March 11, 2016

Wage, profit, and the counter-intuitive labor market

Comment on David Ruccio on ‘How the reserve army works’

Blog-Reference

The reserve army theory is false because it rests on a false profit theory. The commonsensers’ profit theory says that profit goes up when wages go down. This is true for a single firm. And here is where the error/mistake/blunder comes in: what is true for a single firm is NOT true for the economy as as whole. In methodological terms, the reserve army theory is a fallacy of composition (2014a). In colloquial terms, the reserve army theory falls into the category of flat earth theories which are approximately true for a small part of the picture but false for the full picture.

Until this day, the representative economist has not realized that the overall SYSTEMIC interdependencies establish a POSITIVE feedback loop between the (aggregate) product and the (aggregate) labor market, thus that employment INCREASES when the (average) wage rate INCREASES and vice versa. This explains why wage rate and employment decline in tandem in the exhibits above (See intro).

The formally and empirically correct employment and profit theory is incorporated in two equations.*

The most elementary version of the correct employment equation is given here. Legend: L total employment, I investment expenditure, W wage rate, P price, R, productivity, rhoE expenditure ratio, rhoF factor cost ratio, sub c consumption good sector, sub i investment good sector.

The correct profit equation reads: Qm = Yd+I-Sm (2014b, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure.

These two formulas are testable, so there is no need for further pointless filibustering about pseudo-explanations.

Among the numerous low-IQ economic theories, the orthodox labor market theory (wage down―profit up―employment up and vice versa) is the most idiotic and causes the most social devastations when applied as economic policy.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014a). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

* For details see the post ‘Have data, lack theory’ and the working papers on SSRN, in particular ‘Essentials of Constructive Heterodoxy: Employment’.