On the Structure of Macro Theories

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The impetus for this post comes from two good economists, David Colander and Harry Landreth (1996, p.13): “… it is useful to separate out a deep structure of a theory and what might be called a surface structure. The deep structure is the formal complex core of theory. The surface structure is the simple model or vision conveyed of that complex core to those who do not fully understand the complex theoretical core itself. Keynes’s revolution was a surface revolution with an underdeveloped complex core. Classical economics had a much more developed complex [optimizing general-market-equilibrium] core, but a simple surface structure. A number of classical economists recognized the simple surface structure of classical economics was misleading, but their efforts concentrated on modifying the complex core. Their reaction to Keynes’s work is best seen in this light. It was a surface revolution that left many issues of the core untouched. Young economists had yet to be imbued with the complex core of classical economics; they were more interested in surface issues, and to them the Keynesian revolution was a true revolution.”

The young Paul Samuelson, precocious in his comprehension of deep-structure market-centric general-equilibrium modeling, initially resisted The General Theory, worrying about its absent microfoundations (especially for wage rigidity). He was eventually won over by the non-microfounded Keynesian surface structure by its much greater descriptive claim on actual economic instability and, therefore, its far superior macro-policy relevancy. Economic performance and stabilization policymaking benefited from his and other Early Keynesians’ interim decision to stop worrying about deep-structure labor-pricing. Their incoherent surface modeling was not expected to, and did not, endure. The surface-structure nature of Samuelson’s Neoclassical Synthesis ultimately led (in an uglier transition than anticipated) to its demise as a dominant macroeconomic theory.

In that context, the GEM Blog has drawn attention to the damage caused by the academy’s continued pushing aside the generalization of price-mediated exchange. The innovation in itself must be a good thing, eliminating arbitrary, powerful restrictions on the matching of preferences and opportunities. Even more critically, exchange generalization fundamentally advances the development of stabilization-relevant theory by reconciling coherent deep-structure rational-behavior modeling and much of the Early Keynesian practical analysis. During much of the post-WWII period, the surface-structure message of Samuelson’s Neoclassical-Synthesis does a relatively good job explaining fluctuations actually observed in highly specialized economies. Given the importance and rocky history of macroeconomics, that Keynesian achievement matters.

Moreover, the Project’s generalization of rational exchange has not been restricted to wage determination. Most notably, it uses its powerful deep structure to microfound two especially important Keynesian surface-structure models: consumption spending principally driven by income and investment largely determined by the expectation of pure profit. The former required the revival of the Barro-Grossman fixed-wage general-equilibrium analysis, and the latter needed the demonstration of the fundamental irrationality of the textbook Wicksell-Wicksteed factor-income theory. (I am a bit sad about being mean to Wicksell, a truly interesting, admirable economist.)

It is particularly significant that the GEM Project’s task of reconciling elegant deep-structure macroeconomics with policy-useful, more readily understandable surface theory is a long way from being finished. Citing some examples, the generalized-exchange theory can be extended to continuous-equilibrium intra-corporate product pricing, investment finance, product development, and a more comprehensive look at employer/employee arrangements that have been identified in the research agendas of new institutionalists (pioneered by Oliver Williamson), organizational theorists (Herbert Simon), personnel economics (Edward Lazear), modern finance (Eugene Fama), workplace labor economists (Clark Kerr, John Dunlop, et al.) and Arthur Okun’s intra-firm modeling. The gathering extensions of intra-firm rational choice will have important consequences for macroeconomics and informed policymaking, although none will prove as influential as the microfounding of meaningful wage rigidity and the exploration of its application.

Blog Type: Wonkish Chicago, Illinois

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