January 16, 2017

Ideology? Incompetence? Fake? Or all this together?

Comment on Asad Zaman on ‘Ideological Macroeconomics & Increasing Inequality’


There is political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda-pushing). And this is how economics became one of the most embarrassing scientific failures of all times.#1

The fact of the matter is that economists do not know how the actual economy works. They do not even understand the foundational concepts of their subject matter, that is, profit and income. This holds for Orthodoxy AND Heterodoxy.

Economists have NO mandate to dabble in politics because (i) this violates the principle of separation of politics and science, and (ii), economists have no true economic theory, in other words, since Adam Smith economic policy guidance has NO sound scientific foundation.

Asad Zaman cites the known absurdities of orthodox employment theory: “According to Lucas, the Great Depression was really the Great Vacation, where vast numbers of people suddenly decided to stop working in order to enjoy leisure.” However, Heterodoxy never managed to replace this obvious rubbish with a valid employment theory.

The short proof goes as follows. The most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm and is defined by these three OBJECTIVE SYSTEMIC axioms:
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

The investment good sector comes in with the second step. So, what we have with (A1) to (A3) is the pure consumption economy as the most elementary economic configuration.

From these elementary, objective, transparent, and intuitively convincing premises follows the BASIC version of the macroeconomic Employment Law which is shown on Wikimedia AXEC62:

This equation says inter alia: an increase of the overall factor cost ratio ρF≡W/PR leads to higher employment. The complete Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and foreign trade. All these details are not needed at the moment.

The factor cost ratio ρF as defined above embodies the price mechanism which works very differently from what is usually assumed. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R, and vice versa. This follows in an unbroken chain of transparent logical steps from (A1) to (A3). The SYSTEMIC Employment Law is entirely FREE of green cheese behavioral assumptions, consists alone of measurable variables, and is readily testable.

However, what economists assert since time immemorial is this: “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)

This is the worst piece of economic analysis and prescription. The advice to lower wages is based on a logically defective theory and leads to ever more unemployment according to the correct Employment Law.

In their abysmal scientific incompetence, both orthodox and heterodox economists are ultimately responsible for the enormous social devastations of mass unemployment.#2 Consequently, they must immediately be stopped telling the general public that they have valid scientific ideas to save their fellow citizens from mass unemployment, depression, deflation, and stagnation. Both, orthodox AND heterodox economists are fake scientists.

Egmont Kakarot-Handtke

#1 Failed economics: The losers’ long list of lame excuses
#2 Inequality: Market failure or theory failure?