The Great Fact and the GEM Project

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Michael Mandelbaum (2002, p.277) described the Industrial Revolution as “the most influential development in human history since the invention of agriculture ten thousand years ago”. Scholars have divided the economic transformation into two parts. The first part began toward the end of the 18th century and was rooted in the invention of machines driven by steam. The Second Industrial Revolution (SIR) is captured by Alfred Chandler’s (1977, 1992, 1996) insightful analysis. He argued that trend productivity growth was transformed by specialization-based increasing returns associated with the spread of large, hierarchical firms, beginning in North America and Europe, that dates from the middle of the 19th century.

The organization of that now-ubiquitous class of enterprises was triggered by the development of railroad, steamship, telegraph and cable systems which decreased delivery times and uncertainties for large flows of goods through national and international economies. The SIR refers the wave of relatively uncomplex technological innovations that 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 [United States, Britain, Germany] pioneered in the commercialization of new capital-intensive technologies by making the investments and creating the new corporate forms required to fully exploit their profit-making potential.” Chandler (1996) notably points out that, as late as 1840, there were no middle managers in the United States.

The Great Fact

It is remarkably easy to chart a plausible timepath of global living standards (output per capita) over tens of thousands of years. The evidence indicates that it took some 12,000 years (ending around 1000 BC, the time of the Ancient Greeks) for living standards experienced by hunter-gatherers to roughly double. Moreover, near-zero annual progress must have persisted for most of the next three millennia. In early nineteenth-century Britain, the time of Jane Austen’s enduring stories of English manners, the typical Englishman was a farm laborer who consumed some 1500 calories a day – less than modern hunter-gatherer tribes in New Guinea. His material standard of living was little better than earlier experienced by a Roman slave, and the threat of starvation was a fact of life.

Around the middle 19th century, however, living standards began rising rapidly and, in the 20th century, exploded upward. A remarkable thirty-fold global increase was recorded in five generations. Economic activity during the past century and a half, the tiny tip of human experience, became profoundly different from what it had been for thousands of years. That nearly all global progress in living standards has occurred in a single burst that began in the middle-nineteenth century has been named the “Great Fact”.

The evidence becomes especially compelling when coupled with Chandler’s SIR narrative. Over the past one-and-a-half centuries, an increasing and now dominating share of global GDP has been produced in large, bureaucratic firms – the “new corporate forms” nonexistent prior to the second half of the 19th century. The advent of the large corporation and its characteristic scale economies is an essential piece of the “Great Fact”. It is especially interesting to me that macro theorists, to their detriment, never got the message that large establishments are home to optimizing activities that are fundamentally different from what occurs in small firms, making size distribution a necessary part of any model tasked to explain modern economies. The SIR-rooted organization innovations produced a new landscape of technological heterogeneities that had to be accommodated by market economies. Production processes that intensively exploit input specificities, creating complex combinations of scale, high productivity, market rents, workplace information asymmetries, routinization, and the greatly enhanced value of voluntary labor cooperation, have had to coexist in the population of firms with enterprises that are much more simply organized.

The GEM Project

Technological differences are especially consequential when interacting with the only conscious production factor. Employees are the input class capable of recognizing the latitude inherently imperfect information provides for advancing their interests inside the firm. The GEM Project, by generalizing rational exchange from the marketplace to the large-establishment workplace, explicates complications that reduce market-centric modeling to a badly incomplete description of worker pricing and use. In short, the SIR transformation of economic behavior largely occurred inside large corporations, requiring close attention to Chandler’s “new corporate forms” and creating a companion activity set (workplace exchange) that must be modeled and integrated into the mainstream corpus of macro thinking. Generalized-exchange modeling accommodates critical disparities between large and small production establishments, providing macroeconomics an additional class of equilibrium: a rest period in the space of optimizing workplace decision rules.

The Second Industrial Revolution, by introducing large-scale new corporate forms, mandates that effective economic models recognize costly, asymmetric information and routinized jobs. Those constraints direct that most labor hours cannot be rationally priced in the labor market. Rational price-mediated wage determination has to occur inside the large firm.

From that starting point, the GEM Project is able to derive meaningful wage rigidity from axiomatic preferences and technology in the organizing context of continuous general decision-rule equilibrium. MWR rationally suppresses wage recontracting and uniquely microfounds the causality from adverse nominal demand disturbances to involuntary job loss and recognizable business cycles. It is analytically important that the Great Fact, the central event in growth economics, had its genesis in the same SIR reorganization of the production landscape that introduced macro instability into highly specialized economies. Modern cyclicality is rooted in the relatively recent capacity of the interacting demand disturbances and MWR to induce involuntary job loss and recognizable unemployment. It is not surprising that the word “unemployment” first appeared in the Oxford English Dictionary in 1888.

The Project’s generalized-exchange analysis reconstructs macroeconomics to be micro-coherent, stabilization relevant, and accomodative of textbook short- and long-runs. It’s a big deal.

Blog Type: Wonkish San Miguel de Allende, Mexico


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