June 6, 2015

Poisoned, hanged, and shot

Comment on Lars Syll on ‘Austerity policies — prescribing rat poison for ailing economies’

Blog-Reference  see also Blog-Reference

Amartya Sen asks: “How was it possible, it has to be asked, for the basic Keynesian insights and analyses to be so badly lost in the making of European economic policies that imposed austerity?” (See intro)

The essential Keynesian insight is, of course, for all immediate practical purposes correct. Nevertheless, Keynes's employment theory is indeed not general and misses a crucial point (2015; 2012).

The most elementary version of the correct Employment Law is shown on Wikimedia AXEC62:
From this follows:
• An increase in the expenditure ratio ρE leads to higher employment. An expenditure ratio ρE>1 indicates credit expansion, a ratio ρE<1 indicates credit contraction or debt repayment.
• Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
• An increase in the factor cost ratio ρF leads to higher employment. This implies that a higher wage rate W leads to higher employment. This is, of course, contrary to conventional economic wisdom.

Conventional economic wisdom is, we know this from Keynes, wrong. Here is not the place for formal proof but the actual graphics from Nick Bunker's post Waiting for healthy U.S. wage growth give intuitive empirical support.

The correct employment theory tells us that Greece has not only been poisoned but in addition hanged and shot.

In the old days, economics was called the dismal science. It has now become a lethal science.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL