Thinking about economic policy for future PM Corbyn

Comment on Richard Murphy on ‘The political economy of Labour’s fiscal rule’

Blog-Reference

What is the unique selling proposition of MMT vis-a-vis good old Keynesianism? Keynesianism stands for temporary deficit spending with budget-balancing over the business cycle, MMT stands for permanent deficit-spending/money-creation.

However, with regard to the current situation in the UK with the interest rate close to the ZLB, this amounts to the same anti-Austerity policy. In practical policy terms, the fuss between Simon Wren-Lewis/Jonathan Portes and Richard Murphy over the relative merits of monetary and fiscal policy seems a bit overblown.

So let us look at politics. For political planers, the main issue is to make provisions for their worst-case scenario that Jeremy Corbyn becomes the next PM. There are two groups who compete for the role of Mr. Corbyn’s economic policy adviser. The Wren-Lewis/Portes group attempts to keep Mr. Corbyn on the old path of monetary/fiscal policy albeit with more active employment and social policy, the Murphy group tries to get a handle on the Treasury/Central Bank for a permanent MMT deficit policy that spends on everything from employment to the NHS to a Green New Deal. The common denominator, though, is to prevent a potential PM Corbyn from pursuing a genuine socialist policy.

Because of Public Deficit = Private Profit, there is some perverse humor in the idea that Mr. Corbyn either adopts a temporary or a permanent free-lunch program for the Oligarchy.#1

Egmont Kakarot-Handtke


#1 Keynes, Lerner, MMT, Trump and exploding profit

Related 'MMT Progressives: The knife in the back of WeThePeople' and 'How Bill Mitchell stalks Jeremy Corbyn' and 'Richard Murphy: the MMT fraudster dressed up as realist' and 'Economics has arrived at the bottom of the proto-scientific shithole' and 'Mr. Corbyn and the perils of political economics' and 'Endtime for soapbox economists' and 'MMT and grassroots movements' and 'MMTers are NOT Friends-of-the-People' and 'Why the British Labour Party should NOT adopt MMT' and 'Economics as a cover for agenda pushing' and 'MMT: A Trojan Horse for Labour courtesy of the Oligarchy' and 'MMTers are false Progressives and false Friends-of-the-People' and 'MMT and the promotion of Wall Street's idea of social policy' and 'How to spot economics trolls' and 'Prophet Stephanie divines the seizure of the means of production of currency' and 'How Bill Mitchell stalks Jeremy Corbyn' and 'Economic backstabbing: Bill Mitchell hits again' and 'Bill Mitchell’s pure MMT teachings for British Labour' and 'The economist as useful political idiot' and 'Links on MMTers push Wall Street’s agenda' and 'Links on Austerity' and 'Political economics and intellectual corruption' and 'The retirement of a fake scientist and real agenda pusher' and 'Mission accomplished: Economists as useful idiots of the Oligarchy'.

For details of the big picture see cross-references Political Economics/Stupidity/Corruption.

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Forget mainstream economics, scrap MMT, move on to the new Paradigm

Comment on Bill Mitchell on ‘The divide between mainstream macro and MMT is irreconcilable ― Part 2’

Blog-Reference and Blog-Reference and Blog-Reference

Stop beating mainstream economics ― it is long dead.#1 Bill Mitchell, though, does not get tired of enumerating, again and again, the flaws and idiocies of DSGE/RBC/New Keynesianism.

This is Bill Mitchell’s Groundhog Day indictment:#2

• “The problem is that their conclusion is flawed at the most elemental level …”
• “And so, mass unemployment was seen to be a problem of minimum wages, excessive trade union power, other legal constraints on wage cuts etc.”
• “New Keynesian specifications have to be overly simplistic and reliant on behavioural assumptions … that no self-respecting social scientist that actually studies human behaviour would consider to be credible in the least.” [“No science has been criticized by its own servants as openly and constantly as economics. The motives of dissatisfaction are many, but the most important pertains to the fiction of homo oeconomicus.” (Georgescu-Roegen, 1971)]
• “The mainstream proponents want to claim virtue based on the fact that their models are rigourous… but then respond to empirical anomalies with ad hoc (non rigourous) tack ons.”
• “The results they end up producing … are not ‘derivable’ from first-order, microfounded principles at all. Their claim to theoretical rigour fails.”

Yes, mainstream economics is a ludicrous, proto-scientific exercise. The axioms are false, the analytical superstructure is false, and from this follows that economic policy guidance NEVER has had sound scientific foundations. Mainstream economics is refuted on all counts and therefore scientifically indefensible. Who still defends it is stupid or corrupt or both.

More is not to say about the failed/fake science economics.#3 And now the real task begins: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug)

Is MMT the new theory? No, because MMT, too, is axiomatically false.#4 Because of this, MMT policy guidance, too, has no sound scientific foundations.#5, #6

Egmont Kakarot-Handtke


#1 Stop beating mainstream economics ― it is long dead
#2 Reference to Arjun Jayadev/J. W. Mason Mainstream Macroeconomics and Modern Monetary Theory: What Really Divides Them?
#3 The biggest scientific mistake of the last centuries, and it has much to do with academic economists
#4 Both, mainstream economics and MMT are axiomatically false
#5 For the full-spectrum refutation of MMT see cross-references MMT
#6 From false micro to true macro: the new economic Paradigm

Preceding Both, mainstream economics and MMT are axiomatically false.

