Passing Out Nobels

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Year-end is traditionally the time to reward superior performance. In that spirit, this post uses the lens provided by the GEM Project to honor theorists whose work greatly improves the capacity of macroeconomics to explain mass market failure and identify effective remedies. Ought-to-be Nobel Prizes, the case for which has been made clear by generalized-exchange analysis, are passed out to deserving scholars.

Awarding economics Nobels, since the practice began in the 1970s, has been most clear-cut when recognizing fundamental revolutions in the development of the field. Of course, doing so has been restricted by the limit on eligibility to living economists. Sufficiently recent upheavals in macro thought, the interest of the GEM Blog, have featured Early Keynesianism (elaborating and improving on the ideas in The General Theory, especially its focus on mass involuntary job loss), imperfect information (signaled by the prominence of the path-breaking book edited by Phelps, Microeconomic Foundations of Employment and Inflation Theory 1970), rational expectations rooted in the powerful contributions of Lucas, real business cycles that emphasize the rigorous application general market equilibrium to explaining macro instability, and search/ match theory grounded in the attempt to explain some degree of Keynesian joblessness via the close examination of frictional unemployment that inherently attends labor-market activities. Search/match pioneers  include scholars who have most shaped today’s mainstream New Keynesian modeling. In the aftermath of the widespread rejection of Early Keynesianism for being too casual about optimization and equilibrium. New Keynesians coalesced around combining various critiques into a New Neoclassical Synthesis that became the analytical framework used in graduate schools today.

Think about those fundamental revolutions relative to the contribution of the GEM Project’s generalization of rational exchange from the marketplace to workplaces restricted by asymmetric employer-employee information. That modeling has been shown to explain, consistent with optimization and equilibrium, an extraordinary range of previously unexplained macro facts, centrally including the rational existence of involuntary job loss (both temporary layoffs in recession and permanent job downsizing in depression) in response to adverse nominal demand disturbances. the location of forced job loss in firms restricted by information-challenged workplaces, and the rational existence of chronic wage rent paid by the same highly specialized establishments.  Nobels should eventually be forthcoming for significantly contributing to the generalized-exchange revolution. It is interesting to speculate about who is most in line for such recognition. Here are some of my candidates.

Truman Bewley’s (1999) critical work on answering the central instability question leads off. Why do firms rationally resist cutting nominal wages when unemployment is rising? He undertook the necessary task of carefully asking a large number of employers that question. It cannot be ignored  that answers closely aligned to the Project’s workplace analysis, rejecting market-centric predictions. Bewley’s role in the GEM revolution is akin to Rosalind Franklin’s X-ray crystallography Photograph 51 that revealed the double-helix structure of DNA and the genes contained inside, inspiring Watson and Crick.  

Lawrence Katz and Lawrence Summers (1989) conducted the most careful empirical analysis of wage rent. Given that mainstream New Keynesian market-centric analysis cannot accommodate their results documenting the existence and characteristics of wage rigidity, their work languished and sunk into obscurity. The Project revives the fundamental wage-rent evidence, moving it to the forefront of relevant macro analysis. It is compares favorably with most Nobel-honored research.

John Harris and Michael Todaro (1970) insightfully modeled  rational labor flows that support the coexistence of a high- and low-wage sectors in early-stage developing economies. Their work provided important elaboration for Arthur Lewis’ powerful two-sector growth theory. GEM modeling generalizes the H&T contribution to highly specialized economies that are inherently segmented into firms paying market wages and those paying wage rents. Their model’s critical role in understanding the behavior of labor flows in modern circumstances is Nobel material.

Robert Barro (1971) coauthored with the deceased Hershel Grossman a once-famous and still insightful analysis of Keynesian consumption that was impeccably derived except for their reliance on the assumption of wage rigidity. Anticipating the New Neoclassical Synthesis, B&G quickly apologized for their sin and did not object when the analysis was pushed into obscurity. With the GEM microfounding of wage rigidity, Barro’s modeling is restored to its proper centrality in understanding consumption and deserves a belated Nobel.

Michael Jensen’s (2000) residual-claims factor-income distribution model becomes, given GEM microfounded wage rigidities. the distribution model uniquely consistent with rational behavior and the relevant evidence. It is surely Nobel-worthy.

Peter Doeringer and Michael Piore (1972), both students of the estimable John Dunlop, did yeoman work in pulling together a good deal of the intrafirm economic analysis of Dunlap, Clark Kerr, Lloyd Reynolds, Richard Lester, Chales Myers, Frederick Harbison, Arthur Ross, and other Neoclassical Revisionists who motivated the GEM Project’s rigorous rational-behavior modeling of information-challenged workplaces. Given that Kerr and his colleagues are not eligible for Nobels, honoring D&P would be a good thing.  

.Alfred Chandler’s most deserving living associate in developing his analysis of the Second Industrial Revolution (SIR), explaining how trend productivity growth was transformed by increasing returns associated with the spread of large, bureaucratic firms, dating from the late 1800s. The new corporate firms were enabled by creation of railroad, steamship, telegraph and cable systems, reducing delivery times and uncertainties for large flows of goods through national and international economies. The wave of uncomplex technological innovations that accompanied the large-scale reorganization of industry exploited the potential for high-volume, high-speed production. From Chandler et al. (1997, pp.12-13, italics added): “Entrepreneurs and firms in these nations [U.S., Britain, Germany] pioneered the commercialization of new capital-intensive technologies by making the investments and creating the new corporate forms requiredto fully exploit their profit-making potential.” (Alfred Chandler, Franco Amatori, and Takashi Hikino, Big Business and the Wealth of Nations, Cambridge University Press, 1997). That SIR modeling is a crucial missing link between mainstream macro theory and evidence-consistency and deeply deserves greater recognition.

One or more as yet unknown macro theorists who lead the profession in figuring out how to effectively popularize the generalized-exchange theory, thereby generally providing the economic tools needed to root stabilization-relevant macroeconomics in the neoclassical tenets of optimization and general equilibrium while being consistent with the wide range of available evidence.

Blog Type: Speculative

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