June 6, 2015

Poisoned, hanged, and shot

Comment on ‘Austerity policies — prescribing rat poison for ailing economies’

Blog-Reference  see also Blog-Reference

Amartya Sen asks: “How was it possible, it has to be asked, for the basic Keynesian insights and analyses to be so badly lost in the making of European economic policies that imposed austerity?” (See intro)

The basic Keynesian insight is, of course, for all immediate practical purposes correct. Nevertheless, Keynes's employment theory is indeed not general and misses a crucial point (2015; 2012).

The most elementary version of the correct employment equation reads: here

From this follows:
• An increase of the expenditure ratio rhoE leads to higher employment. An expenditure ratio rhoE>1 indicates credit expansion, a ratio rhoE<1 indicates credit contraction or debt repayment.
• Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
• An increase of the factor cost ratio rhoF leads to higher employment. This implies that a higher wage rate W leads to higher employment. This is, of course, contrary to conventional economic wisdom.

Conventional economic wisdom is, we know this from Keynes, wrong. Here is not the place for a formal proof but the actual graphics from Nick Bunker's post ‘Waiting for healthy U.S. wage growth’ gives intuitive empirical support: here

The correct employment theory tells us that Greece has not only been poisoned but in addition hanged and shot.

In the old days, economics has been called the dismal science. It has now become the lethal science.

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. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL