August 4, 2017

Going beyond No-Idea economics

Comment on Noah Smith on ‘Japan Buries Our Most-Cherished Economic Ideas’

Blog-Reference and Blog-Reference on Aug 6

Noah Smith summarizes: “So Japan’s experience underscores one central, disturbing truth: Economists really have no idea how inflation works. It is simply a mystery.” and “In Japan, nothing of the sort has happened ― wages and prices show little sign of rising despite the disappearance of unemployment. So much for the Phillips Curve.”

Fact is that economics is a failed science because economists are scientifically incompetent. NO mystery here.

The fact that the Phillips curve now seems to be flat only tells one that it has been misspecified all along. Thanks to the scientific incompetence of economists this remained undetected since Samuelson/Solow messed things up. The methodological blunder consists in interpreting the Phillips curve as a behavioral relationship. What has to be done is to formulate the Phillips curve as a structural-systemic relationship.* This relationship consists alone of measurable variables and is therefore readily testable.

The correct relationship covers the familiar arguments about how effective demand and deficit spending affects employment. Secondly, the so-called factor cost ratio shows how the price mechanism affects employment.

The correct systemic Phillips curve tells one that in the given situation the only way for Japan to maintain full employment and to turn deflation around is to engineer an increase of the average wage rate.

Egmont Kakarot-Handtke

* For more details see ‘Putting economic policy on scientific foundations