June 28, 2017

The minimum wage debate: a showpiece of economists’ hereditary idiocy

Comment on Sandwichman on ‘Seattle Minimum Wage’

Blog-Reference and Blog-Reference

“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)

Fact is that economists do NOT have the true theory. Fact is, in methodological terms, that economics is axiomatically false. The lethal blunder comes under the label of microfoundations or as Krugman put it: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

The methodological blunder of the minimum wage debate consists in partial analysis and microfoundations. This type of analysis NEVER leads to results that can be generalized, but always to results that change from place to place and from time to time. So, this type of analysis (i) runs directly into the Fallacy of Composition, and (ii), remains forever inconclusive.

Interim result: The traditional microfoundations approach is as false as one can get and has to be fully replaced by the macrofoundations approach.

The correct macro employment equation#1 is reproduced on Wikimedia.#2 From this objective-structural-systemic relationship follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio).
(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 structural-systemic employment equation is a bit longer and contains in addition the public sector and the foreign trade sector.

Item (i) and (ii) cover the familiar arguments about how effective demand affects employment. Item (iii) embodies the macroeconomic price mechanism. It works such that overall employment L INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

From this follows:
(1) The average wage rate has to be prevented from falling because this leads to rising unemployment and deflation. One possibility is to fix a minimum wage rate which increases over time. Note that this is a SYSTEMIC necessity and has NOTHING to do with social policy.
(2) The minimum wage rate has to be implemented nationwide (strictly speaking world wide). To implement it locally or for certain branches is absolutely counterproductive.
(3) The implementation has to be done intelligently. It is, for example, stupid to kill the marginal firms with the introduction of a nationwide minim wage.
(4) Given their track record of idiocy, economists have to be kept out of further discussion and implementation.

Minimum wage policy has to be carried out under the macroeconomic condition w greater than p+r+pr, that is roughly speaking, employment increases if the increase of the average wage rate w is greater than the increase of average price p and productivity r.

To make local and partial minimum wage increases will in all eternity lead to inconclusive results and only keep a bunch of incompetent scientists busy with senseless debate, inconclusive empirical studies, and brain-dead blog posts.

Egmont Kakarot-Handtke

#1 For details see ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#2 Wikimedia

Related 'Economics and the Fallacy of Insufficient Abstraction' and 'The role of labor and business in a well-organized society' and 'Rethinking the Phillips curve' and 'Attention: there are THREE types of inflation' and 'Textbooks and the mental cloning of dumb economists'. For more details of the bigger picture see cross-references Employment

REPLY to Barkley Rosser on Jun 28

Note that the EconoSpeak admin=your sidekick Sandwichman has deleted since Jun 24 the following posts:
The minimum wage debate: a showpiece of economists’s hereditary idiocy
Note on Marshall’s Magic Wand
Economics and the Fallacy of Insufficient Abstraction
The role of labor and business in a well-organized society

In these posts and the references you find the detailed refutation of your unqualified blather.*

Egmont Kakarot-Handtke

* See also cross-references Employment and cross-references Incompetence

REPLY to Barkley Rosser on Jun 29

I agree with you about the brilliance of Joan Robinson which is encapsulated in her assessment of economics: “Scrap the lot and start again.”

The others, who are brilliant in your eyes, will not even make it into a footnote of the history of science. With regard to Adam Smith I concur with Schumpeter: “… he had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” If this is your definition of brilliance you are probably one of the dullest readers.

For an assessment of the rest of your list see:
Marx, the moron
Walras is long gone
How Keynes got macro wrong and Allais got it right
Hayek and other informationally retarded proto-economists
The father of modern economics and his imbecile kids
How Arrow pushed economics over the cliff

Economics is a failed science and those you call brilliant messed it up.

Addendum on Jun 29

“Few people, and least of all we economists ourselves, are prone to offer us congratulations on our intellectual achievements. Moreover our performance is, and always was, not only modest but also disorganized. Methods of fact-finding and analysis that are and were considered substandard or wrong on principle by some of us do prevail and have prevailed widely with others.” (Schumpeter)