December 30, 2016

Let Keynes rest in peace

Comment on Koichi Hamada on ‘Keynes Reborn’

Blog-Reference 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. To get out of failed economic theory requires nothing less than a full-blown paradigm shift.

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:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek 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 employment equation gets a bit longer and contains in addition profit distribution, public deficit spending, and foreign trade.

Items (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, works other than standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R. This implication is readily testable against standard economics.

The systemic employment equation points the way to an effective employment policy. Right policy depends on true theory. Both neoclassical and Keynesian labor market theories are provable false.*

Egmont Kakarot-Handtke

* For details see ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment