November 15, 2017

Full employment through the price mechanism

Comment on Bill Mitchell on ‘Automation and full employment ― back to the 1960s’

Blog-Reference and Blog-Reference

Bill Mitchell argues “A currency issuing government has the ability to address change in a timely way so as to minimize the effects of disruptive innovation by maintaining full employment and keeping the economy on track. It’s a matter of maintaining demand so resources that technological innovation and increased productivity make available are not idled owing to lack of demand.”

This is not false but only the first half of the correct employment theory. Bill Mitchell argues within the familiar Keynesian macroeconomic framework. He has not realized that Keynes’ employment theory is provably false.#1

The elementary 2-sector version of the axiomatically correct (objective, systemic, behavior-free, macrofounded#2) Employment Law is shown on Wikimedia: #3

From this equation follows:
(i) An increase in the expenditure ratio ρE leads to higher employment L (the Greek letter rho ρ stands for ratio). An expenditure ratio ρE greater than 1 indicates a budget deficit = credit expansion, a ratio ρE less than 1 indicates credit contraction.
(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.

The complete Employment Law contains, in addition, profit distribution, the public sector, and foreign trade.

Item (i) and (ii) cover Keynes’ familiar arguments about aggregate demand. The factor cost ratio ρF as defined in (iii) embodies the macroeconomic price mechanism. The fact of the matter is that overall employment L 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.

With regard to automation then follows (under the initial condition of I given and ρE=1 and P constant) that the average wage rate has to rise in lockstep with productivity in order to keep ρF constant and employment at the given level.

There are TWO set screws for controlling employment, i.e. ρE and ρF. Bill Mitchell completely ignores the macroeconomic price mechanism which is formally embodied in ρF.

False theory leads to false policy guidance. With their defective employment theory, economists ― including Post Keynesians and MMTers ― bear the intellectual responsibility for the social devastation of mass unemployment.#4

Egmont Kakarot-Handtke

#1 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#2 The macrofoundations approach is defined by three systemic axioms: (A0) The objectively given and 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. (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. For a start it holds X=O.
#3 Wikimedia AXEC62 Employment Law
#4 For details of the big picture see cross-references Employment/PhillipsCurve.

REPLY to Kaivey on Nov 15

Stop hallucinating and learn to read!

The title of my post is ‘Full employment through the price mechanism’. It is shown that ― for systemic reasons ― the average wage rate must rise faster than the productivity in order to move towards full employment and that the average wage rate must rise at the same rate as productivity in order to maintain full employment and price stability.

I made it quite explicit that “This is the OPPOSITE of what microfounded economics teaches.” Your Pavlovian waffle about the advocates of the free market system is entirely beside the point.#1

You say “MMT is a way of tweaking the machine to run at a more optimum level taken into account people’s needs, psychology, desires, and wants, and the greater good of the collective society.”

Dream on. MMT is proto-scientific garbage. The employment theory is provably false since Keynes.#2 The political claim that MMT fights for the little guy (Kelton: a pony for every American) is rancid soap opera stuff.#3

For the ‘greater good of the collective society’ MMTers have to be expelled from the scientific community.

#1 The market economy is inherently unstable and economists never grasped it
#2 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#3 MMT: Money-making for the one-percenters

REPLY to ANC Driver on Nov 17

There are two issues here: employment and profit.

Profit, in turn, comes in two forms: monetary profit Qm and distributed profit Yd. This gives one the Profit Law for the elementary production-consumption economy as Qm≡Yd−Sm. Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving. Note that there is a positive feedback loop between profit and distributed profit. This, by the way, sinks the idea of economic equilibrium.

For the investment economy including government and excluding foreign trade, macroeconomic profit is given by Qm≡Yd+(I−Sm)+(G−T). This compares to the original MMT balances equation (S−I)+(T−G)=0 or 0=(I−S)+(G−T).#1 The equations clearly tell everybody that MMT deals with a zero-profit economy ― no profit, no distributed profit. Nobody has ever seen a zero-profit economy. So the whole of Modern Monetary Theory is vacuous blather.

This means, of course, that MMT employment theory, too, is vacuous blather. The Employment Law for the closed economy is shown on Wikimedia.#2, #3

The Employment Law tells everyone that the average wage rate must rise faster than productivity in order to achieve full employment. This is a testable proposition because the Employment Law consists of measurable variables (see ADDENDUM below).

It is only a question of time until MMT is empirically refuted.

#1 Wikipedia Modern Monetary Theory
#2 Wikimedia AXEC46 Employment Law including profit distribution
#3 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster


ADDENDUM on Nov 23 'Australia Wage Growth and Underutilization Rate'

Source: Tweet Philip Soos
See the Employment Law above for the inverse relationship between wage rate and unemployment.