July 28, 2015

Stop guessing, start thinking

Comment on David Ruccio on ‘The guessing game’

Blog-Reference

The guessing about the effects of minimum wages makes it clear to everyone that economists lack the correct labor market theory or, even worse, the correct theory of the interaction of markets.

The acceptance of the supply-demand-equilibrium depiction by the majority of economics students can be taken as a proof that you can sell whatever green cheese assumption you may dream up to substandard thinkers.

The first task of Heterodoxy is to discard nonentities like utility or equilibrium and to fully replace the supply-demand-cross as the representation of a market (2015b).

The second task is to determine the systemic interaction between the product and the labor market and the key drivers of overall employment (2015a).

After the vertical differentiation of the product and the labor market, the next task is the horizontal differentiation of arbitrary many product and labor markets (2014).

To recall, Keynes's main issue was employment theory and he was quite clear that orthodox employment theory was defective. However, Keynes succeeded only partly, his employment theory is not general either and misses a crucial feature (2012). The most elementary version of the correct employment equation is given here.

From this follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment. This implies that a higher average wage rate W leads to higher employment. This explains the original Phillips curve.
(iv) A price increase is conducive to lower employment. This explains stagflation.

Consisting exclusively of measurable variables, the structural employment equation can be tested. So there is no need to continue the silly guessing game as the main occupation of substandard thinkers.

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. (2014). The Truly General Theory of Employment: How Keynes Could Have Succeeded. SSRN Working Paper Series, 2406891: 1–25. URL
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL