The Chimera of Macroeconomics

  Nothing good comes for free. In other words, we have to pay a price for anything desirable. That’s the Principle No. 1 of the Harvard economist Gregory Mankiw in his super-selling Principles of Economics : “People face trade-offs.”              By the way, did you know that the book of economic principles has a 50-year Millite cycle? The cycle starts with J.S. Mill, Principles of Political Economy , 1848, to Alfred Marshall, Principles of Economics , 1890 to Paul Samuelson, Economics , 1948 to Gregory Mankiw, 1998 to Author You, Understanding Economic Correctly , 2048.                Suppose a boy named Donald. He has a long list of girls in order of preference as candidate of soul mate, lifetime or otherwise, subject to monogamy from Constitution: Audrey, Elizabeth, Kate, Natalie, Ann, Ivo ñ a, Mila ñ a, Stormy, Jean and all the way down to l a ni ñ a...

  Suppose there in town are five manufacturers of widget: J. Watt & Co. with a machine of steam engine, N. Otto & Co. of internal combustion engine, N. Tesla of electric motor, S. Jobs of CAM, and S. Altman of AI.              Over the quarter as the communal accounting period, all the firms are fixated each with a single unit of machine or “physical capital” as called in economics. The only way to aggrandize the quantity of production is hiring more “labor” as in economics.              The capital cost is “sunk” and does not count as far as the particular quarter is concerned. In other words, there is no such thing as a “fixed cost.” With the machine “invariable,” does the labor cost of production remain constant as the unit of widget multiples from one, two, three and on? Unfortunately No, no, no! Each step forward, the “marginal production cost” in...

  Back home after spending the afternoon hours in the library, Alicia faces a dishful of sushi prepared by loving Mom. Alicia, the rational, never grabs several pieces handful. She takes piece by piece, each in its entirety. She never leaves uneaten half, not to mention one thousandth (1/ 1,000) thereof. In economics jargon, the piece as in the dish is the “marginal” unit.   There is no question that she is crazy for the very first unit of sushi. The question: Is there any cost taking the first? Yes of course, nothing good comes for free. Yet, the cost of preparing sushi is irrelevant because it is already “sunk.” The relevancy comprises of gaining weight, mouth smell, getting many things around dirty and the feeling of fullness. Wait; does her time at dinner come for free? Never, the time (duration) is the most valuable currency for all of us with limited time of life. Time is the most critical cost because she has many other things to do at each “moment” of life. Is her...

Most troubles with Cambridge macroeconomics stem from fatal misunderstanding of the market framework. Just one of so many tragic instances is the comedy-like narrative, “In the money market, the demand for money slopes downward because the interest rate is the opportunity cost of holding money.” Those macroeconomists get each and every term of the single sentence wrong.              For the purpose of “getting the market correct,” we navigate through as follows:   1)               Setting the boundary 2)               The demand curve 3)               The supply curve 4)               The opportunity cost 5)     ...

J.M. Keynes once commented, or is said as such, that he was the only non-Keynesian in the room. Probably he was right.              First, he in the 1936 book suggests the liquidity preference function, M= L(i) , to the effect that the interest rate is the cause and “money demand” the effect. Strangely however, his Disciples rebut that the interest rate is to be determined endogenously of their model even as they before anything else buy into “liquidity preference.” The unintended consequence: One of the two causal directions of contradiction must be wrong.              Second, the Master discredits in so many words the classical loanable funds “theory” of interest rate. The following year and on, J.R. Hicks and Alvin Hansen, among other macroeconomists, resurrected the so-called “theory” to use it as another pillar of the “fairly well working” IS-LM model. As for...

Suppose a representative product (in mass ) whose utility (in value ) is exchangeable for the purchasing power of the piece of paper (75% cotton 25% linen, to be precise) with the face of George Washington in the front. As a matter of fact, this is the way we, if in the US, index the representative mass-cum-value , or “rep” hereinafter, to the one-dollar bill. Then, one (1) $5 supra-orange is comparable to five (5) reps ; one $3 meta-apple is equivalent to three (3) reps .              In the meantime, incidentally, the otherwise-useless rectangular paper becomes the legal tender to play the function of economy-wide medium of exchange. It is of course the portrait of George Washington (together with two signatures) that transforms one into the other: or the legal tender becomes the medium of exchange.              With the above said, by way of accounting for repr...

Classical economists including Irving Fisher defined the real interest rate to be the nominal rate after the inflation rate : or r= i- π . This makes sense (to a certain extent).              Somehow, Cambridge macroeconomists call as “real variable” a monetary aggregate divided by the price level; for instance, the “real GDP” ( Y ) is to mean the monetary GDP over the price level ( Y N / P ). They claim the real GDP as such represents the GDP in “real quantities.” The same is for all the other macroeconomic aggregates such as C, I, G, X, M (for Imports) , L, K, N and the like. Very fine, convenient and great, but for being totally empty!              Emptiness No.1: There is no time dimension conceived howsoever. The GDP must represent an aggregate per annum , but the year in such a definition is never clear: the past, the coming or other 360 consecutive days?...

One of the magic words of Cambridge macroeconomics is the “short run.” Somehow, the term sweeps all the periods, short or long, under the rug of “moment” (T 0 in the time dimension). No wonder all “real quantities” are defined with no regard whatsoever to “period.”              Let us come all the way back to the classical framework of “the market.” One of the first things we do is to define and confine the accounting period. Otherwise, we would never be able to name the “quantity traded” or the “equilibrium price.” To be meaningful, we say for instance that the quantity ( q ) of apples traded was 10,000 natural units at the average price ( p ) of half a dolla r, over the past week (T -1 , negative dimension for the purpose of accounting only). Apparently, no period, no quantity, no price, no market!              Now in Cambridge macroeconomics: Is there a way t...

John M. Keynes proposes a liquidity preference function, M= L(i) (1936, p. 168). The function is partly true. Some of us would keep larger money in cash or bank deposits than usual when there is no opportunity whatsoever from which to expect a positive return or interest receipt. Unfortunately, however, “Half knowledge is more dangerous than ignorance.”              Whose fault may it be, the equation has long been over-relied, way too much, in Cambridge macroeconomics. Particularly, the equation is one of the four pillars in the IS-LM model, which is “pretty-well working” according a famous and infamous Nobel laurate.              First and foremost, there on earth is no such thing as the interest rate. As well known in elementary finance, interest rate is very specific to the investor, the asset, the time horizon, the portfolio, and the social, political and ec...