May 30, 2018

The demise of phony experts: Macroeconomics is provably false

Comment on Simon Wren-Lewis on ‘Nominal wages are not real wages, and why it matters in the UK’


Simon Wren-Lewis discusses the relationship between UK wage- and profit share, real wage, employment, and the NAIRU in order to bust two myths about immigration and employment. This is a futile exercise because macroeconomics is false since Keynes. After-Keynesians have not realized it until this day.#1

Roughly speaking, economists never got their foundational concepts straight. Here is the evidence from the General Theory: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This elementary syllogism is conceptually and logically defective because Keynes never came to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

Because the foundational concept of profit is false, the whole analytical superstructure is false. Since Keynes, macroeconomics is scientifically worthless.

Macroeconomic profit Qm is not a flow like wage income Yw but the difference of flows, i.e. Qm≡C−Yw in the most elementary case. It is methodologically not admissible to add wage income Yw and profit Qm together and to call the sum total income. This is the Humpty Dumpty Fallacy.#2

Because the Profit Theory is false, the Distribution Theory is false and the concept of profit “share” is nonsensical.

From the correct macroeconomic axioms follows the Profit Law as Qm≡Yd+(I−Sm)+(G−T)+(X−M). Total income is the sum of wage income Yw and distributed profit Yd.

Employment Theory is false by logical implication. The most elementary version of the correct macroeconomic Employment Law is shown on Wikimedia.#3

From this equation follows, inter alia, 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 standard economics teaches.

As Simon Wren-Lewis argues: “It is often difficult to convince those on the left that weakening labour power over wages can be a good thing, if lower nominal wages are passed on to lower prices. It can be a good thing because it allows the central bank to raise demand and therefore output by more than they otherwise could while keeping inflation stable. It reduces the sustainable unemployment rate: the NAIRU.”

It is difficult to convince microfounded economists, who are hopelessly trapped in the Fallacy of Composition, that the average wage rate must rise relative to price and productivity in order to reduce unemployment and that NAIRU has always been a NONENTITY.#4, #5

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)

Economists do NOT have the true theory. Macroeconomics is axiomatically false. Economists do not know how the price and profit mechanism works. Economic policy guidance has had no sound scientific foundations since Adam Smith/Karl Marx. There never was such a thing as an economic expert.

Egmont Kakarot-Handtke

#1 Why Post Keynesianism Is Not Yet a Science
#2 For details of the big picture see cross-references Profit
#3 Wikimedia, Employment Law
#4 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#5 For details of the big picture see cross-references Employment

Related 'The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment' and 'The Coherency of Money, Profit, Price, and Distribution' and 'Essentials of Constructive Heterodoxy: Profit'.