February 19, 2017

NAIRU does not exist because equilibrium does not exist

Comment on Lars Syll on ‘Debunking the NAIRU myth’ and on Brian Romanchuk on ‘NAIRU Should Be Bashed, Smashed, And Trashed’

Blog-Reference and Blog-Reference

The current state of economics is this: Walrasian microfoundations are false since 140+ years and Keynesian macrofoundations are false since 80+ years.#1 By consequence, employment theory, too, is false and this, of course, includes NAIRU.#2 What is urgently needed is true macrofoundations and the true employment theory.

Because employment theory is false, economic policy guidance regularly WORSENS the situation, that is, economists bear the intellectual responsibility for unemployment, deflation, depression, stagnation.#3

What orthodox employment theory says 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.” (Tobin)

What microfounded supply-demand-equilibrium economics says is that there is a NEGATIVE relationship between wage rate and employment. From the true macrofoundations follows that the MACROECONOMIC relationship between wage rate and employment is POSITIVE.

It should be possible to empirically establish which of the two opposing propositions is true. In fact, the Great Depression and the current mass unemployment gives one a clear hint that supply-demand-equilibrium in general and labor market theory in particular is dead wrong.#4

Egmont Kakarot-Handtke

#1 See ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#2 See ‘NAIRU ― a folk psychological hallucination
#3 See ‘How economists murdered the economy and got away with it
#4 See ‘Macroeconomics without Keynes

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REPLY to Ralph Musgrave on Feb 19

You argue: “The fact that there is little empirical evidence to support NAIRU is easily explained by the amount of background noise. Same problem applies in other subjects (chemistry, astronomy, etc). But in subjects other than economics, it is normally possible to do experiments where non-relevant variables , i.e. ‘other stuff’, is held constant. In economics that is not possible normally.”

This is one of the oldest excuses of economists which can be traced back to Hume and Mill: “There is a property common to almost all the moral sciences, and by which they are distinguished from many of the physical; this is, that it is seldom in our power to make experiments in them.” (Mill)#1

The solution of this methodological problem consists in making a system science out of the moral or behavioral or social proto-science of economics. To get out of failed economic theory requires nothing less than a full-blown paradigm shift from accustomed behavioral microfoundations to entirely new systemic macrofoundations.

In the following a sketch#2 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 contains in addition profit distribution, government deficit/surplus, and the trade balance.

Item (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, does NOT work as 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 and vice versa.

The systemic employment equation fully replaces the bastard Phillips curve and NAIRU.#2, #3 The equation contains nothing but measurable variables and is therefore testable.

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)

Economists do NOT have the true theory and this explains their endless inconclusive wish-wash. In their scientific incompetence both orthodox and heterodox economists are ultimately responsible for the enormous social devastations of mass unemployment. Economists are not only hopeless blatherers but a real danger for their fellow citizens.

#1 See also ‘Failed economics: The losers’ long list of lame excuses
#2 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#3 For the relationship between profit and employment see ‘Have data, lack theory

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REPLY to Tom Hickey on Feb 19

Science is about invariances (Nozick) but there is NO such thing as behavioral invariances. Because of this the neo-Walrasian axioms* are methodological madness to begin with. There is NO need to invoke the Sonnenschein-Mantel-Debreu theorem in order to refute/unlearn standard economics.

The subject matter of economics is NOT the behavior of humans but the behavior of the economic system.** See ‘The existence of economic laws and the nonexistence of behavioral laws’.

* The microfoundations approach is defined with these five hard core propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
** The macrofoundations approach is defined with these three BEHAVIOR-FREE systemic axioms: (A0) The objectively given and 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. (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.

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REPLY to Matthew Franko, Tom Hickey on Feb 20

Seems you lost your way. The point at issue is NAIRU and not the relationship between investment and saving. The latter is given by Qm=I-Sm, i.e. monetary profit is equal to the difference between investment and monetary saving. For more details see ‘Wikipedia and the promotion of economists’ idiotism’ and cross-references Refutation of I=S

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ICYMI on Feb 20

NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather
Comment on Simon Wren-Lewis on ‘NAIRU bashing’

NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false.

You say: “The way economists have thought about the relationship between unemployment and inflation over the last 50 years is the Phillips curve.”

This hallucinatory Phillips curve has first of all to be rectified.#1 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 contains in addition profit distribution, government deficit/surplus, and the trade balance.

Item (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, does NOT work as 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 and vice versa. If the average price increases faster than the average wage rate employment decreases.

The systemic employment equation fully replaces the hallucinatory Phillips curve and NAIRU. The equation contains nothing but measurable variables and is therefore testable. No prohibiting measurement problems at all!

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)

Economists do NOT have the true employment theory and this explains their endless inconclusive blather about NAIRU which is a NONENTITY like the Tooth Fairy or dancing-angels-on-a-pinpoint.

#1 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster


Related 'Why you should NEVER use supply-demand-equilibrium' and 'The key to macro and Keen's debt-employment model' and 'Economics and the social science delusion' and 'From Orthodoxy to Heterodoxy to Sysdoxy' and 'The key to macro and Keen's debt-employment model' and 'Unemployment is high because economics is false: period, full stop, end of story' and 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather' and 'NAIRU and economists’ lethal swampiness'