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Wikimedia AXEC106l

NAIRU does not exist because equilibrium does not exist

Comment on Lars Syll on ‘Debunking the NAIRU myth’ and on Brian Romanchuk on ‘NAIRU Should Be Bashed, Smashed, And Trashed’

Blog-Reference and Blog-Reference

The current state of economics is this: Walrasian microfoundations are false for 10+ years and Keynesian macrofoundations are false for 80+ years.#1 By consequence, employment theory, too, is false and this, of course, includes NAIRU.#2 What is urgently needed are true macrofoundations and the true employment theory.

Because employment theory is false, economic policy guidance regularly WORSENS the situation, that is, economists bear the intellectual responsibility for unemployment, deflation, depression, and stagnation.#3

What orthodox employment theory says is this: “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.” (Tobin)

What microfounded supply-demand-equilibrium economics says is that there is a NEGATIVE relationship between wage rate and employment. From the true macrofoundations follows that the MACROECONOMIC relationship between wage rate and employment is POSITIVE.

It should be possible to empirically establish which of the two opposing propositions is true. In fact, the Great Depression and the current mass unemployment gives one a clear hint that supply-demand-equilibrium in general and labor market theory, in particular, is dead wrong.#4

Egmont Kakarot-Handtke


#1 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#2 NAIRU ― a folk psychological hallucination
#3 How economists murdered the economy and got away with it
#4 Macroeconomics without Keynes

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REPLY to Ralph Musgrave on Feb 19

You argue: “The fact that there is little empirical evidence to support NAIRU is easily explained by the amount of background noise. Same problem applies in other subjects (chemistry, astronomy, etc). But in subjects other than economics, it is normally possible to do experiments where non-relevant variables, i.e. ‘other stuff’, is held constant. In economics that is not possible normally.”

This is one of the oldest excuses of economists which can be traced back to Hume and Mill: “There is a property common to almost all the moral sciences, and by which they are distinguished from many of the physical; this is, that it is seldom in our power to make experiments in them.” (Mill)#1

The solution to this methodological problem consists of making a systems science out of the moral or behavioral or social proto-science of economics. To get out of failed economic theory requires nothing less than a full-blown paradigm shift from accustomed behavioral microfoundations to entirely new systemic macrofoundations.

In the following, a sketch of the correct employment theory is given.#2 The most elementary version of the objective systemic Employment Law is shown on Wikimedia AXEC62:

From this equation follows
(i) An increase in the expenditure ratio ρ_E leads to higher employment (the Greek letter ρ stands for ratio). An expenditure ratio ρ_E greater than 1 indicates credit expansion, a ratio ρ_E less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete Employment Law contains in addition profit distribution, government deficit/surplus, and the trade balance.

Items (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio ρ_F as defined in (iii) embodies the price mechanism which, however, does NOT work as standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

The systemic Employment Law fully replaces the bastard Phillips Curve and NAIRU.#2, #3 The equation contains nothing but measurable variables and is therefore testable.

Right policy depends on true theory: “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)

Economists do NOT have the true theory and this explains their endless inconclusive wish-wash. In their scientific incompetence, both orthodox and heterodox economists are ultimately responsible for the enormous social devastations of mass unemployment. Economists are not only hopeless blatherers but a real danger to their fellow citizens.


#1 Failed economics: The losers’ long list of lame excuses
#2 Keyns' Employment Function and the Gratuitous Phillips Curve Disaster
#3 For the relationship between profit and employment see Have data, lack theory

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REPLY to Tom Hickey on Feb 19

Science is about invariances (Nozick) but there is NO such thing as behavioral invariances. Because of this the neo-Walrasian axioms#1 are methodological madness, to begin with. There is NO need to invoke the Sonnenschein-Mantel-Debreu theorem in order to refute/unlearn standard economics.

The subject matter of economics is NOT the behavior of humans but the behavior of the economic system.#2 See The existence of economic laws and the nonexistence of behavioral laws.

#1 The microfoundations approach is defined with these five hardcore propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#2 The macrofoundations approach is defined with these three BEHAVIOR-FREE systemic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

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REPLY to Matthew Franko, Tom Hickey on Feb 20

Seems you lost your way. The point at issue is NAIRU and not the relationship between investment and saving. The latter is given by Qm≡I−Sm, i.e. monetary profit is equal to the difference between investment and monetary saving. For more details see Wikipedia and the promotion of economists’ idiotism and cross-references Refutation of I=S.

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ICYMI on Feb 20

NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather
Comment on Simon Wren-Lewis on ‘NAIRU bashing’

NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false.

You say: “The way economists have thought about the relationship between unemployment and inflation over the last 50 years is the Phillips curve.”

