May 31, 2017

Toward a non-Neanderthal employment policy

Comment on Brad DeLong on ‘Why Is the FOMC So Certain the U.S. Is "Essentially at Full Employment"?’

Blog-Reference and Blog-Reference

The question is not so much whether to replace the unemployment rate by the employment-to-population ratio as a metric for the labor market condition but to clarify the relationship between employment, wage rate, price and productivity. These issues have been dealt with the help of the analytical tool of the (bastard) Phillips curve.

The fact of the matter is that Phillips curve labor market theory is Neanderthal economics.* The elementary version of the correct objective, systemic, behavior-free, macrofounded employment equation is shown on Wikimedia.

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.

From this follows that if rhoF is kept constant employment is kept constant. In other words if the wage rate rises with the same rate as price times productivity employment is kept constant. If the FED wants to increase employment and price it has to set the PRIORITIES right and see to it that the average wage rate increases.

Unfortunately, the price mechanism DESTABILIZES the economy. The sequence is as follows: price up - rhoF down - employment down - wage rate down - rhoF down - employment down - and so on. In other words, the market economy is inherently unstable. The core claim of equilibrium economics is provable false. Standard employment theory is false since 200+ years but still in use in the FED Neanderthal.

Egmont Kakarot-Handtke

* For details see ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

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REPLY to pgl on May 31

You say: “Simply put ― we are not yet at full employment.” Agree. But then, it is economists who bear the intellectual responsibility for the social devastation of unemployment because economic policy has no sound scientific foundation. Economists are failed or fake or Neanderthal scientists and this is ― simply put ― the ultimate reason why “we are not yet at full employment.”

Your comment does not much to improve the situation.

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REPLY to pgl on May 31

“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. Applied to economy-wide unemployment, this doctrine places the blame on trade unions and governments, not on any failure of competitive markets.” (Tobin, 1997)

This is a generalization of partial analysis and this primitive methodological mistake is known since antiquity as fallacy of composition.

The correct systemic employment equation (above) says exactly the opposite. This means that the remedy that “economists have all learned” WORSENS the situation. Which brings us to Napoleon: “Late in life, moreover, he claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust.” (Viner)

Economics is a failed science and Brad DeLong and you are part of the incompetent crowd that reduces the economy to dust.

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COMMENT on Edward Lambert on Jun 1

Keynesianism is axiomatically false since 80 years.#1 Effective demand is only part of the employment equation.#2 Because of this Keynes’s employment theory is provable false.#3 There is NO use to quote the GT, better to get out of the Neanderthal because in your ignorance you are part of the problem.#4

#1 See ‘How Keynes got macro wrong and Allais got it right
#2 See ‘Keynes saw the problems but did not solve them
#3 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#4 See ‘Mass unemployment: The joint failure of orthodox and heterodox economics


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COMMENT on Robert Waldmann on Jun 4

It is pretty obvious that the participation rate varies with the age structure of a population and is lower in an aging population. Now, one can argue that it is ‘too low’ given the underlying age structure and given the observation that people retire/are retired earlier than 30 years ago.

Let us be satisfied for the moment with the diagnosis ‘too low’ in order not to be distracted by a pointless discussion about measurement problems. So the practical question is how to increase overall employment in the economy. This is a very old and fundamental question of economics and economists have answered it thus: “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. Applied to economy-wide unemployment, this doctrine places the blame on trade unions and governments, not on any failure of competitive markets.” (Tobin, 1997)

This answer is dead wrong because it is a generalization of partial analysis and this primitive methodological mistake is known since antiquity as fallacy of composition.

The other answers to the employment problem are monetary and fiscal policy. Let us put these options aside as not feasible for the moment and focus on the price mechanism. To recall, one of the core tenets of standard economics has always been that the uninhibited working of the price mechanism establishes full employment of ALL factors. Of course, it was always understood that things do not work perfectly in real life.

Now, it has been proved that the price mechanism does NOT work as supposed, that is, a reduction of the average wage rate does NOT increase employment for the economy as a whole. The correct systemic employment equation* says exactly the opposite. This means that the remedy that “economists have all learned” WORSENS the situation.

From this follows for economic policy that a third tool in addition to monetary and fiscal policy is needed. What has to be achieved is a rectification of the price mechanism. This has nothing to do with stickiness or frictions or other imperfections. Fact is: the perfectly working price mechanism INCREASES unemployment in the economy because there is a positive feedback loop built right into the core of the market economy. Macro-economically it is NOT wage rate down ― employment up, but it is wage rate down ― employment down.

Whoever is tasked with the challenge of increasing employment/participation has to increase the wage rate with a higher rate than price times productivity. This is a SYSTEMIC necessity and has NOTHING to do with social policy. The FED’s attempt to push inflation via monetary policy is counterproductive and proves that the FED and the economists who supply it with policy guidance are still deep in the woods of the economics Neanderthal. What “economists have all learned, and many of us teach” is logically and empirically inconsistent proto-scientific rubbish.

* Wikimedia