January 20, 2017

Macro poultry entrails reading

Comment on Nick Rowe on ‘AD/AS: a suggested interpretation’


Economists think they can 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. This means in turn that the AD/AS analysis is a perfect instantiation of economists’ bad habit of confused interpretation of silly charts, an exercise which is in no way different from the poultry entrails reading of the old Roman haruspex.

Nick Rowe claims: “If you explain the AD/AS framework my way, you will see that it portrays a deep and realistic understanding of macroeconomics that is lost in more ‘sophisticated’ models. If you don’t start with the AD/AS framework you are doing it wrong.”

The plain fact of the matter is that Nick Rowe is in the state of manifest and incurable self-delusion. Keynesian macro in general, and AD/AS in particular, has always been methodologically unacceptable and its proper place is the waste basket.#1

What economists’ in their innate scientific incompetence fail 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. This is an imperative methodological necessity.

The false Walrasian microfoundations and the false Keynesian macrofoundations have to be replaced by the true macrofoundations. This is achieved by taking Keynes’s idea of a ‘monetary theory of production’ as the starting point.

(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.

The graphical representation of this absolute formal minimum is given on Wikimedia. This chart replaces the hare-brained totem of SS-function―DD-function―equilibrium. A detailed description of the elementary macro relationships has been given elsewhere.#2

The systemic macro axiom set A1/A3 is the one stone that kills, for a start, the Keynesian multiplier, ALL IS-LM models from Hicks onward, ALL AD/AS models, the stickiness argument, and the (Bastard-) Phillips curve including the natural rate hypothesis.#3

This, though, is forever beyond the horizon of the representative economist who flunked the intelligence test already by accepting the totems of micro and macro. If you don’t start macro with A1/A3 you are doing it wrong.

Egmont Kakarot-Handtke

#1 See ‘Keynesianism is broke: Get over it!
#2 See ‘Getting out of IS-LM = Getting out of despair
#3 For details see cross-references Paradigm shift