March 10, 2015

Economists: stop dreaming and waffling and do your scientific homework

Comment on ‘America can be a full-employment economy once again’

Blog-Reference

John Komlos writes:
“Isn’t it strange that full employment has to be a dream, even a quarter millennium after the beginning of our stupendous surge in wealth with the Industrial Revolution? But what is full employment? Well, it’s simple enough, isn’t it? An economy in which there are enough jobs to go around for everyone.”

In a well-functioning market economy all factors, including labor, are fully employed. This is what standard economic theory asserts. Obviously, this is regularly not the case and that means that the theory of employment is empirically refuted.

Being no real scientists economists simply ignore refutation. This is normal operating procedure since time immemorial and more than one methodologist has condemned it.

“In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

This is exactly what we observe: an endless writing and waffling about the natural rate of unemployment.

The empirically testable employment formula for the investment economy is given here.

Employment L depends in the main on investment expenditures I, the expenditure ratio rhoE, and on the price mechanism which is embodied in the factor cost ratio rhoF. If this ratio increases employment increases (all other variables held constant).

The price mechanism, i.e., the factor cost ratio which consists of wage rate, price, and productivity, should regulate itself, such that full employment results under the condition that I and rhoE (= aggregate demand) is given. The fact of the matter is that the price mechanism does not work as the representative economist thinks it works and this has nothing to do with market imperfections, or stickiness, or expectations, or uncertainty (for details see 2014a; 2014b; 2012).

Orthodox employment theory is false and has to be replaced.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014a). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2014b). Towards Full Employment Through Applied Algebra and Counter-Intuitive Behavior. SSRN Working Paper Series, 2456184: 1–25. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL