March 31, 2015

Going beyond ink-blot association

Comment on J. W. Mason on ‘Causes and Effects of Wage Growth’

Blog-Reference

It is pretty clear that your post lacks an underlying coherent theory. Looking at data without a well-defined theoretical perspective is not different from reading tea leaves or from freely associating about an ink blot. Accordingly, the argument consists of a parade of various popular stories (here five in total, i.e. labor/political, China/robot, Friedman, markup, NAIRU).

Storytelling is the natural mode of communication in political (i.e. proto-scientific) economics. As Hicks once summed up a similar discussion:
“As far as I can make out, there are relevant and important senses in which all these statements are each of them right and each of them wrong.” (1939, p. 184)

Inconclusiveness is a convenient stratagem because “... you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158). Exactly for this reason, it is methodologically unacceptable

In order to get out of this medieval angels-on-a-pinpoint discussion, a theoretical fixpoint is needed that satisfies the criteria of material and formal consistency. To make a long argument (2015; 2014; 2012) short, the correct employment equation for the investment economy is given here.

The equation says that employment L increases with
• investment expenditures I,
• an increasing expenditure ratio rhoE (=C/Y),
• an increasing factor cost ratio rhoF (=W/PR),
under the condition of product market clearing if price P and productivity R in the consumption and investment good industry as well as distributed profit Yd remain unaltered in the period under consideration. A falling average wage rate for the business sector as a whole increases unemployment.

The testable structural employment equation is general; it includes the working of the wage-price mechanism and contains Keynes's argument as a special case. Finally, it holds under inflationary and deflationary conditions.

The testable structural employment equation terminates inconclusive wish-wash and unambiguously determines the relationship of wage rate, price, productivity, aggregate demand, the income distribution, and employment.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hicks, J. R. (1939). Value and Capital. Oxford: Clarendon Press, 2nd edition.
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. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL