David Ruccio comments on James Kwak’s summary#1 of labor market theory and the minimum wage controversy: “That is the very definition, in our own time, of vulgar economics: ‘interpret, systematise and defend in doctrinaire fashion the conceptions of the agents of bourgeois production who are entrapped in bourgeois production relations.’”
One wonders why vulgar economics is not simply replaced by something better. After all, the vulgarity critique goes back as far as Marx. Time enough, one tends to think, to not only repetitively point out the numerous defects of the ridiculous Econ 101 supply-demand-equilibrium construct but to explode economism/vulgarity once and for all with a superior approach.#2
The fact of the matter is, though, that the critics never tried to replace Econ 101 in earnest. They only put lipstick on a dead pig by adding more ‘realism’ or ‘complexity’: “The supply-and-demand diagram is a good conceptual starting point for thinking about the minimum wage. But on its own, it has limited predictive value in the much more complex real world.”#1
This is like adding just another epicycle to the false Geo-centric theory instead of replacing it by the Helio-centric theory. What incompetent critics like Kwak and Ruccio do not realize is that the supply-and-demand diagram can by NO stretch of the imagination be accepted as ‘a good conceptual starting point’ but has to go DIRECTLY into the wastebasket. What is needed is an entirely NEW conceptual starting point.
Econ 101 as a whole ― not only the labor market theory ― is false. The ultimate reason is that it rests on false premises. As a result, the standard analytical tool, i.e. SS-curve―DD-curve―equilibrium, is absolutely useless because it represents a NONENTITY. So, (i) the formal representation of “the” market is false to start with, and (ii), it is, as a matter of principle, inadmissible to generalize the results of partial analysis for the economy as a whole. This is the Fallacy of Composition which pervades the whole of economics.
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 from false Walrasian microfoundations and false Keynesian macrofoundations to entirely NEW macrofoundations.
In the following, a sketch of the correct employment theory is given.#3 The elementary version of the objective systemic Employment Law for the investment economy is shown on Wikimedia AXEC62:
(i) An increase in the expenditure ratio ρE leads to higher employment (the Greek 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.
(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.
Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio ρF as defined in (iii) embodies the price mechanism which, however, does not work as 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 is the OPPOSITE of what standard economics teaches and has profound implications for the minimum wage discussion.
The systemic Employment Law contains nothing but measurable variables and is therefore readily testable. As always in science, a test decides the matter.
Right policy depends on true theory: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)
Standard supply-demand-equilibrium economists lack the true theory. Econ 101 is provably false.#4 Standard labor market theory is provably false. The age-old minimum wage discussion is a moronic joke. Scientifically incompetent orthodox AND heterodox economists are ultimately responsible for mass unemployment, deflation, depression, and stagnation.#5
#1 Kwak The Curse of Econ 101
#2 Traditional Heterodoxy’s paradigmatic impotence
#3 For details see the working papers
► The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
► Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
► The Truly General Theory of Employment: How Keynes Could Have Succeeded
► Towards Full Employment Through Applied Algebra and Counter-Intuitive Behavior
► Essentials of Constructive Heterodoxy: Employment
#4 The father of modern economics and his imbecile kids
#5 Economists: Incompetent? Stupid? Corrupt?
Related 'Traditional Heterodoxy’s paradigmatic impotence' and 'The end of traditional Heterodoxy in the Malmö coal pit' and 'Economics, methodology, and the Molehill Impossibility'