June 10, 2017

Think deeper

Comment on Bradford DeLong on ‘RETHINK 2%’

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)

The fact of the matter is that economists do NOT have the true theory. More precisely, economists do not know how the price- and profit mechanism works. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong.

Because of this, economic policy guidance never had sound scientific foundations. This holds also for the RETHINK 2% letter to the Federal Reserve Board of Governors#1 which in turn is based on Josh Bivens’s article.#2

Note for a start that Josh Bivens does not mention profit ― the pivotal variable of economics ― once. From this follows that his underlying profit theory is false. And from this in turn follows that his whole argument is false. ALL models that do not explicitly define macroeconomic profit are false.

The elementary version of the correct objective, systemic, behavior-free, macrofounded employment equation is shown on Wikimedia.#3 This equation says ― among other things ― that an increase of the factor cost ratio rhoF=W/PR leads to higher employment. The ratio rhoF embodies the price mechanism.

In order to focus on the crucial point imagine the FED has the means to directly influence the price P and increases it by 2%, all other variables unchanged. The correct macroeconomic employment equation tells us that employment falls. Bad move.

Next try. The FED sets the change of price to zero and instead increases the wage rate W by 2 %. The correct macroeconomic employment equation tells us that employment rises. Good move.

What supply-demand-equilibrium economists never understood is that 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.#4 Standard employment theory is false. The proposal to get the economy going by increasing price inflation is the direct result of the complete lack of understanding how the market economy works.

Egmont Kakarot-Handtke

#1 Letter to the Federal Reserve Board of Governors
#2 Josh Bivens ‘Is 2 percent too low?
#3 Wikimedia For details see ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#4 See also ‘How Wicksell and the rest got inflation/deflation wrong

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