The last issue of the American Economic Review

The last issue of the American Economic Review caught my eye, because it included the speeches held by the two most recent recipients of the Prize of the Bank of Sweden in memory of Alfred Nobel. I read through the paper of Bengt Holmström on „Pay for Performance and Beyond“, in which he shows why a fuller consideration of the incentive structure of employees (or more generally: agents) often leads to the conclusion that monetary incentives are more harmful than conventionally thought. I think that two aspects of this contribution are especially interesting. First, it shows how a fuller appreciation of context - Holmström speaks, in a very abstract manner, to be sure, of issues like multitasking, differences in the measurability of outcomes, organizational rules, job design, workplace organization etc. - often leads to the inversion of the implications of standard textbook models, or in the words of Holmström:

„This explains why bringing the market inside the firm is such a misguided idea, something I failed to understand [earlier] and advocates of market-like incentives in firms seem to miss today.“ (p. 1774)

Second, we observe that the standard principal-agent model still serves a the prime reference model for understanding contractual relationships. Holmström’s discussion is fully contained within this setup - in effect, he defines all the different aspects of a workplace, like job-content or diversity of tasks, as forces shaping an incentive-structure. Hence, what we observe is the resilience of a certain theoretical perspective focusing on scarcity and optimizing rationality and, as a consequence, Holmström never comes to the question whether an alternative perspective on such relationships - as applied in sociology, management studies and heterodox economics - might probably be superior for studying the subtleties he introduces into the bargaining process.

Aside from this casual observation, this Newsletter contains, again, a substantial number of interesting and noteworthy books, which has become the usual case for our (northern-hemisphere) summer issues. However, aside from seasonal cycles I have the general impression that the number of publications in heterodox economics - especially books, but also journals - is expanding overproportionally (also think of this one here!). If this conjecture holds true, it would signify, against all odds, the healthy state of Heterodox Economics.

All the best & see you soon,

Jakob