Ptolemy-Goldberg Disease

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Modern macroeconomics is suffering through an epidemic of research gone bad. More and more, theorists’ are giving in to Ptolemaic temptations, making consistency with consensus theory the overriding objective of both model-building and interpretation of the evidence. The defense of the micro-coherent market-centric DSGE model class has culminated in what I have named the Ptolemaic Convention, in which mainstream gatekeepers accept without further justification the presumption of market clearing.

Ptolemaic impulses are often teamed with Rube-Goldberg execution, in which complicated or difficult explanations are provided for phenomena that can otherwise be more simply or easily explained. Complexity helps obscure that inadequate explanations are being offered. Goldberg modeling can, for a while, defend human capital invested in theories that increasingly conflict with accumulating evidence. The point deserves emphasis. The dogged effort to make consensus market-centric DSGE theory appear stabilization-relevant has become a wellspring of research that is Ptolemaic in motivation and Goldberg in execution.

A significant modern example of the Ptolemy-Goldberg disease is the ubiquitous labor-market search theory, attributed in its modern Search/Match/Bargain incarnation to Christopher Pissarides (1985), Dale Mortenson (1986), and Peter Diamond (1982). The ubiquitous macro application of that model is little more than an effort to enrich frictional joblessness sufficiently to account for observed cyclicality, defending the troubling implication of the consensus New Neoclassical Synthesis (NNS) that all unemployment is voluntary.    

Voluntary unemployment. Modern S/M/B models are constructed within a general-market-equilibrium framework and, consequently, have no access to meaningful wage rigidity. The GEM Project has demonstrated that microfounded MWR requires the generalization of rational exchange from the marketplace to the workplace. (Chapter 1) Market-centric thinking cannot rationally suppress wage recontracting, which is easily shown to be a necessary condition for the existence of both involuntary job loss and chronic wage rent that rations good jobs. The bottom line is that MWR uniquely motivates the causal link from nominal demand disturbances to forced layoffs. Over-engineered search theory tries to make do with voluntary joblessness, despite the indisputable fact that involuntary job loss has accounted for the lion’s share of rising unemployment during all postwar recessions. Mainstream S/M/B theorists, taking seriously their NNS pledge to work wholly within the micro-coherent market-centric general-equilibrium model class, have no choice. They must proactively ignore what we know about how modern economies work.

Match capital. Most of the new hires in modern, specialized economies is for nonsupervisory, largely routinized jobs, the human capital for which is largely employer-specific and provided via on-the-job training. Substantial idiosyncratic match capital, a key element of S/M/B modeling, badly captures both the hiring process for most employees and the needs of their employers. Intensive information gathering in the matching process is not cost-effective, especially when ubiquitous probationary periods more efficiently generate critical information on absenteeism, other work habits, and productivity. (Chapters 5, 8) Moreover, even if substantial match capital did exist, the GEM Project demonstrates that it would be dominated by the chronic rents already rationally paid in highly specialized large establishments. Finally, how dishonest is it to collectively, and conveniently, forget that those firms post wages, a practice that provides no room for idiosyncratic bargaining? The GEM Project easily explains why wage posting is rational.

Recruitment. The S/M/B model is ultimately about recruitment. We know that unemployment decreases, at least a little bit, as the speed at which the average applicant is processed increases. Some bold S/M/B theorists provide detail on the match process; most prefer to let elaboration on making that sausage remain below the radar. Mainstream causation typically runs from the number of recruiters (Ņ), mediated by their constant productivity (), to new hires (Ň): Ņ(t)=Ň(t)/. An increase in the number of recruiters reduces, via faster processing, both the number of job seekers and the jobless rate. Farmer (2010b) provides an explicit model of the recruitment process, in which firms periodically move significant numbers of employees between jobs in production and recruitment, generating something that looks vaguely like a business cycle. To practitioners, and deep down economists must also know this, recruitment-process centrality does not pass the laugh test. It is complete nonsense that the number of unemployed is determined by the number of recruiters. The capacity of mainstream macro theorists to tolerate nonsense in defense of their market-centric theory is truly astonishing.

Nash bargain. S/M/B modelers’ widespread use of empty-box Nash bargaining is a curious Goldberg exercise that produces labor pricing that is downward flexible at cyclical frequencies. Nash cannot suppress wage recontracting, cannot accommodate involuntary job loss, and creates – by varying the hire-wage for similar jobs – an unmanageable intra-firm wage structure. Why don’t we care that no corporation relies on such wage setting? Not one. More generally, why have theorists been so eager to replace the Early Keynesian labor market restricted by nominal downward wage rigidity, producing involuntary job loss in the circumstances of adverse demand disturbances, with the market-centric DSGE version of the S/M/B labor market that is counter-factually restricted to voluntary joblessness? Early Keynesian problems, while substantial and in need of correcting, are nowhere near as debilitating as the today’s consensus blind alley.

Evidence. Mortenson and Pissarides (1999, p.1172) once asserted that modern labor-market search theory can be “shown to explain well the employment fluctuations observed in the US economy.” That is an astounding claim for a model that has no room for involuntary job loss, the primary engine of employment fluctuations over each and every postwar business cycle. The hard truth is that micro-coherent S/M/B research does not come close to fitting the most important cyclical facts. The model’s prominence results wholly from academic gatekeepers inflicted with the Ptolemy-Goldberg disease.

Blog Type: Wonkish Saint Joseph, Michigan


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