February 26, 2017

NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy

Comment on Simon Wren-Lewis on ‘The NAIRU: a response to critics’ and Lars Syll on ‘Simon Wren-Lewis — flimflam defender of economic orthodoxy’

Blog-Reference and Blog-Reference and Blog-Reference

The NAIRU-Phillips curve is an explicit formal description of the functioning of the macroeconomic labor market. Formal description means that one has a number of variables and their relationships which summarize the current knowledge of how the economy or some part of it works. Scientific knowledge is embodied in the true theory.

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)

The two questions that arise with any description are: (i) is it conceptually/logically consistent, and (ii), is it materially consistent? The second question involves the measurability of variables, the practical problem of measurement, data gathering, and statistical methodology. From a description that is either formally inconsistent or materially inconsistent ANY economic policy conclusions can be drawn. Put the other way round, policy proposals that are not based on a materially/formally consistent theory are at the same level as sitcom blather, storytelling, or soap box agenda pushing.

Economic policy guidance that is not based on the true theory is pretty much the same as ancient Roman poultry entrails reading.

The NAIRU-Phillips curve is scientifically worthless because it is conceptually inconsistent.#1 So, any discussion about measurement problems or the economic policy implications of a NAIRU is pointless. Needless to emphasize that most of the discussion circles around these distracting side issues.

The NAIRU-Phillips curve is integral part of standard economics: “The concept of the NAIRU, or equivalently the Phillips curve, is very basic to macroeconomics. It is hard to teach about inflation, unemployment and demand management without it.”#2

Standard economics is built upon this set of foundational propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

It should be pretty obvious that the standard axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5).

Methodologically, the neo-Walrasian axioms are forever unacceptable but scientifically incompetent economists from Jevons/Walras/Menger onward accepted them as defining the ‘language of economics’: “Accepting the concept of the NAIRU does not mean you have to agree with their judgements. But if you want to argue that they could be doing something better, you need to use the language of macroeconomics.”#2

Not at all! The neo-Walrasian language of macroeconomics is composed of NONENTITIES and this leads quite naturally to measurements problems, material inconsistency, and vacuous political blather. So Heterodoxy is right in saying that “the NAIRU has to be bashed, smashed, and trashed”.

The problem of traditional Heterodoxy is that it has nothing better to offer.#3 The standard microfoundations HC1/HC5 are false, but Keynesian macrofoundations are also false. So, both orthodox and traditional heterodox labor market theories are proto-scientific rubbish.#4 As an inevitable consequence, the whole discussion about NAIRU has degenerated to the squabble of political sects. Wren-Lewis tries in vain to deny this plain fact: “Economics is certainly not a religion, where all you have to do is choose which sect you belong to and then follow great works.“

What has to be done to get out of confused sectarian squabble is to fix the labour market theory by putting it on consistent macrofoundations.

Two factors determine macroeconomic employment: overall demand and the price mechanism, or more specifically, the actual configuration of average wage rate, price, and productivity. By consequence, economic policy is about private/public demand management AND wage/price management.

The correct theory of the macroeconomic price mechanism tells us that ― for purely SYSTEMIC reasons ― the average wage rate has in the current situation to rise faster than the average price. THIS opens the way out of mass unemployment, deflation, and stagnation and NOT the blather of scientifically incompetent orthodox and heterodox agenda pushers.#4

Egmont Kakarot-Handtke

#1 See ‘NAIRU, wage-led growth, and Samuelson’s Dyscalculia
#2 See SWL ‘The NAIRU: a response to critics
#3 See LPS ‘Simon Wren-Lewis — flimflam defender of economic orthodoxy
#4 See ‘Mass unemployment: The joint failure of orthodox and heterodox economics


Related 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather' and 'NAIRU does not exist because equilibrium does not exist' and 'If it isn’t macro-axiomatized, it isn’t economics'

February 22, 2017

Pants kicking is over, let’s do serious economics now

Comment on Lars Syll on ‘Solow kicking Lucas and Sargent in the pants’

Blog-Reference and Blog-Reference on Feb 25

The aspiring student is not much helped with this description of economics: “wildly incorrect,” “fundamentally flawed,” “wreckage,” “failure,” “fatal,” “of no value,” “dire implications,” “failure on a grand scale,” “spectacular recent failure,” “no hope”. (See intro)

Clearly, the description is spot on and it holds for Walrasianism, Keynesianism, Marxianism, Austrianism. Everybody knows by now that economics is a failed science. The lack of sound theoretical foundations, though, has never stopped an economist from giving his scientifically worthless economic policy advice.

The question of the aspiring student is: Given that economics is a failed science, I am not so much interested in who messed up what in the last 200+ years, or whether the incompetence has been greater in Chicago than in Cambridge, what I need to know is how the actual economy works. So, do not waste more time with pants kicking, tell me what the fatal mistake/error/blunder is and how to get over it.

Here is ― for the last time ― the bone of contention: “The purported strength of New Classical macroeconomics is that it has firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ individuals. To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations ― without ever presenting neither ontological nor epistemological justifications for this claim ― has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if ― after having swallowed the sour grapes of the Sonnenschein-Mantel-Debreu-theorem ― these economists want to resurrect the omniscient walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world.” (See intro)

In brief, Walrasian microfoundations are false. Methodologically, the iron law applies: Because the axiomatic foundations#1 are false the whole analytical superstructure from constrained maximization to DSGE/RBC/New Keynesianism is false.

Unfortunately, Keynesian macrofoundations are false, too.#2 So, there is NO valid economics.

This is the current state of economics: Economists give policy advice without having a scientifically sound theory.#3 Economic theory is a failure because it has been based on methodologically unacceptable axiomatic foundations. Therefore, there is no way around a paradigm shift. In other words, the false Walrasian microfoundations and the false Keynesian macrofoundations have to go out of the window and have to be completely replaced by entirely new macrofoundations.#4

There is no other way out of the scientific mess economics is in. As Hilbert put it: “The axiomatic method is indeed and remains the one suitable and indispensable aid to the spirit of every exact investigation no matter in what domain; ... To proceed axiomatically means in this sense nothing else than to think with knowledge of what one is about.”

Until this very day, neither Orthodoxy nor Heterodoxy got the basic economic concepts and their relations right. And this is why economics is still on the proto-scientific level of incoherent blathering with NO idea ‘of what one is about’.

How science is done is known since more than 2000 years ― except to economists: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle) Because of this “... it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison)

The new general rule to apply for economic research, discussion, peer-review and textbooks is: If it isn’t macro-axiomatized, it isn’t economics. This rule vaporizes roughly 99 percent of what has hitherto been accepted as economics. Forgetting all this proto-scientific rubbish enhances scientific productivity enormously.

Egmont Kakarot-Handtke

#1 The microfoundations approach is defined with these five hard core propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#2 See ‘How Keynes got macro wrong and Allais got it right
#3 See ‘Paul the Menace
#4 See ‘From false micro to true macro: the new economic paradigm


Related 'The methodological blunders of fake scientists' and cross-references Axiomatization

February 21, 2017

The methodological blunders of fake scientists

Comment on Lars Syll and Alan Musgrave on ‘The logical fallacy that good science builds on’

Blog-Reference

The scientific method is well-defined: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.

Both, orthodox and heterodox economists claim to do science but obviously lack any deeper understanding. Feynman put is thus: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

What is missing is a proper understanding of what science is all about. Lars Syll, the heterodox chief methodologist, puts up this straw man: “Scientific arguments are not analytical arguments, where validity is solely a question of formal properties. Scientific arguments are substantial arguments. If Robert Lucas is a Keynesian or not, is nothing we can decide on formal properties of statements/propositions. We have to check out what the guy has actually been writing and saying to check if the hypothesis that he is a Keynesian is true or not.”

This is as sylly as one can get. Science has NEVER been formal logic alone, that is, drawing conclusions from premises without regard to the empirical content of the premises: “In the most fruitful applications of mathematics to the physical world, some nonmathematical axioms also enter. The Newtonian system of mathematical mechanics depends as much on the Newtonian laws of motion and gravitation as it does on the axioms of mathematics.” (Kline)

Both, material and logical consistency has to be established by proof. This, of course, is the hard part of science. The most impressive kind of proof is to derive a logical conclusion from the theory about a hitherto UNKNOWN fact and then to look specifically for it and actually find it. This is the triumph of the perfect hand-in-glove-fitting of material and formal consistency.

“Thirty years after Laplace wrote this apotheosis of mechanics, something happened that tended to prove that mechanics has the power over existence as he described it. In 1846 a French astronomer, Urbain Leverrier, at the end of some calculations in which he confronted the astronomical observations of the known planets with the results of an appropriate mechanical system, was led to proclaim that there existed a still unknown planet, which, moreover, must be visible in a certain region of the sky. Direct observation of that region soon confirmed the existence of that planet, now called Neptune. Neptune, therefore, was discovered not by scanning the firmament with telescope, but ‘at the tip of a pencil’.” (Georgescu-Roegen)

The deduction of hitherto unknown facts is the very opposite of the realists’ flat-earth methodology: “In inference to the best explanation we start with a body of (purported) data/facts/evidence and search for explanations that can account for these data/facts/evidence. Having the best explanation means that you, given the context-dependent background assumptions, have a satisfactory explanation that can explain the fact/evidence better than any other competing explanation — and so it is reasonable to consider/believe the hypothesis to be true.” (See intro)

Not much has been achieved with this methodology. Indeed, it is the very characteristic of Heterodoxy that it talks much about methodology and ontology and philosophy instead of presenting a spectacular new insight as the direct result of their purportedly superior approach.

Heterodoxy simply conflates the axiomatic-deductive method with mathematics: “Deductive logic may work well — given that it is used in deterministic closed models! In mathematics, the deductive-axiomatic method has worked just fine. But science is not mathematics.” (See intro)

No, it is not and never was. It has always been empirical: “But the axioms Science is the attempt to make the chaotic diversity of our sense-experience correspond to a logically uniform system of thought.” (Einstein)

More precisely: “The basic concepts and laws which are not logically further reducible constitute the indispensable and not rationally deducible part of the theory. It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” (Einstein)

In marked contrast to Heterodoxy, Orthodoxy never had any qualms with axiomatics: “In particular, it is supposed, in the main, that there is perfect competition and that the choices of economic agents can be deduced from certain axioms of rationality.” (Arrow, Hahn)

The cargo cultist failure of Orthodoxy is the inability to see that a behavioral assumption like rationality is inadmissible as an axiom because its reality content is zero. Therefore, the whole of Walrasian economics from utility maximization to DSGE/RBC is indeed ― as Heterodoxy always criticized ― an empirically vacuous logical exercise. This, though, is NOT the fault of the axiomatic-deductive method but a misapplication by methodologically incompetent economists.

The characteristic of science is to start with a consistent set of elementary concepts, e.g. mass, force, energy, velocity, acceleration etcetera, because: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen)

As Hilbert put it: “The axiomatic method is indeed and remains the one suitable and indispensable aid to the spirit of every exact investigation no matter in what domain; ... To proceed axiomatically means in this sense nothing else than to think with knowledge of what one is about.”

Until this very day, neither Orthodoxy nor Heterodoxy got the basic economic concepts profit and income right. And this is why economics is still on the proto-scientific level of incoherent blathering with NO idea ‘of what one is about’.#2

Egmont Kakarot-Handtke

#1 See ‘Heterodoxy and the re-invention of science
#2 See ‘If it isn’t macro-axiomatized, it isn’t economics


Related 'The end of traditional Heterodoxy in the Malmö coal pit' and 'The scientific self-elimination of Heterodoxy' and 'Pants kicking is over, let’s do serious economics now' and cross-references Axiomatization and cross-references Paradigm shift

February 20, 2017

NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather

Comment on Simon Wren-Lewis on ‘NAIRU bashing’

Blog-Reference and Blog-Reference and Blog-Reference

NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false.

You say: “The way economists have thought about the relationship between unemployment and inflation over the last 50 years is the Phillips curve.”

This hallucinatory Phillips curve has first of all to be rectified.#1 The objective systemic employment equation is shown on Wikimedia. From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation contains in addition profit distribution, government deficit/surplus, and the trade balance.

Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does NOT work as standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa. If the average price increases faster than the average wage rate employment decreases.

The systemic employment equation fully replaces the hallucinatory Phillips curve and NAIRU. The equation contains nothing but measurable variables and is therefore testable. No prohibiting measurement problems at all!

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 employment theory and this explains their endless inconclusive blather about NAIRU which is a NONENTITY like the Tooth Fairy or dancing-angels-on-a-pinpoint.

Egmont Kakarot-Handtke

#1 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

***
REPLY to Blissex on Feb 21, also on MNE

You comment on the rectification of the obsolete NAIRU-Phillips curve: “That sounds very plausible, and the replacement of the imaginary Phillips curve(s) is welcome, but your comment lacks one very important detail, the ‘central banker’s’ question.”

It is a matter of indifference whether ‘that sounds very plausible’. The point is whether the hallucinatory NAIRU-Phillips curve or the objective SYSTEM-Phillips curve is the TRUE representation of the determinants of employment/unemployment.

Scientific truth is methodologically well-defined by material and formal consistency and is established by PROOF and NOT by what ‘sounds plausible’ to Blissex.

Because the NAIRU-Phillips curve is PROVABLE false NO economic policy conclusions can be drawn from it, neither with regard to monetary nor to fiscal policy. Because economists lack the true theory their economic policy guidance has NO sound scientific foundation since Adam Smith.

Everybody has the right to climb on a soap box and to address the Circus Maximus with policy proposals EXCEPT economists. Economics is supposed to be a science and economists are supposed to adhere to scientific standards. This means that economists have to make sure that they have the true theory about how the economy works BEFORE they tell the world how to save the economy.

The fact of the matter is that profit theory, IS theory, theory of money, and employment theory is false.#1 Because employment theory is false, economic policy guidance regularly WORSENS the situation, that is, economists bear the intellectual responsibility for mass unemployment, deflation, depression, stagnation.#2

Before economists in general and Wren-Lewis in particular can address ‘the central banker’s question’ there is a lot of scientific homework to do.#3

Egmont Kakarot-Handtke

#1 See ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#2 See ‘How economists murdered the economy and got away with it
#3 See ‘If it isn’t macro-axiomatized, it isn’t economics

***

REPLY to Simon Wren-Lewis on Feb 21, also on MNE

You say: “What I find very dispiriting about most of the comments on this post is a complete failure to engage with what I have said, and say where they disagree. Instead it is more along the lines of repeating the NAIRU is rubbish, without ever giving a coherent account of what exactly is rubbish.”

The microfounded NAIRU-Phillips curve has first of all to be rectified.* The macrofounded SYSTEM-Phillips curve is shown on Wikimedia.

From this correct employment equation follows in the MOST ELEMENTARY case that an increase of the macro-ratio rhoF=W/PR leads to higher total employment L.

The ratio rhoF embodies the price mechanism. Let the rate of change of productivity R for simplicity be zero, i.e. r=0, then there are three logical cases:
(i) The rate of change of the wage rate W is equal to the rate of change of the price P, i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are. That is, NO amount of inflation or deflation has any effect on employment.
(ii) The rate of change of the wage rate is greater than the rate of change of the price then employment INCREASES.
(iii) The rate of change of the wage rate is smaller than the rate of change of the price then employment DECREASES.

