June 10, 2017

Textbooks and the mental cloning of dumb economists

Comment on Lars Syll on ‘Economics textbooks transmogrifying truth — wages and unemployment’

Blog-Reference and Blog-Reference

Lars Syll summarizes: “Unfortunately, Jones macroeconomics textbook is not the only one containing this kind of utter nonsense on Keynes. Similar distortions of Keynes’s views can be found in, e. g., the economics textbooks of ‘New Keynesian’ economists like Greg Mankiw and Paul Krugman.”

Economics textbooks are false from Samuelson’s classic until today.#1 Not only because of occasional distortions but because both Walrasian microfoundations and Keynesian macrofoundations are axiomatically false. Therefore, it does not suffice to rectify occasional distortions and misrepresentations.

One can readily agree with Lars Syll: “Keynes in General Theory devoted substantial attention to the subject of wage rigidities, he certainly did not hold the view that wage rigidities were ‘the reason … for the high unemployment of the Great Depression’.” This, though, cannot alter the fact that Keynes’s employment theory as a whole is provable false.

Keynes’s critique of Orthodoxy was always spot on but from this does not follow that his own approach was much better. Keynes based macroeconomics on logically and conceptually defective foundations and neither After-Keynesians nor Post Keynesians nor New Keynesians nor Anti-Keynesians have realized his foundational blunder in 80 years.

Keynes defined the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This two-liner is defective because Keynes never came to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et. al.)

Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined the whole theoretical superstructure of Keynesian macroeconomics falls apart: (i) all I=S/IS-LM models are provable false; (ii) the investment multiplier is formally defective; (iii) the error/mistake in Keynes’s profit theory remained undetected; (iv) the error/mistake in Keynes’s employment function remained undetected.#2

The rectification of Keynes’s false employment function gives the correct relationship between wages and unemployment.#3 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.

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. This, and NOT stickiness, is the crux.

Textbook economics has not gotten the price mechanism right until this day. Supply-demand-equilibrium is simply a bad joke. Economic policy advice never had sound scientific foundations. Applied textbook economics, both in the Walrasian and Keynesian version, ruins the economy.

Egmont Kakarot-Handtke

#1 See ‘The father of modern economics and his imbecile kids
#2 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#3 See ‘Toward a non-Neanderthal employment policy