September 11, 2015

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Comment on Merijn Knibbe on ‘Unemployment – a long run’


Heterodoxy is in danger of joining Orthodoxy at the lowest possible intellectual level. To argue that figures are suspect/manipulated and to describe a situation as pathological is brain-dead political rhetoric. Does anybody think that playing the blame-game helps to stop growing unemployment?

Growing unemployment is, first and foremost, proof that economics is a failed science. To recall: orthodox economics entails the claim/promise that all resources are fully employed or at least on the way to full employment. Even for the layman, persistent unemployment is irrefutable proof that the market economy does not work as intended or claimed.

Heterodoxy as a scientific enterprise means to improve statistics if they are unreliable and come up with a new Paradigm if the old has failed.

The current situation is a clear refutation of both employment and quantity theory. There is not much use in discussing these defunct theories any further. The most elementary version of the axiomatically correct macroeconomic Employment Law is shown on Wikimedia AXEC62: #1

This equation tells us four things:
(i) Full employment is attainable.
(ii) An increase in the expenditure ratio ρE leads to higher employment.
(iii) Increasing investment expenditures exert a positive influence on employment.
(iv) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.

The factor cost ratio formally represents the price mechanism which, however, works quite differently from what standard economics suggests. 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. It is worldwide upward wage rate stickiness that produces worldwide unemployment and deflation.

Best of all: the Employment Law is testable, so there is no need to continue the brain-dead orthodox/heterodox beer hall blather.

Egmont Kakarot-Handtke

#1 For details see Major Defects of the Market Economy and The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment.