November 4, 2016

How economists murdered the economy and got away with it

Comment on Barkley Rosser on ‘The Biggest Disjuncture Ever Between Public Opinion And Professional Economists?’


I am not going to defend Mr. Trump’s economic policy announcements nor his choice of advisers. I have argued above that economists have no mandate to dabble in politics because (i) this violates the principle of separation of politics and science, and (ii), economists have no true economic theory and are therefore a serious hazard for economic policy in general.

The short proof goes as follows. The most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm and is defined by these three OBJECTIVE axioms:
A1. Yw=WL wage income Yw is equal to wage rate W times working hours L,
A2. O=RL output O is equal to productivity R times working hours L,
A3. C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

The investment good sector comes in with the second step. So, what we have with A1/A3 is the pure consumption economy as the most elementary economic configuration.

From these elementary, objective, transparent and intuitively convincing premises follows the BASIC version of the employment equation which is shown on Wikimedia. This equation says inter alia: An increase of the overall 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. All these details are not needed at the moment.

The factor cost ratio rhoF as defined above embodies the price mechanism which works very different from what is usually assumed. As a matter of fact, overall employment (in the world economy or a closed national economy) INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

This follows in an unbroken chain of transparent logical steps from A1/A3. The employment equation consists alone of measurable variables and is readily testable.

However, what professional economists assert since time immemorial is this: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed. Applied to economy-wide unemployment, this doctrine places the blame on trade unions and governments, not on any failure of competitive markets.” (Tobin, 1997)

This is the worst piece of standard economic analysis and prescription of all times.

The advice to lower wages is based on a logically defective theory and leads to ever more unemployment/depression/deflation according to the correct employment equation.

Professional economists with impeccable credentials have caused enormous social devastations since the Great Depression. At the very least, they should now stop giving the impression that they have any valid scientific ideas to save their fellow citizens from mass unemployment and stagnation.

Mr. Trump and his non-professional aides may be economically dangerous for the USA. But, how much damage they will presumably do will not be worse than what professional economists have already done.

The idea that professional economists can save the world is patently absurd. It is just the opposite.

Egmont Kakarot-Handtke

Immediately preceding 'Scientific suicide in the revolving door'
Immediately following 'Economics: the simple logic of failure'

Related 'Unemployment is high because economics is false: period, full stop, end of story' and 'The very serious blunders of very serious people' and 'A brief rectification of employment theory' and 'Unemployment is the outcome of political economics' and 'Demystifying employment theory and policy'