February 20, 2017

NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather

Comment on Simon Wren-Lewis on ‘NAIRU bashing’

Blog-Reference and Blog-Reference and Blog-Reference

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.

Egmont Kakarot-Handtke

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

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REPLY to Blissex on Feb 21, also on MNE

You comment on the rectification of the obsolete NAIRU-Phillips curve: “That sounds very plausible, and the replacement of the imaginary Phillips curve(s) is welcome, but your comment lacks one very important detail, the ‘central banker’s’ question.”

It is a matter of indifference whether ‘that sounds very plausible’. The point is whether the hallucinatory NAIRU-Phillips curve or the objective SYSTEM-Phillips curve is the TRUE representation of the determinants of employment/unemployment.

Scientific truth is methodologically well-defined by material and formal consistency and is established by PROOF and NOT by what ‘sounds plausible’ to Blissex.

Because the NAIRU-Phillips curve is PROVABLE false NO economic policy conclusions can be drawn from it, neither with regard to monetary nor to fiscal policy. Because economists lack the true theory their economic policy guidance has NO sound scientific foundation since Adam Smith.

Everybody has the right to climb on a soap box and to address the Circus Maximus with policy proposals EXCEPT economists. Economics is supposed to be a science and economists are supposed to adhere to scientific standards. This means that economists have to make sure that they have the true theory about how the economy works BEFORE they tell the world how to save the economy.

The fact of the matter is that profit theory, IS theory, theory of money, and employment theory is false.#1 Because employment theory is false, economic policy guidance regularly WORSENS the situation, that is, economists bear the intellectual responsibility for mass unemployment, deflation, depression, stagnation.#2

Before economists in general and Wren-Lewis in particular can address ‘the central banker’s question’ there is a lot of scientific homework to do.#3

Egmont Kakarot-Handtke

#1 See ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#2 See ‘How economists murdered the economy and got away with it
#3 See ‘If it isn’t macro-axiomatized, it isn’t economics

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REPLY to Simon Wren-Lewis on Feb 21, also on MNE

You say: “What I find very dispiriting about most of the comments on this post is a complete failure to engage with what I have said, and say where they disagree. Instead it is more along the lines of repeating the NAIRU is rubbish, without ever giving a coherent account of what exactly is rubbish.”

The microfounded NAIRU-Phillips curve has first of all to be rectified.* The macrofounded SYSTEM-Phillips curve is shown on Wikimedia.

From this correct employment equation follows in the MOST ELEMENTARY case that an increase of the macro-ratio rhoF=W/PR leads to higher total employment L.

The ratio rhoF embodies the price mechanism. Let the rate of change of productivity R for simplicity be zero, i.e. r=0, then there are three logical cases:
(i) The rate of change of the wage rate W is equal to the rate of change of the price P, i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are. That is, NO amount of inflation or deflation has any effect on employment.
(ii) The rate of change of the wage rate is greater than the rate of change of the price then employment INCREASES.
(iii) The rate of change of the wage rate is smaller than the rate of change of the price then employment DECREASES.

So, it is DIFFERENCES in the rates of change of wage rate and price and not the absolute magnitude of change. Every PERFECTLY SYNCHRONOUS inflation/deflation is employment-neutral, that is, employment sticks indefinitely where it is. In more general terms the neutrality condition reads W(1+w)/P(1+p)R(1+r)=rhoF=constant.

There is NO such thing as a NAIRU, all depends on relative rates of change. This is a testable proposition.

* See ‘NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather

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REPLY to Anonymous on Feb 23, also MNE

The fatal mistake of the discussion is to accept the NAIRU-Phillips curve (with the well-known disclaimers) and to focus on the economic policy implications with regard to the given situation in the US/UK/etc. But there is NO use to discuss policy if the underlying theory is defective.

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)

So what FIRST has to be done is to fix the NAIRU-Phillips curve.* The insight that there is NO such thing as a NAIRU then opens up new economic policy perspectives.

The correct theory of the macroeconomic price mechanism tells us that ― for purely SYSTEMIC reasons ― the average wage rate has in the given situation to rise faster than the average price. This opens the way out of mass unemployment, deflation, and stagnation.

If the price mechanism does not spontaneously deliver, as standard economics claims since 200+ years, THIS becomes an issue for economic policy and economics has to figure out the optimal rates of change for wage rate and price.

* For details see ‘NAIRU, wage-led growth, and Samuelson’s Dyscalculia


Related 'NAIRU does not exist because equilibrium does not exist' and 'If it isn’t macro-axiomatized, it isn’t economics' and 'The disutility of debunking NAIRU' and 'NAIRU ― a folk psychological hallucination' and 'False theory makes wrong policy: economics as loose cannon' and 'Naive arithmetic' and 'NAIRU, wage-led growth, and Samuelson's Dyscalculia' and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy' and 'NAIRU and economists’ lethal swampiness'