On the Neoclassical Tradition in Labor Economics

In a recent article George Boyer and Robert Smith describe the development of the neoclassical tradition in labor economics. In this paper I reexamine this subject and provide an alternative account of the evolution of thought in the field. I argue Boyer and Smith incorrectly define both the institutional and neoclassical approaches to labor market analysis. The essence of institutional economics is not a fact-gathering, descriptive approach, but a paradigm built on property rights, a behavioral model of the human agent, and theories of imperfect competition. In the case of the neoclassical paradigm, they err by defining it too broadly, making it largely coterminous with constrained optimization. What they refer to as neoclassical labor economics is actually divided into two separate theoretical approaches, one a market-clearing approach associated with the modern Chicago School and the second a nonmarket-clearing approach associated with economists of what I refer to as the "Cambridge Group." and the labor economists affiliated with the Cambridge Group are all within a common stream of economic thought built around Keynesian economics at the macro level and various non-clearing market models at the micro level. What Boyer and Smith call "modern labor economics" is, by way of contrast, associated with the Chicago/market-clearing approach. "The commodity theory of labor is not false, it is incomplete." John R. Commons (1919: 17). "It does not follow from any of this that the ordinary forces of supply and demand are irrelevant to the labor market, or that we can do without the textbook apparatus altogether. It only follows that they are incomplete and need completing." Robert Solow (1990: 22). "What we need is a theory which will take account of both sorts of markets, a theory in which both fixprice and flexprice markets have a place." John R. Hicks (1974: 24) In a recent issue George Boyer and Robert Smith (2000) described the evolution of thought in the field of labor economics and, in particular, the ascendance of the neoclassical paradigm and decline of the institutional. Since this topic has received only modest attention to date, their article represents a valuable addition to the literature. Personally, I also found it informative and insightful in a number of respects. There are, however, also some deeply problematic issues in their article pertaining to both fact and interpretation. In this essay I reexamine the 20 th century evolution of thought in labor economics with two purposes …