August 21, 2015

Sticky brains

Comment on Mark Thoma on ‘Evidence for Sticky Wages’


“We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. ... Applied to economy-wide unemployment, this doctrine places the blame on trade unions and governments, not on any failure of competitive markets.” (Tobin, 1997, p. 11)

Conventional employment theory is false because the underlying profit theory as the core of all of economics is logically defective (2014). In simple words: economists cannot tell the difference between profit and income and because of this, they cannot tell how the market economy works. To make the longer systematic analysis short, the most elementary version of the correct Employment Law is summarized on Wikimedia AXEC62:
From this equation follows inter alia:
(i) An increase in the expenditure ratio ρE leads to higher employment.
(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 ρF≡W/PR leads to higher employment. This implies that a higher average wage rate W leads to higher employment.
(iv) A price increase lowers the factor cost ratio and is conducive to lower employment.
(v) The complete Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and the trade balance with the rest of the world.

Point (i) and (ii) are familiar Keynesian stuff. We focus here alone on the factor cost ratio as defined in (iii). This variable formally represents the price mechanism which, however, does not work as standard economics claims. 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 a systemic law and not a behavioral assumption.

The core of the employment problem is that the price mechanism does not work as the textbook cliche says and this has nothing to do with wage or price stickiness but with scientific incompetence, more precisely with the Fallacy of Composition.

With their scientifically untenable textbook employment theory, economists bear the intellectual responsibility for the social devastations of unemployment.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Tobin, J. (1997). An Overview of the General Theory. In G. C. Harcourt, and P. A. Riach (Eds.), The ’Second Edition’ of The General Theory, volume 2, pp. 3–27. Oxon: Routledge.

ICYMI August 22

It is UPward stickiness that produces unemployment and deflation. See the formal proof above.#1 The U.S. is on the way to get more of both.

#1 For details of the big picture see cross-references Employment.