The conversation surrounding “Zero Marginal Product” workers has been interesting. Alex Tabarrok offers an able summary and a few first-cut thoughts that I find congenial.

As for Paul Krugman’s thoughts on the same issue, I found his last point particularly interesting:

Instability of the business hierarchy: One last point may be that firms don’t seem to retain their position at the top as long as they used to; there seems to be much more thrashing in the business hierarchy. GM ruled the roost for many decades; these days one decade’s Goliath is another’s pitiful helpless giant (see Microsoft). And if firms know that their position is temporary, they may be less inclined to keep workers during a slump in an attempt to retain long-term loyalty.

This reminded me of Ashwin Parameswaran’s very different explanation, as elaborated in his critique of what he sees as our brittle “cronyist economy”:

Due to insufficient exploratory innovation, a crony capitalist economy is not diverse enough. But this does not imply that the system is fragile either at firm/micro level or at the level of the macroeconomy. In the absence of any risk of being displaced by new entrants, incumbent firms can simply maintain significant financial slack. If incumbents do maintain significant financial slack, sustainable full employment is impossible almost by definition. However, full employment can be achieved temporarily in two ways: Either incumbent corporates can gradually give up their financial slack and lever up as the period of stability extends as Minsky’s Financial Instability Hypothesis (FIH) would predict, or the household or government sector can lever up to compensate for the slack held by the corporate sector. …
Most developed economies went down the route of increased household and corporate leverage with the process aided and abetted by monetary and regulatory policy. But it is instructive that developing economies such as India faced exactly the same problem in their “crony socialist” days. In keeping with its ideological leanings pre-1990, India tackled the unemployment problem via increased government spending. Whatever the chosen solution, full employment is unsustainable in the long run unless the core problem of cronyism is tackled.

For Parameswaran, this post-cronyist economy would involve “much more thrashing in the business hierarchy”:

Most exploratory investments are destined to fail as are most firms, sooner or later. Yetdue to the diversity of firm-level strategies, the macroeconomy of vulnerable firms is incredibly resilient. At the same time, the transfer of wealth from incumbent corporates to the household sector via reduced corporate slack and increased investment means that sustainable full employment can be achieved without undue leverage. The only question is whether we can break out of the Olsonian special interest trap without having to suffer a systemic collapse in the process.

I wonder if Krugman and Parameswaran see things differently because Krugman is focusing on the “real economy,” where something like a macroeconomy of vulnerable firms seems to prevail, at least in some sectors, while Parameswaran’s mental model is dominated by the major financial institutions.