Understanding the Great Recession: Most Troubling Question

UNDERSTANDING THE GREAT RECESSION: MOST TROUBLING QUESTION

Here is the most troubling question about the badly inadequate foundations of the NK macro model. Why didn’t the advent of the GEM Project resolve the debilitating problems associated with the widespread misuse of the market-centric search/match (S/M) theory? Once rational exchange is generalized from the marketplace to the large-establishment-venue (LEV) workplace, deriving meaningful wage rigidity from axiomatic model primitives in the context of continuous general decision-rule equilibrium straight-forward. Macro theory that is simultaneously rational and stabilization-relevant is within easy reach of mainstream theorists, once a couple problems are settled. 

First, macroeconomists must learn about the availability of powerful generalized-exchange modeling. That is the central task of the GEM Project and necessarily takes time. The more difficult second roadblock is the academy’s mainstream gatekeepers who must admit the new approach into active debate and dissemination, an inherently large hurdle for any model class that appears non-incremental. I believe, however, that the characterization of generalized-exchange theory as non-incremental is mistaken. The Project’s workplace-marketplace synthesis is deeply rooted in mainstream literature, especially the work of a once-dominant school of American labor economics. Clark Kerr, John Dunlop, Lloyd Reynolds, and their colleagues carefully modeled, from a neoclassical perspective, rational exchange in LE workplaces. They understood size-separation of firms to be critical, enabling the effective introduction of asymmetric, costly workplace information and routinized jobs into rational-exchange economics. Given the guidance of the close economic modeling of workplace behavior that already exists in the labor literature, mainstream gatekeepers are surely up to the challenge of recognizing the intuitive extension of rational exchange to employee-employer interaction in large firms.

Indeed, given that generalized-exchange modeling delivers the holy grail of macroeconomics, i.e. simultaneous rationality and stabilization-relevance, the second hurdle is what really matters. The power of the GEM model class necessitates significant depreciation of existing mainstream human capital and, even worse, the implicit repudiation of a large chunk of what leading macro theorists have innovated and taught. Among the most prominent examples of the latter is the extraordinary development of labor-search theory in the ill-conceived effort to expand the reach of frictional unemployment to cyclical behavior. Reputational capital is typically the most intractable barrier in intellectual upheavals, no matter how badly the change is needed. If history is our guide, the bulk of the energy and effort needed to reconstruct mainstream macro theory will come from young macroeconomists less burdened with reputational capital. I invite them to join the GEM project.

New Keynesians