August 3, 2017

Putting economic policy on scientific foundations

Comment on Chris Dillow on ‘Fiscal policy with a flat Phillips curve’


Chris Dillow says: “It’s widely agreed that the Phillips Curve is flat, that low unemployment is not stoking up wage inflation ― though perhaps this has been true for longer than thought.” Perhaps it never has been true.

The fact that the Phillips Curve now seems to be flat only tells one that it has been misspecified all along. Thanks to the scientific incompetence of economists this remained undetected since Samuelson/Solow messed things up. The methodological blunder consists in interpreting the Phillips Curve as a behavioral relationship. What has to be done is to formulate the Phillips Curve as a structural-systemic relationship.

To make matters short here, the elementary version of the correct systemic Phillips Curve is shown on Wikimedia.#1, #2 This relationship consists alone of measurable variables and is therefore identical with the observed Phillips Curve.

The correct relationship covers the familiar arguments about how effective demand affects employment. Secondly, the ratio rhoF embodies the macroeconomic price mechanism. It works such that overall employment L INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa. This is the opposite of what microfounded employment theory teaches.

The correct systemic Phillips Curve tells one that in the given situation the most urgent policy measure is to set an increase of the average wage rate in motion. Otherwise, the economy gets trapped in a spiral of rising unemployment and deflation.

Egmont Kakarot-Handtke

#1 Wikimedia AXEC36 Structural-systemic Phillips Curve

#2 For the derivation see Sec. 5 to 7 of the working paper Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster.

Related 'Forget Friedman, forget Keynes' and 'The minimum wage debate: a showpiece of economists’ hereditary idiocy' and 'The role of labor and business in a well-organized society' and 'Macrofounded labor market theory' and 'Rethinking the Phillips Curve' and 'Attention: there are THREE types of inflation' and 'Toward a non-Neanderthal employment policy' and 'NAIRU ― letting one more nonentity go' and 'Going beyond No-Idea economics' and 'A la recherche de l'inflation perdue'

LINKS on Aug 7

Going beyond No-Idea economics
Comment on Noah Smith on ‘Japan Buries Our Most-Cherished Economic Ideas’

A la recherche de l'inflation perdue
Comment on David Andolfatto on ‘Where’s the inflation?’

#Economics #FailedScience #FakeScience #PhillipsCurve

LINK on Aug 27

Note on Michael Dotsey, Shigeru Fujita, and Tom Stark on ‘Do Phillips Curves Conditionally Help to Forecast Inflation?’

The working paper concludes: “We find no evidence for relying on the Phillips Curve during normal times, such as those currently facing the U.S. economy.”

This is due to the fact that the Phillips Curve is misspecified since Samuelson/Solow. For the correct specification see Putting economic policy on scientific foundations.