September 26, 2016

From gossip to the correct employment theory

Comment on ProGrowthLiberal on ‘The New Men Without Jobs Conservative Excuse’


Economists love to psychologize about their fellow citizens. A long-standing topos is that the unemployed are drunkards, sluggards, criminals, social parasites, or smart optimizers who simply prefer leisure over work.

It is pretty obvious that NO way leads from this brain-dead folk psychological gossip to the explanation of employment/unemployment for the economy as a whole. Nonetheless, economists are quite sure how to cure unemployment: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed. 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)

In more than 200 years, employment theory has not risen above this substandard intellectual level. Time for a sketch of the formally and empirically correct employment theory (2012; 2014). The basic version of the objective structural Employment Law is shown on Wikimedia AXEC62:
From this equation follows inter alia:
(i) An increase in the expenditure ratio ρE leads to higher employment (the letter rho ρ stands for ratio). An expenditure ratio ρE greater than 1 indicates credit expansion, a ratio ρE less than 1 indicates credit contraction.
(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.

Items (i) and (ii) cover Keynes’ arguments about the role of aggregate demand, which have been commonsensically right but formally defective. More precisely, Keynes’s multiplier is provable false. The factor cost ratio ρF as defined in (iii) embodies the price mechanism which works very differently from what the representative economist hallucinates. As a matter of fact, overall employment (in the world economy or a closed national economy) INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

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.

Both, the Walrasian and Keynesian approaches have produced misleading policy advice. Unemployment is ultimately the result of theory failure, that is, of the utter scientific incompetence of economists who are mainly occupied with gossiping about whether the new men without jobs are floated by wives, girlfriends, relatives, or by Uncle Sam. It is only a question of time before these new men get the idea to tar and feather the ‘throng of superfluous economists’ (Joan Robinson).

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. (2014). Towards Full Employment Through Applied Algebra and Counter-Intuitive Behavior. SSRN Working Paper Series, 2456184: 1–25. 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, pages 3–27. Oxon: Routledge.