January 30, 2017

Macroeconomics without Keynes

Comment on Roger Farmer on ‘Keynesian Economics Without the Consumption Function’

Blog-Reference and Blog-Reference and Blog-Reference on Apr 11 adapted to context

Roger Farmer announces: “In Prosperity for All, I describe a theory of Keynesian economics, developed in my recent body of work, in which the transmission mechanism from demand to employment is through wealth, not through income. I call this, a theory of Keynesian economics without the consumption function.”

This does not go far enough. Keynesianism as a WHOLE, and not only the consumption function, has to be buried because it is axiomatically false.

1. How Keynes got it wrong
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 conceptually defective because Keynes never came to grips with profit (Tómasson et. al.). As a result, all I=S models and the Keynesian multiplier are false.#1,#2

2. Rectification
The defective Keynesian premises have to be replaced by the correct macrofoundations.
(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.

These macro axioms replace Keynes’s provable false formal foundations and by implication the false Walrasian microfoundations.

3. The correct employment equation
The elementary version of the objective systemic employment equation for the investment economy which follows from A1/A3 is shown on Wikimedia.#3

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 gets a bit longer and contains in addition profit distribution, the government sector, and foreign trade.

Item (i) and (ii) cover Keynes’s arguments about aggregate demand. The ratio rhoE replaces the Keynesian consumption function. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does not work as standard economics assumes. As a matter of fact, overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This implication is readily testable against standard economics.

4. Conclusion
The replacement of Keynes false macrofoundations by the true macrofoundations yields the objective systemic (= behavior-free) employment equation. This equation is the one stone that kills the Keynesian multiplier, all IS-LM models, the stickiness argument, the false Keynesian profit theory, and the (Bastard-) Phillips curve including the natural rate hypothesis.#4

Egmont Kakarot-Handtke

#1See ‘How Keynes got macro wrong and Allais got it right
#2 See ‘Why Post Keynesianism Is Not Yet a Science
#3 Wikimedia
#4 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

Related 'New IS-LM macro ― just another fake revolution' and 'Windmill economics' and 'Keynes saw the problems but did not solve them'