Blog-Reference and Blog-Reference
Walrasian, Keynesian, Marxian, and Austrian economists are groping in the dark with regard to the two most important features of the market economy, that is, the profit mechanism and the price mechanism. To get out of failed economic theory requires nothing less than a full-blown paradigm shift.
In the following, a sketch of the correct employment theory is given.#1 The most elementary version of the objective systemic Employment Law is shown on Wikimedia AXEC62:
(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.
(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 Employment Law gets a bit longer and contains in addition profit distribution, public deficit spending, and foreign trade.
Items (i) and (ii) cover Keynes’ well-known arguments about aggregate demand. The factor cost ratio ρF as defined in (iii) embodies the price mechanism which, however, works other than standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R. This implication is readily testable against standard economics.
The systemic Employment Law points the way to an effective employment policy. Right policy depends on true theory. Both neoclassical and Keynesian labor market theories are provable false.*
#1 For details see The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment.