Comment on Lars Syll on ‘AD/AS models and the ‘disappearance’ of involuntary unemployment’
Blog-Reference and Blog-Reference on Aug 7
Walrasian, Keynesian, Marxian, and Austrian economists are groping in the dark with regard to the two most important features of the market economy: the price mechanism and the profit mechanism. The fault lies in the fact that economists argue from false premises, that is, Walrasianism in all shapes and forms (DSGE, RBC, AD/AS, etc.) argues from unacceptable microfoundations, and Keynesianism in all shapes and forms argues from false macrofoundations (2011).
To get out of failed economics requires nothing less than a paradigm shift from the accustomed amateurish nonsense to entirely new axiomatic foundations.
In the following, a sketch* of the formally and empirically correct employment theory is given. A rather elementary version of the objective structural macroeconomic Employment Law (2012) is shown on Wikimedia:
From this equation follows:
(i) An increase in the expenditure ratio ρE leads to higher employment (the Greek letter ρ stands for ratio). An expenditure ratio ρE greater than 1 indicates credit expansion, a ratio ρE less than 1 indicates credit contraction. The expenditure ratio fully replaces the concept of a consumption function.
(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.
The complete AND testable Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and import/export. It contains NO behavioral assumptions of any sort.
Items (i) and (ii) cover Keynes’ arguments about aggregate demand, which have been commonsensically right but formally defective. More precisely, Keynes’s multiplier is provably false (see 2012). The factor cost ratio ρF as defined in (iii) embodies the price mechanism which works very differently from what the representative economist falsely assumes. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.
For the relationship between real wage, productivity, profit, and real shares see (2015, Sec. 10).
So, in simple terms, full employment (in any definition) can be achieved by increasing overall demand (expenditure ratio, investment expenditures, etc.) or by INCREASING the average wage rate or by a combination of the two.
Keynes’ approach is macrofounded but incomplete because he had no deeper understanding of the price and profit mechanism. Both, the Walrasian and Keynesian approaches have produced misleading policy advice. To propose a reduction of the average wage rate in a recession/depression, as orthodox economists did repeatedly, is a manifestation/proof of utter scientific incompetence. The AD/AS model is one of the most ridiculous attempts to formalize fundamental economic relationships. For the correct approach see (2015).
The structural Employment Law contains nothing but measurable variables and is therefore readily testable. So, there is NO need for prolonged waffling about Walrasian or Keynesian models or voluntary/involuntary unemployment. As always in science, a test decides the matter. What is beyond any doubt is that both orthodox and heterodox economics has been OUTSIDE of science since its inception.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
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). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
* Students are referred to the working papers for more details.