Helping Great Economists: Clark Kerr, John Dunlop, et al.

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When I began teaching labor economics at MIT in 1969, mainstream thinking in the field was dominated by a loosely organized school of economists who used their neoclassical training to investigate what went on inside large, specialized workplaces. Such information-challenged workplaces spread rapidly in the early 20st century. The GEM Project has named this school the Early Internal-Labor-Market theorists.

A keystone innovation of Early ILM literature is the reference wage (Wń). In the middle 20th-century, numerous on-site studies of workplace exchange found that employees prefer wages that are consistent with interpersonal and intertemporal reference standards that become ingrained (via repeated application) over time, evolving into a mainstay of workplace standards of acceptable treatment. The literary workplace analysis of Clark Kerr, John Dunlop, Richard Lester, Lloyd Reynolds, Arthur Ross, Frederick Harbison, Charles Myers, and others set the stage for the GEM Project’ generalization of rational exchange that microfounded meaningful wage rigidity (MWR) and chronic labor rent.

Original Great Idea

The great insight of the original ILM theorists is that optimizing labor-pricing decision rules, constraints, and mechanisms of exchange in highly specialized workplaces are inherently restricted by costly, asymmetric employer-employee information. They identified rational intra-firm mechanics that differ fundamentally from neoclassical behavior in the marketplace. As noted, they learned that workers resent being treated as a commodity governed by the impersonal interaction of supply and demand. They want, instead, to be taken out of the market. They also learned that workers in highly specialized establishments have sufficient on-the-job latitude to enforce that preference.

Dunlop (1994, p.380) succinctly described the separate-venue modeling by the Early ILM theorists: “The objective changes in the economy – within sectors, in the emergence of large enterprises and workplaces, and in the ideas and arrangements developed to govern and manage these workplaces – made it quite obvious to a new generation of economists in the 1940s, who were exposed in practical terms to labor markets and labor-management-government issues, that conventional (external) labor-market theory was grossly inadequate. It neglected a vast range of activities within the walls of organizations as well as their forms of interaction with exterior markets.”

The hands-on original ILM economists were close to providing an early solution to what has become a persistent, debilitating class of labor-related deficiencies in contemporary macro theory. They uncovered the facts but ultimately failed to construct a coherent theory of rational workplace behavior. As a result, they worked increasingly outside the economic mainstream. Kerr (1988, p.21) recognized the difficulty: “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 et al. never derived a formal generalization of rational price-mediated exchange, but they did set the stage for that innovation by constructing a detailed roadmap to what actually goes on in modern employee-employer interaction.

The GEM Helping Hand.

The absence of an integrated, consistent theory  eventually led to the abandonment of Early ILM thinking by mainstream labor economists. The Project’s helping hand revives the workplace venue of rational exchange pioneered by Kerr et al. GEM innovations in labor pricing and use are rooted in profit- and utility-maximizing behavior in information-challenged workplaces. Rational on-the-job behavior mandates labor pricing that is both downward rigid over stationary business cycles and chronically in excess of market opportunity costs.

Highly specialized workplaces correspond to Kerr’s (1954) “structured” markets, which he argued embody important institutional constraints. (Somewhat later, John Dunlop coined the term “internal labor markets”.) In the structured environment, firm boundaries relative to the market are more expansively drawn, making its workers a noncompeting group. Outsider access to jobs within the establishment is limited to specific ports of entry, typically the least desirable positions; existing employees have first claim on better jobs via promotion or transfer. Significant training occurs on the job as part of the general process of workplace socialization, featuring the acquisition of formal and informal firm-specific human capital and increasing the cost of labor turnover to the firm. Due-process rules, governing on-the-job interaction between employees and management, are characteristic of structured workplaces and “effectuate standards of equity that a competitive market cannot or does not respect.” Kerr emphasized that his “structured” and “unstructured” (market) wage-determination processes describe fundamentally different activity sets.

Is the Game Worth the Candle?

Early internal-labor-market theorists (Clark Kerr, John Dunlop, and their colleagues) ambitiously modeled, guided by their neoclassical economic training, employee-employer behavior in large, specialized workplaces. Their research remains central to proper macroeconomics. But their failure to root the modeling in optimization and equilibrium, the fundamental tenets of economic theory, resulted in being excluded from contemporary mainstream debate on the proper nature of macroeconomics. That the GEM helping hand should allow the important work of Kerr, Dunlop, et al. back into the conversation is surely worth the candle.

Blog Type: New Keynesians Saint Joseph, Michigan

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  1. gary lammert May 31, 2020

    The Observational and Empirical Case for Observational Quantitative Asset Debt Growth and Decay Saturation Fractal Macroeconomics as a Science akin to physics, chemistry, and biology…

    The data that follows offsets the immediately assumed possibility of quackery.