This hallucinatory Phillips Curve has, first of all, to be rectified.#1 The objective systemic Employment Law is shown on Wikimedia AXEC62:

From this equation follows:
(i) An increase in the expenditure ratio ρ_E leads to higher employment (the Greek letter ρ stands for ratio). An expenditure ratio ρ_E greater than 1 indicates credit expansion, a ratio ρ_E less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete Employment Law contains in addition profit distribution, government deficit/surplus, and the trade balance.

Items (i) and (ii) cover Keynes’ well-known arguments about aggregate demand. The factor cost ratio ρ_F as defined in (iii) embodies the price mechanism which, however, does NOT work as standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa. If the average price increases faster than the average wage rate employment decreases.

The systemic Employment Law fully replaces the hallucinatory Phillips Curve and NAIRU. The equation contains nothing but measurable variables and is therefore testable. No prohibiting measurement problems at all!

Right policy depends on true theory: “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)

Economists do NOT have the true employment theory and this explains their endless inconclusive blather about NAIRU which is a NONENTITY like a Tooth Fairy or dancing-angels-on-a-pinpoint.


#1 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

Related 'Why you should NEVER use supply-demand-equilibrium' and 'The key to macro and Keen's debt-employment model' and 'Economics and the social science delusion' and 'From Orthodoxy to Heterodoxy to Metadoxy' and 'The key to macro and Keen's debt-employment model' and 'Unemployment is high because economics is false' and 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather' and 'NAIRU and economists’ lethal swampiness'.

Unemployment is high because economics is false

Comment on “Battling Unemployment: A Clear Win for the ‘Cycs'”

Blog-Reference and Blog-Reference on Jan 10, 2017, adapted to context and Blog-Reference and Blog-Reference on Jan 12 and Blog-Reference

Walrasian, Keynesian, Marxian, and Austrian economists are groping in the dark with regard to the two most important features of the market economy, that is, the profit mechanism and the price mechanism. The fault lies in the fact that economists argue from the micro-level upwards to the economy as a whole. And here the Fallacy of Composition regularly slips in. To get out of failed economic theory requires nothing less than a full-blown Paradigm Shift from accustomed microfoundations to entirely new macrofoundations.

In the following, a sketch of the correct employment theory is given.#1 The most elementary version of the objective systemic Employment Law is shown on Wikimedia AXEC62:

From this equation follows inter alia:
(i) An increase in the expenditure ratio ρ_E leads to higher employment (the letter ρ stands for ratio). An expenditure ratio ρ_E greater than 1 indicates credit expansion, a ratio ρ_E less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete AND testable Employment Law gets a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Item (i) and (ii) cover Keynes’ well-known arguments about aggregate demand. Here, though, the focus is on the factor cost ratio ρ_F as defined in (iii). This variable embodies the price mechanism which, however, does not work as standard economics assumes. As a matter of fact, 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 Law contains nothing but measurable variables and is therefore readily testable. There is no need for further discussion. As always in science, a test decides the matter.

Right policy depends on true theory: “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, 1991)

Standard economists do not have the true theory. Standard labor market theory is provable false.

Egmont Kakarot-Handtke


#1 See the working papers for more details.

Related 'How economists murdered the economy and got away with it' and 'Economics: the simple logic of failure' and 'From false micro to true macro: the new economic paradigm' and 'NAIRU does not exist because equilibrium does not exist'

Reduced-form bricolage and sticky brains

Comment on Stephen Williamson on ‘Sticky Prices, Financial Frictions, and the Ben Bernanke Puzzle’

Blog-Reference

Stephen Williamson cannot explain how the monetary economy works, instead he tells us how economists work.

“For convenience, NK models — which at heart are well-articulated general equilibrium models — are sometimes (if not typically) subjected to linear approximation, and reduced to two equations. One is an "IS curve," which is basically a linearized Euler equation that prices a nominal government bond, and the other is a "NK Phillips curve" which summarizes the pricing decisions of firms. ... The basic idea is that this reduced form model is fully grounded in the optimizing, forwardlooking behavior of consumers and firms, and so conforms to how modern macroeconomists typically do things (for good reasons of course).” (See thread intro)

Unfortunately the basic idea is wrong and there is actually not one methodologically sound reason for how modern macroeconomists typically do things. No doubt about it, modern macroeconomists are irrecoverably lost in the proto-scientific wood (2014b; 2014a).

There are two kinds of macroeconomics: true or false. Clearly, NK-RBC-NC falls squarely into the second class. As a matter of principle, all well-articulated general equilibrium models are false. Hence it is pointless to discuss their irrelevant differences.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

Kaput toys

Comment on Nick Rowe on ‘Wren-Lewis Takes a Stab at It’

Blog-Reference

You write: “Firms are worker-owned cooperatives, so we don't need to distinguish wages from profits.”

That is, of course, a fatal error/mistake. You have to distinguish between wage income, distributed profit and profit. These are quite different things. It is irrelevant whether the firm is a cooperative or a joint-stock company. Your error/mistake, though, is pardonable because the profit theory is false since Adam Smith and the models of Stephen, Simon, Nick E. and all the rest are not one iota better in this respect. Time to realize that RBC, NK and NC models are logically defective.

For the correct profit theory see first here and for the correct theory of money see then here.

Egmont Kakarot-Handtke