August 1, 2015

Back at Keynes' problem

Comment on mschlotzhauer on ‘Euro area unemployment rate at 11.1% and EU at 9.6% in June 2015’


“Important revolutions have occurred before our time, and since the days of Heraclitus change has been discovered over and over again.” (Popper, 1960, p. 160)

Mschlotzhauer is a case in point and, of course, McKinsey et al. who traditionally earn their bread and butter by telling firms that they have to change and that they need change agents and that McK et al. will help for a modest fee.

Change is a weasel word because there are two types: change for the better and change for the worse. With undifferentiated change-talk, the representative economic consultant tries to make individual deterioration and degradation acceptable.

An unemployment rate of 11% can only be interpreted as (i) a failure of the market system, and (ii), a failure of economics. To recall, economic theory once claimed that the price mechanism sees to it that all factors are fully employed. This claim/promise was implicitly dropped with the concept of natural unemployment which was located around 5%. Now, mschlotzhauer tells people that the good times of natural unemployment are gone: ‘The system that we all knew and loved no longer exists.’ Worse: ‘Unemployment will only get higher over time as deflation settles in in a rather permanent way.’

Right between the eyes: Sorry folks, the market system does not work as advertised and the worst is still before you. Not surprisingly, like all consultants at all times, mschlotzhauer tells people to accept deterioration and to reinterpret it as chance.

“The other option is to accept that we are headed towards a completely new direction, and become active participants in shaping the next wave of social and technological disruptions. When the winds of change blow, some build walls while others build windmills. Make your choice wisely!” See blog

Let us put mschlotzhauer and the other windmakers aside. What an unemployment rate of 11% tells everybody is that we are back at Keynes' problem of the 30s. For a thinking economist, this means that there must be something deeply wrong with employment theory.

The core of the employment problem is that the price mechanism does not work as standard economics hallucinated from Smith to Hayek and this has nothing to do with wage or price stickiness but with the fact that economists are scientifically incompetent.

Change, indeed, is urgently needed. Yet, change in the proper sense means to leave the false orthodox employment theory behind and to advance to the correct heterodox employment theory (2015a; 2015b).

Full employment is possible, acceptance of secular stagnation is premature. Actually, economists are the greatest hazard to the economy.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL
Kakarot-Handtke, E. (2015b). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.

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