So, it is DIFFERENCES in the rates of change of wage rate and price and not the absolute magnitude of change. Every PERFECTLY SYNCHRONOUS inflation/deflation is employment-neutral, that is, employment sticks indefinitely where it is. In more general terms the neutrality condition reads W(1+w)/P(1+p)R(1+r)=rhoF=constant.

There is NO such thing as a NAIRU, all depends on relative rates of change. This is a testable proposition.

* See ‘NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather

***

REPLY to Anonymous on Feb 23, also MNE

The fatal mistake of the discussion is to accept the NAIRU-Phillips curve (with the well-known disclaimers) and to focus on the economic policy implications with regard to the given situation in the US/UK/etc. But there is NO use to discuss policy if the underlying theory is defective.

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)

So what FIRST has to be done is to fix the NAIRU-Phillips curve.* The insight that there is NO such thing as a NAIRU then opens up new economic policy perspectives.

The correct theory of the macroeconomic price mechanism tells us that ― for purely SYSTEMIC reasons ― the average wage rate has in the given situation to rise faster than the average price. This opens the way out of mass unemployment, deflation, and stagnation.

If the price mechanism does not spontaneously deliver, as standard economics claims since 200+ years, THIS becomes an issue for economic policy and economics has to figure out the optimal rates of change for wage rate and price.

* For details see ‘NAIRU, wage-led growth, and Samuelson’s Dyscalculia


Related 'NAIRU does not exist because equilibrium does not exist' and 'If it isn’t macro-axiomatized, it isn’t economics' and 'The disutility of debunking NAIRU' and 'NAIRU ― a folk psychological hallucination' and 'False theory makes wrong policy: economics as loose cannon' and 'Naive arithmetic' and 'NAIRU, wage-led growth, and Samuelson's Dyscalculia' and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'

Walras, Keynes, Samuelson, DSGE, IS-LM ― R.I.P.

Comment on Roger Farmer on ‘Let’s All Be Keynesians Now’ and on ‘Animal Spirits in a Monetary Model’

Blog-Reference and Blog-Reference

Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This elementary syllogism is inconsistent because Keynes never came to grips with profit (Tómasson et. al.). As a result, all I=S models and all IS-LM models are false.#1,#2

Because Keynesian macro is inconsistent any synthesis with inconsistent Walrasian micro is inconsistency squared since Samuelson.#3

The common denominator of Keynes, Walras, Samuelson, Farmer and Platonov is that they have NO idea of the pivotal concept of the subject matter, that is, of profit. That is disqualifying for an economist.

In methodological terms, axiomatically false is the death sentence for a paradigm, because when the foundational premises are inconsistent the whole analytical superstructure falls apart.

The representative economist has not realized until this very day that there is NO such thing as fresh thinking about analytical monstrosities that were already dead in the cradle 140+ and 80+ years ago.

Egmont Kakarot-Handtke

#1 See ‘How Keynes got macro wrong and Allais got it right'
#2 See ‘Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
and cross-references Refutation of I=S
#3 See ‘The father of modern economics and his imbecile kids

February 19, 2017

NAIRU does not exist because equilibrium does not exist

Comment on Lars Syll on ‘Debunking the NAIRU myth’ and on Brian Romanchuk on ‘NAIRU Should Be Bashed, Smashed, And Trashed’

Blog-Reference and Blog-Reference

The current state of economics is this: Walrasian microfoundations are false since 140+ years and Keynesian macrofoundations are false since 80+ years.#1 By consequence, employment theory, too, is false and this, of course, includes NAIRU.#2 What is urgently needed is true macrofoundations and the true employment theory.

Because employment theory is false, economic policy guidance regularly WORSENS the situation, that is, economists bear the intellectual responsibility for unemployment, deflation, depression, stagnation.#3

What orthodox employment theory says is this: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed.” (Tobin)

What microfounded supply-demand-equilibrium economics says is that there is a NEGATIVE relationship between wage rate and employment. From the true macrofoundations follows that the MACROECONOMIC relationship between wage rate and employment is POSITIVE.

