November 12, 2016

How to end the futile economics zombie ping-pong

Comment on Simon Wren-Lewis on ‘Do New Keynesians assume full employment?’


It is impossible for Nick Rowe and Simon Wren-Lewis to get their heads around the fact that Walrasianism, Keynesianism, Marxianism, Austrianism is axiomatically false, that is, beyond repair. So ― not to get them out from behind the curve ― just for the record: it is pointless to pick one aspect, e.g. employment, and to discuss the respective faults or merits of some model variants. The iron methodological rule says: when the axioms are false the whole analytical superstructure is false.

Already Keynes knew this: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.”

Standard economics is built upon false premises. Therefore, the way forward is to bury all variants for good and to fully replace the false Walrasian micro axioms and the false Keynesian macro axioms by true macro axioms.#1

This is the correct set of premises: (A0) The objectively given and most elementary configuration of the (world-) 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.

(A1) to (A3) defines the pure production-consumption economy.#2 Note that the set of foundational equations is ENTIRELY FREE of behavioral assumptions like constrained/intertemporal optimization or equilibrium, that is, the axiom set is OBJECTIVE SYSTEMIC. This new analytical workhorse fully replaces Nick Rowe’s hallucinatory behavioral construct.

In the pure production-consumption economy, this is what happens if, for example, the productivity falls, due to some shock, by 50 percent: the price doubles because the correct Law of Supply and Demand says for the most elementary case that P=W/R, i.e., the market clearing price is equal to unit wage costs or, in other words, the real wage is equal to the productivity at any employment level, i.e. W/P=R. This is the objective-systemic configuration to start with. The usual guessing ping-pong about what agents might maximize or expect or do has always been futile, is futile with Nick and Simon, and will be futile for all eternity.

From the minimalist formal core, (A1) to (A3) follows in consistent logical steps the investment economy with the systemic employment equation, a.k.a. Phillips curve.#3,#4

The systemic employment equation says that employment increases if productivity falls and all other variables are held constant. Secular stagnation results from productivity and price rising faster than the wage rate, with all other variables held constant.

To paraphrase a summary of Blaug: ‘At long last, it can be said that the history of general theory from Walras to Arrow-Debreu and on to DSGE and New Keynesianism has been a journey down a blind alley, and it is the set A1/A3 to have finally hammered down the nails in the coffin.’

Egmont Kakarot-Handtke

#1 See ‘How to restart economics’ and ‘From microfoundations to macrofoundations
#2 For a detailed description see ‘The future of economics: why you will probably not be admitted to it, and why this is a good thing
#3 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#4 Equation on Wikimedia

REPLY to Anonymous on Nov 18

You say: “in Keynes y=I+C consumption is spending from current income only like, you know, the marginal propensity to consume, consume out of what?”

Yes, I know what Keynes said. And I know also (i) what Keynes said is false, (ii) After-Keynesians have not realized it until this day.

This is what Keynes said in the General Theory “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This two-liner is conceptually and logically defective because Keynes did not come 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 profit ― the pivotal magnitude of economics ― is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular, all I=S and IS-LM models.#1

Neither pro-Keynesians nor anti-Keynesians detected Keynes's foundational error/mistake in the last 80 years. It was Allais who got the elementary mathematics of national accounting right.#2

Keynes was not a great thinker but what came after him is abysmal. Anonymous is a case in point.

#1 For the formal proof see ‘Why Post Keynesianism Is Not Yet a Science
#2 See ‘How Keynes got macro wrong and Allais got it right