April 5, 2017

Economics and the high art of kicking the can down the road

Comment on Chris Dillow on ‘Wages & Productivity’

Blog-Reference and Blog-Reference and Blog-Reference

Chris Dillow asks: “Would higher wages boost economic growth?” And he answers: “They might, if the marginal propensity to spend out of wages is higher than that out of profits. However, Ben Chu suggests a different mechanism ― that higher wages might stimulate growth via the supply-side rather than demand-side.”

Note first of all that there is NO such thing as spending out of profits, there is only spending out of distributed profits. Profit and distributed profit are quite different things but economists have not realized this in the past 200+ years. Anyway, this does not matter much because the ambition of economists is NOT to solve problems but to kick them down the road and ultimately to bury them in the swamp where it is deepest.

Swampiness is what Popper called an immunizing stratagem. Accordingly, Chris Dillow throws in a host of additional issues (capital-labor substitution, investment, retraining, business expansion, fiscal stimulus, Verdoorn’s law, uncertainty, management quality, fear of competition, credit constraints, the Phillips curve, weak profits, etc) and ends with this climax: “The question is: is capitalism cooperative or conflictual?” Needless to emphasize that neither this nor any other question is answered.

Nobody, except economists, can take this clueless and inconclusive blather seriously.

So, here without much ado the elementary version of the correct (objective, systemic, macrofounded) employment equation.* From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (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.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation contains in addition profit distribution, the public sector, and the trade balance.

Item (i) and (ii) cover Keynes’s familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism. The fact of the matter is that 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. As always in science, a test decides the matter.

The simple answer of the correct employment equation to the simple question “Would higher wages boost economic growth?” is unambiguously YES.

Egmont Kakarot-Handtke

* For details see cross-references Employment