It should be possible to empirically establish which of the two opposing propositions is true. In fact, the Great Depression and the current mass unemployment gives one a clear hint that supply-demand-equilibrium in general and labor market theory in particular is dead wrong.#4

Egmont Kakarot-Handtke

#1 See ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#2 See ‘NAIRU ― a folk psychological hallucination
#3 See ‘How economists murdered the economy and got away with it
#4 See ‘Macroeconomics without Keynes

***

REPLY to Ralph Musgrave on Feb 19

You argue: “The fact that there is little empirical evidence to support NAIRU is easily explained by the amount of background noise. Same problem applies in other subjects (chemistry, astronomy, etc). But in subjects other than economics, it is normally possible to do experiments where non-relevant variables , i.e. ‘other stuff’, is held constant. In economics that is not possible normally.”

This is one of the oldest excuses of economists which can be traced back to Hume and Mill: “There is a property common to almost all the moral sciences, and by which they are distinguished from many of the physical; this is, that it is seldom in our power to make experiments in them.” (Mill)#1

The solution of this methodological problem consists in making a system science out of the moral or behavioral or social proto-science of economics. To get out of failed economic theory requires nothing less than a full-blown paradigm shift from accustomed behavioral microfoundations to entirely new systemic macrofoundations.

In the following a sketch#2 of the correct employment theory is given. The most elementary version of the objective systemic employment equation is shown on Wikimedia.

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation contains in addition profit distribution, government deficit/surplus, and the trade balance.

Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does NOT work as standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

The systemic employment equation fully replaces the bastard Phillips curve and NAIRU.#2, #3 The equation contains nothing but measurable variables and is therefore testable.

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 and this explains their endless inconclusive wish-wash. In their scientific incompetence both orthodox and heterodox economists are ultimately responsible for the enormous social devastations of mass unemployment. Economists are not only hopeless blatherers but a real danger for their fellow citizens.

#1 See also ‘Failed economics: The losers’ long list of lame excuses
#2 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#3 For the relationship between profit and employment see ‘Have data, lack theory

***

REPLY to Tom Hickey on Feb 19

Science is about invariances (Nozick) but there is NO such thing as behavioral invariances. Because of this the neo-Walrasian axioms* are methodological madness to begin with. There is NO need to invoke the Sonnenschein-Mantel-Debreu theorem in order to refute/unlearn standard economics.

The subject matter of economics is NOT the behavior of humans but the behavior of the economic system.** See ‘The existence of economic laws and the nonexistence of behavioral laws’.

* The microfoundations approach is defined with these five hard core propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
** The macrofoundations approach is defined with these three BEHAVIOR-FREE 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.

***

REPLY to Matthew Franko, Tom Hickey on Feb 20

Seems you lost your way. The point at issue is NAIRU and not the relationship between investment and saving. The latter is given by Qm=I-Sm, i.e. monetary profit is equal to the difference between investment and monetary saving. For more details see ‘Wikipedia and the promotion of economists’ idiotism’ and cross-references Refutation of I=S

***

ICYMI on Feb 20

NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather
Comment on Simon Wren-Lewis on ‘NAIRU bashing’

NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false.

You say: “The way economists have thought about the relationship between unemployment and inflation over the last 50 years is the Phillips curve.”

This hallucinatory Phillips curve has first of all to be rectified.#1 The objective systemic employment equation is shown on Wikimedia. From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation contains in addition profit distribution, government deficit/surplus, and the trade balance.

Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does NOT work as standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa. If the average price increases faster than the average wage rate employment decreases.

The systemic employment equation fully replaces the hallucinatory Phillips curve and NAIRU. The equation contains nothing but measurable variables and is therefore testable. No prohibiting measurement problems at all!

