August 25, 2016

Sumner’s moronomics

Comment on merijntknibbe on ‘A schocker for Sumner’

Blog-Reference

As PeterP says: “Major mistake: you took Sumner seriously.” Sumner cobbled five theoretically unfounded assertions together, christened them voodoo AD, and pseudo-refuted them with selected examples from different times and countries. This is moronomics.

However, where Sumner is right is that old Keynesianism from the 1960s has already been false and that not much has improved with Post-New-After-Keynesianism. On the other hand, Orthodoxy has degenerated since Keynes to the absolute zero point of DSGE.

After more than 200 years there is no such thing as a valid employment theory. To get out of failed economics requires nothing less than a paradigm shift.

In the following, a sketch of the formally and empirically correct employment theory is given. A rather elementary version of the objective structural employment equation (2012) is shown on Wikimedia.

From this equation follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the 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 AND testable employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export. Empirical testing has to take the variations of ALL variables into account.

Items (i) and (ii) cover Keynes’s arguments about aggregate demand, which have been commonsensically right but formally defective. More precisely, Keynes’s multiplier is provably false (see 2012). The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which works very different from what the representative economist falsely assumes. As a matter of fact, overall employment (in the world economy or a closed national economy) INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

For the relationship between real wage, productivity, profit, and real shares see (2015, Sec. 10).

So, in simple terms, full employment (in any definition) can be achieved by increasing overall demand (average expenditure ratio, investment expenditures etc.) or by INCREASING the AVERAGE wage rate (more precisely by increasing the factor cost ratio rhoF) or by a combination of the two. Note that increasing the average wage rate is not the same thing as increasing the minimum wage).

The Keynesian approach is macrofounded but incomplete because Keynes had no deeper understanding of the price and profit mechanism. Microfounded employment theory, though, is even worse. Both, the Walrasian and Keynesian approaches have produced counterproductive policy advice. Unemployment is ultimately the result of theory failure. The scientific incompetence of economists causes probably more human and material damage than natural or political disasters.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL