Blog-Reference and Blog-Reference

Economics is a failed/fake science or what Feynman called a cargo cult science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit ― the pivotal concept of the subject matter ― wrong. The pluralism of provably false theories is evidence for the representative economist’s scientific incompetence.

After 200+ years, there is still no such thing as a valid profit-, employment-, or inflation they, there is always a whole bunch of theories/models and everyone is free to pick the one that suits him politically. This guarantees that economics remains what it is since the founding fathers: a brain-dead talk-show.

Brian Romanchuk gives a vivid description of how economists produce their proto-scientific junk: “So imagine that your boss tells you to come up with ‘an inflation model’ for some country (which is a pretty common demand for employees of central banks or investment firms). According to post-Keynesian theory, the ‘correct’ answer is to respond that inflation is an historical accident. However, I must point out that the theoretically correct answer is also an extremely career-limiting one, so any employee stuck in that particular situation needs to figure out what their superiors want to see, and give them exactly that (even if the model stinks).”

This characterization of the representative economist fits the definition of a pseudo-inquirer: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack)

There is no use to untangle the multiple idiocies in Brian Romanchuk’s treatment of inflation theory. What has to be done is to replace his blather by the scientifically correct approach.

In order to go back to the basics, the elementary production-consumption economy is for a start clearly defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (profit/loss Qm≡C−Yw, saving/dissaving Sm≡Yw−C).

Money is needed by the business sector to pay the workers who receive the wage income Yw per period. The workers spend C per period. Given the two conditions, the market clearing price is derived for a start as P=W/R (i). So, the macroeconomic price P is determined by the wage rate W, which has to be fixed as a numéraire, and the productivity R.

The average stock of transaction money follows for a start as M=kYw, with k determined by the payment pattern. In other words, the quantity of money M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by the central bank. This, to begin with, kills the commonplace Quantity Theory of inflation.#1, #2

The market clearing price is given in the general case with the macroeconomic Law of Supply and Demand P = ρ

_{E}W⁄R (ii), with ρ

_{E}≡C/Yw.#3 An expenditure ratio ρ

_{E}greater than 1 indicates credit expansion = dissaving, a ratio ρ

_{E}less than 1 the opposite. In the initial period ρ

_{E}=1, i.e. the household sector’s budget is balanced. The ratio ρ

_{E}establishes the link between the product market and the money/capital market.

Now we have deficit spending, i.e. ρ

_{E}greater 1, yields a price hike. If deficit spending is repeated period after period, the price remains on the elevated level but there is NO inflation. No matter how long the household sector’s debt increases, there is NO accelerated price increase. The same holds for the government sector.#4

The macroeconomic Law of Supply and Demand makes it clear that inflation only occurs if the wage rate W increases in successive periods faster than productivity R. This can happen at ANY employment level. It is NOT a precondition that employment is close to the capacity limit. This is merely a false interpretation of the Phillips curve.#5

The explanation for the fact that inflation in the USA is since some time below the FED’s target value of 2 percent is that the rate of change of the average wage rate has been lower than the rate of change of productivity. Things become a bit more complex, of course, when foreign trade, investment etcetera is taken into account. This does not change the fact that the core of inflation theory is given with eq. (ii). This tiny equation fully replaces Brian Romanchuk’s gigantic roll of proto-scientific toilet paper.

Egmont Kakarot-Handtke

#1 Inflation: back to basics

#2 Attention: there are THREE types of inflation

#3 Wikimedia, Macroeconomic Law of Supply and Demand

#4 MMT was right all along: Gov-Deficits do NOT cause inflation

#5 NAIRU, wage-led growth, and Samuelson's Dyscalculia