February 28, 2016

Going beyond sitcom economics

Comment on Lars Syll on ‘Bernie Sanders and the Verdoorn law’

Blog-Reference and Blog-Reference and Blog-Reference  adapted to context

Both, the neoclassical and the Keynesian approach are known to be worthless because their respective foundational premises are false. Proofs have been given elsewhere.*

Because neither side argues within a formally and empirically consistent theoretical framework, the Friedman—RomerRomer debate is sitcom economics.

What is obviously needed for the evaluation of any political program is the correct employment theory. The general public tends to think that economists have developed this theory over the last centuries. But this has not been the case.

To cut a meticulous formal derivation short, the most elementary version of the correct employment equation is given here. From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the letter rho stands for ratio). An expenditure ratio rhoE>1 indicates credit expansion, a ratio rhoE<1 indicates credit contraction/debt repayment of private households.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export. The equation contains only measurable variables and is testable, so there is no need for the usual clueless filibuster.

Item (i) and (ii) is familiar since Keynes. What is missing in the Keynesian employment multiplier, though, is the ratio rhoF as defined in (iii). This variable embodies the price mechanism. It works such that overall employment increases if the average wage rate W increases relative to average price P and productivity R.

The employment equation says that an increase of investment expenditure or deficit spending increases employment. The multiplier, though, is different from Keynes’s flawed multiplier (2012). The crucial difference consists in rhoF.

Now, the fact of the matter is, that an increase of productivity counteracts the expansive effect of investment or deficit spending. That is to say, if a Verdoorn effect indeed exists, which is an entirely different question, then it keeps employment roughly at the current level (2011). So, the Verdoorn effect does not help, but hinders.

To increase overall employment requires an increase of rhoF and this means that the expansion must be wage driven, i.e., the increase of the wage rate must be such that it overcompensates the retrograde effects of productivity and price increases.

To be sure, the correct employment theory is far beyond the horizon of Friedman, RomerRomer and the blathering rest of sitcom economists.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Increasing Returns and Stability. SSRN Working Paper Series, 1921267: 1–19. URL
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL

* See blog and working papers.
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REPLY to Nanikore on Feb 29

As I said in the post above: “The [employment] equation contains only measurable variables and is testable, so there is no need for the usual clueless filibuster.”

If historians have the periods well documented, all that has to be done is to put the data into the employment equation and to check whether the employment figure comes out correctly. See also the post ‘Prediction does not work? Try retrodiction first

This is how economics as an empirical science works.

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REPLY to Lafayette on Feb 29

There is no need to repeat yourself. As I said in the post above: “The [employment] equation contains only measurable variables and is testable, so there is no need for the usual clueless filibuster.”

All that has to be done is to put the data into the employment equation and to check whether the employment figure comes out correctly. This is how economics as an empirical science works but, of course, this never happened.

Economics is a failed science and you (and Friedman, Romer/Romer, Krugman, etc) are part of it.

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REPLY  to Nanikore on Feb 29

It is pretty obvious that you have no idea how science works.

(i) The first thing to know is that genuine scientists do not predict at all, see ‘Scientists do not predict’. Therefore, your WWII argument is beyond silly.

(ii) Historians have no say in science because they cannot rise above the level of storytelling: “That is why Descartes said that history was not a science — because there were no general laws which could be applied to history.” (Berlin, 2002, p. 76)

(iii) The fact that scientists do not predict the next political or natural disaster is perfectly compatible with making a projection under the IMPLICIT condition that no disaster happens. Every TV watcher understands that the weather forecast for the weekend holds under the IMPLICIT condition that the world is not blown up in the meantime.

(iv) That the world is complex is not such a new insight as you seem to think, and even the dullest Econ 101 student knows by now from J. S. Mill how to deal with it: “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (1874, V.55)

(v) If you had done your homework you would also know this from Walras: “Any order of phenomena, however complicated, may be studied scientifically provided the rule of proceeding from the simple to the complex is always observed.” (2010, p. 211)

(vi) The major problem of economics is not the complexity of the world but the stupidity of economists who can until this day not tell the difference between income and profit: “We know from the history of science that entrenched classificatory schemes and misleading descriptive vocabularies have impeded scientific advance as much or more than the complexities and observational inaccessibility of the subject matter.” (Rosenberg, 1980, p. 114) *

(vii) Is it not curious that economists are deeply convinced that ‘I know that I know nothing’ is a statement humanity needs urgently for enlightenment and must, therefore, be repeated ad nauseam?


References
Berlin, I. (2002). Freedom and Its Betrayal. London: Chatto Windus.
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.
Walras, L. (2010). Elements of Pure Economics. London, New York, NY: Routledge.

* See ‘How the intelligent non-economist can refute every economist hands down


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REPLY  to Lafayette on Feb 29

It is pretty obvious that you have confused yourself into a cul-de-sac.

(i) The first thing to know is that genuine scientists do not predict at all, see ‘Scientists do not predict’.

(ii) Historians have no say in science because they cannot rise above the level of storytelling: “That is why Descartes said that history was not a science — because there were no general laws which could be applied to history.” (Berlin, 2002, p. 76) See also (2014) and the post ‘Prediction does not work? Try retrodiction first’.

(iii) Economics is NOT a science of human behavior but of the behavior of the economic system. See ‘The Science-of-Man fallacy’ and ‘Economics — the fly that cannot see the glass’.

(iv) The major problem of economics is not the complexity of the world or the unpredictability of history but the scientific incompetence of economists who can until this day not tell the difference between income and profit. See ‘How the intelligent non-economist can refute every economist hands down’.

(v) Economics is a failed science because Walrasianism, Keynesianism, Marxianism, Austrianism is provably false. Provably means that wish-wash, filibuster, or blather does not help. Donald Trump has a pertinent message for the representative economist: ‘You are fired!’


References
Berlin, I. (2002). Freedom and Its Betrayal. London: Chatto Windus.
Kakarot-Handtke, E. (2014). The Synthesis of Economic Law, Evolution, and History. SSRN Working Paper Series, 2500696: 1–22. URL