    From the December 2018 Composite Equity nadir valuation low: x/2-2.5x/2-2.5x/1.5y :: 11/26/26/15 of 16 weeks : on a daily basis nonlinearity can be observed between the 22nd and 23rd week of the second 26 week fractal. (see main page regarding second fractal nonlinearity)
    This correlates to a 3/7/7/4 of 5 month fractal series of similar x/2-2.5x/2-2.5x/1.5-1.6y proprotionality. On a daily basis for the CRB, the fractal progression is 5/11/10/4 of 7 days. A 1987 like collapse is expected over the next three trading days.
    This web site makes the observation that the asset debt economic system is mechanistic and quantitative in its nature of its hourly, daily, weekly, monthly, and yearly composite asset class valuations following simple growth and decay fractal valuation patterns so precise that ‘the mathematical laws’ and ‘self assembly’ of asset valuation growth and decay are similar to physics and chemistry and biology.
    Asset Debt Saturation Macroeconomics likewise has the quality and property of a science.
    The simple ever recurring and easily observed quantitative fractal ‘mathematical laws’ determined by the nadir asset valuation are:(y connotes final valuation low for the individual fractal series pattern)
    and x/2-2.5x/1.5 to 2.5y
    (the second fractal length of 2-2.5x determines the ideal base first fractal length; the third fractal is a 1.5 multiple of this ideal base.)
    Qualitatively, the facilitated creation of excessive debt leads to overvaluation, overproduction, and over-ownership of assets. The system is self correcting with liquidation of bad debt and a lower re-equilibrium of asset valuations with a lower total denominator of composite system wealth near the nadir of bad debt liquidation and lower asset composite valuation.
    At any given time period, all individual asset valuations are denominated in first time derivative of the composite total worth of all other asset valuations.
    The fractal mathematical laws of the composite asset valuations of the asset debt system are elegantly simple.
    While global central banks’ interventions can cause observational rises of subfractal components, the fractal grouping patterns are still easily observable.
    In fact these observational patterns show the direct effect of central bank intervention.
    The US Hegemonic Asset Debt Macroeconomic grand Fractal series had an initiating fractal base of about 18 years near the initiation of its constitution in 1790.
    The First Fractal started in 1807-8 and ended after the panic of 1837 in 1842-43 for a base fractal of 36 years. Its 90 year Second Fractal ended with nadir composite equity valuations in 1932. The US 89 year Third Fractal composed of two subfractal series of 51 years and 39 years and is expected to end very shortly (three trading days) in 2020. A fourth fractal is expected to end in 2074. (1.5y) The US 54 year fourth fractal will be supported with necessary debt creation.

    A Look at the 1982 second subfractal series: 9/20/12 year :: x/2-2.5x/1.5y concluding US 1932 third fractal series:
    The monthly fractal progression of US composite Equities from the low in 2003 was made of two fractal series: 6/13/15/10 months :: x/2-2.5x/2.5x/1.6y and a decay fractal of x/2-2.5x/1.5y : 9/20/12 months: The ideal base of a second 20 month fractal is 8 months with 1.5 times 8 months yielding a 12 month third fractal.
    What was the composite equity and CRB valuation fractal effect of the global Central Bank intervention on the 2008-2009 collapse? The 2/5/5/3 month fractal series composing the 12 month third decay fractal begins a valuation climb in March 2009 at the beginning of its third 5 month fractal.
    Note the x/2-2.5x/1.5y fractal similarity of the 1982 9/20/12 year fractal series (completing the 89 year US Third Fractal) to the 9/20/12 month fractal series completing the second 20 year subfractal series which started in 1990.
    Sans global central Bank coordinated intervention, the expected unassisted starting point for the observed March 2009 composite nadir was at the end of the 2/5/5/3 month natural self assembly fractal series or September 2009
    From the expected September 2009 low (unassisted by Central Bank assumption of toxic debt and collaborative interCentral bank money printing and interbank borrowing), the two monthly subfractal series – 2/5/4/3 and 3/7/8 months :: x/2.5x/2x/1.5y and x/2-2.5x/2-2.5y, respectively – make up a 26 month base first fractal sequence of the final 12 year third subfractal.
    The final 12 year third fractal sequence of the 1982 9/20/12 year :: x/2-2.5x/1.5y decay fractal series (this second fractal subseries follow a 1932 10-11/21/21-22 51 year first fractal subseries ) is composed of 26/53/52 of 53 months. (x/2-2.5x/2-2.5y)
    The second 53 month subfractal of the 26/53/52 of 53 series is composed of two fractal subseries 3/7/6 months and 8/17/17 months (x/2-2.5x/2-2.5y – both subseries)
    The third 52 of 53 month series is composed of 10/26/18 of 19 months. The integrative final series is 10/25/20 months)
    The first 10 month fractal is composed of a 2/4/4/3 month series; the second 26 month fractal is composed of a 5/11/11 month series, and the third 19 month series a 3/7/7/4 of 5 months series.
    The patterned asset composite valuation activity of the Asset Debt macroeconomic system is directly observational and is indisputable. What causes the ideal self assembly of mathematically precise fractal asset valuation growth and decay patterns?
    What causes the mathematical laws and derived numerical constants of physics and the naturally occurring self assembly of subatomic particles, atomic particles, molecules, plant and animal embryological development, stars, solar systems, galaxies and the universe?
    The observational self assembly highly patterned fractals defining the counterbalancing growth and decay of valuations of composite assets composing the asset debt macroeconomic system confers upon that macroeconomic system the properties of a science.