October 29, 2018

More on economists’ sticky brains

Comment on David Glasner on ‘More on Sticky Wages’

Blog-Reference and Blog-Reference on Oct 31

Economics is one of the most embarrassing failures in the history of modern science. The biggest blunders are profit theory and employment theory. Keynes saw the defects of employment theory but could not rectify them.#1 Eventually, the analysis got stuck in inconclusive blather about sticky wages.#2, #3, #4

David Glasner clearly recognizes that standard economics is one big Fallacy of Composition: “Keynes’s criticism here is entirely correct. But I would restate slightly differently. Standard microeconomic reasoning about preferences, demand, cost, and supply is partial-equilibrium analysis.” And: “… Keynes was certainly correct to reject the naïve transfer of partial equilibrium theorizing … to macroeconomic theorizing about economy-wide disturbances in which the assumptions underlying the comparative-statics analysis used in microeconomics are clearly not satisfied.”

Obviously, a Paradigm Shift is needed: “The search for that different kind of theorizing is the challenge that has always faced macroeconomics. Despite heroic attempts to avoid facing that challenge and pretend that macroeconomics can be built as if it were microeconomics, the search for a different kind of theorizing will continue; it must continue.”

David Glasner is too late. What escaped his attention is that the paradigm shift from false microfoundations to true macrofoundations is a done deal.#5

From the axiomatically correct macrofoundations, #6 follows the elementary version of the objective-systemic Employment Law as shown on Wikimedia.#7

From this equation follows inter alia
(i) An increase in the expenditure ratio ρE leads to higher employment L (the Greek letter 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 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.

The macroeconomic price mechanism, which is formally embodied in ρF, tells everyone that downward stickiness of wages has NEVER been the problem but upward stickiness.

False theory leads to false policy guidance. With their defective microfounded employment theory, economists bear for 150+ years the political responsibility for the social devastation of mass unemployment.#8

Egmont Kakarot-Handtke

#1 Keynes saw the problems but did not solve them
#2 Employment theory as an example of proto-scientific soapbubbling
#3 Full employment, the Phillips Curve, and the end of Gaganomics
#4 Go! ― test the Profit and Employment Law
#5 From false microfoundations to true macrofoundations
#6 The macrofoundations approach starts with three 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.
#7 Wikimedia AXEC62 Employment Law
#8 For details of the big picture see cross-references Employment