November 6, 2016

Unemployment is high because economics is false: period, full stop, end of story

Comment on “Battling Unemployment: A Clear Win for the ‘Cycs'”

Blog-Reference and Blog-Reference on Jan 10, 2017 adapted to context and Blog-Reference and Blog-Reference on Jan 12 and Blog-Reference

Walrasian, Keynesian, Marxian and Austrian economists are groping in the dark with regard to the two most important features of the market economy, that is, the profit mechanism and the price mechanism. The fault lies in the fact that economists argue from the micro level upwards to the economy as a whole. And here the fallacy of composition regularly slips in. To get out of failed economic theory requires nothing less than a full-blown paradigm shift from accustomed microfoundations to entirely new macrofoundations.

In the following a sketch* of the correct employment theory is given. The most elementary version of the objective systemic employment equation is shown on Wikimedia.

From this equation follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(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 AND testable employment equation gets a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. Here, though, the focus is on the factor cost ratio rhoF as defined in (iii). This variable embodies the price mechanism which, however, does not work as standard economics assumes. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R. This is the opposite of what standard economics teaches.

The systemic employment equation contains nothing but measurable variables and is therefore readily testable. There is no need of further discussion. As always in science, a test decides the matter.

Right policy depends on true theory: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991)

Standard economists do not have the true theory. Standard labor market theory is provable false.

Egmont Kakarot-Handtke

* See the working papers for more details

Related 'How economists murdered the economy and got away with it' and 'Economics: the simple logic of failure' and 'From false micro to true macro: the new economic paradigm' and 'NAIRU does not exist because equilibrium does not exist'