July 24, 2017

Forget Hayek

Comment on David Glasner on ‘Hayek, Deflation and Nihilism’

Blog-Reference and Blog-Reference and Blog-Reference and Blog-Reference

There are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, and the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

Theoretical economics consists of the major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism, MMT ― which are mutually contradictory, axiomatically false, and materially/formally inconsistent.

A closer look at the history of economic thought shows that theoretical economics had been hijacked from the very beginning by the agenda pushers of political economics. Smith and Ricardo fought for Liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Keen.

Political economists have achieved NOTHING of scientific value in the past 200+ years. Hayek was a political economist and an utterly incompetent scientist. His foundational error/mistake/blunder consisted of the assumption that the economy is inherently stable and heals itself. This has never been more than an assertion. No proof has ever been given. Worse, it can be proved that the market economy is inherently unstable.

Economics is a systems science ― NOT a behavioral science. Accordingly, the correct approach is not microfoundations but macrofoundations. An elementary version of the axiomatically correct (objective, systemic, behavior-free, macrofounded) Employment Law is shown on Wikimedia AXEC62.#1
From this equation follows:
(i) An increase in the expenditure ratio ρE leads to higher employment L (the Greek letter ρ stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.

Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio ρF as defined in (iii) embodies the price mechanism. The fact is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is the OPPOSITE of what microfounded economics teaches.#2

Hayek’s vacuous theoretical blather in the 1930s boiled down to the proposal of flexible wage cuts: “Hayek viewed deflation as potentially beneficial if it would break the rigidities obstructing adjustments in relative prices.”

Hayek obviously had no idea how the market system works. The Employment Law shows that a reduction of the wage rate reduces employment. This means that the market economy is inherently unstable. The commonsensical reaction to unemployment is a fall in the wage rate, but this increases unemployment.

The lethal methodological blunder of microfounded employment theory consists of the Fallacy of Composition, i.e. the illegitimate transfer of truths that hold for one firm/market onto the economy as a whole. False theory leads to false policy guidance. Scientifically incompetent economists bear the intellectual responsibility for the social devastation of mass unemployment.

“Late in life, moreover, he [Napoleon] claimed that he had always believed that if an empire were made of granite the ideas of economists if listened to, would suffice to reduce it to dust.” (Viner) Hayek was one in the long line of scientifically incompetent political economists who actively participated in the dustification of the market economy. He will find his ultimate history-of-thought resting place in the close neighborhood of Flat-Earthers.

Egmont Kakarot-Handtke

#1 Essentials of Constructive Heterodoxy: Employment
#2 For details of the big picture see cross-references Employment.

Related 'Hayek or how economists miss their subject matter for more than 200 years' and 'Hayek and other informationally retarded proto-economists' and 'Hayek ― agenda pusher or scientist?' and 'Why Hayek was not a scientist' and 'Hayek was not an economist' and 'Hayek: mad, bad, or just another incompetent economist?' and 'Forget Friedman, forget Keynes' and cross-references Failed/Fake Scientists.