downsizing queues, by the sharply increased interindustry wage dispersion occurring during the stagflation decade, by the downsizing consequences of the 1970’s price-wage-price spiral, by the greatly enhanced explanatory power that results whenever a rational description of wage determination replaces convenient, badly misleading guesswork, and much more.
The advent of generalized-exchange modeling has made mainstream modeling’s misalignment with instability facts especially unacceptable. GEM wage rigidities provide the evidence-consistent rational-behavior LEV channel through which nominal demand disturbances induce same-direction, proportional movement in employment and output. Bedrock causality and location are well beyond the grasp of rational-behavior market-centric thinking.
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