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 employment theory and this explains their endless inconclusive blather about NAIRU which is a NONENTITY like the Tooth Fairy or dancing-angels-on-a-pinpoint.

#1 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster


Related 'Why you should NEVER use supply-demand-equilibrium' and 'The key to macro and Keen's debt-employment model' and 'Economics and the social science delusion' and 'From Orthodoxy to Heterodoxy to Sysdoxy' and 'The key to macro and Keen's debt-employment model' and 'Unemployment is high because economics is false: period, full stop, end of story' and 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'

February 17, 2017

Why you should NEVER use supply-demand-equilibrium

Comment on Peter Dorman on ‘Why You Should Never Use a Supply and Demand Diagram for Labor Markets’

Blog-Reference and Blog-Reference

As can be seen in every textbook, economists answer any question by painting the triad SS-function―DD-function―equilibrium. Leijonhufvud called this analytical tool totem of the micro/totem of the macro. What economists do not understand until this day is that there is NO such thing as an economic equilibrium and NO such thing as SS and DD functions. The totem of micro/macro is a NONENTITY like the Tooth Fairy or the Easter Bunny.

After economists have applied their standard analytical workhorse supply-demand-equilibrium for more than a century self-doubts arise, at least with regard to the labor-market: “S&D is simply the wrong model, based on a failure to distinguish between offers and transactions.” (see intro)

But economists never bury one self-delusion without advertising the next: “Fortunately, there’s a better model out there, search theory, with fairly straightforward intuitions and tons of available data.”

What the representative economist fails to realize is that the foundational error/mistake/ blunder of the supply-demand-equilibrium approach lies in the microfoundations.#1 The lethal methodological blunder can be stated as an impossibility theorem: NO way leads from the explanation of individual behavior to the explanation of how the economic system works. Because of this, the microfoundations approach has already been dead in the cradle 140 years ago.

What the representative economist fails to realize is that the economy as a system is defined by the interrelationship of a number of elementary variables. Every model, no matter how differentiated, must contain these OBJECTIVE SYSTEMIC interrelationships as its formal hard core. In other words, the false microfoundations have to be replaced by the true macrofoundations. This in turn leads to an objective systemic theory of the labor market.#2

All this is forever beyond the horizon of the representative economist who can easily drop what he sold as the true model yesterday but not methodological individualism because: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow)

The commitment to microfoundations is the ultimate reason why economics in general and labor market theory in particular is false. The search theory of the labor market is no exception.

Egmont Kakarot-Handtke

#1 The microfoundations approach is defined with these hard core propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#2 See ‘The one stone that kills orthodox and heterodox employment theory

Related 'Essentials of Constructive Heterodoxy: The Market' and 'The Law of Supply and Demand: Here It Is Finally' and 'How to Get Rid of Supply-Demand-Equilibrium'

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REPLY to Stephen Williamson on Feb 17

Already Schumpeter found it necessary to diffuse doubts about the scientific content of the supply-demand-equilibrium approach: “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.”

As a matter of fact, the ‘primitive apparatus of the theory of supply and demand’ is a thoroughly faulty construct: “There is little or nothing in existing micro- or macroeconomics texts that is of value for understanding real markets. Economists have not understood how to model markets mathematically in an empirically correct way.” (McCauley, 2006)

For the methodologically correct approach see: ‘Essentials of Constructive Heterodoxy: The Market

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REPLY to ProGrowthLiberal on Feb 19

You say: “In my Brooklyn neighborhood, there are competing stores a few blocks apart. So if I cannot buy milk in one I go to the other.”

That is rather smart, but it escaped your attention that this thread is about the LABOR market and neither about the goods market in general nor the Brooklyn milk market in particular.

The SS-function―DD-function―equilibrium approach is false for BOTH the goods and the labor market because ALL microfounded approaches are methodologically false. The macrofounded approach delivers the following testable macro employment equation = true Phillips curve.

Explanations haven been given elsewhere.


Related 'NAIRU does not exist because equilibrium does not exist' and 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'