Liquidity Preference: Gregory Mankiw among Other Economists is Totally Wrong

I quote the following from Chapter 11 of N. Gregory Mankiw, Macroeconomics:

The underlying reason is that the interest rate is the opportunity cost of holding money. ….  The demand [for money] is downward sloping because a higher interest rate raises the cost of holding money and thus lowers the quantity demanded.  

Really amazing is that according to what I learned as a sophomore merely two sentences as above contains numerous fallacies.

Fallacy No. 1. The opportunity cost of holding money is what we need most desperately at the particular accounting period of time. Over all else, some would choose apples while others movie-going. 

F2. There is no such thing as demand for money. Demand represents the quantity of a certain object wanted in the accounting period of the narrator’s interest: for instance, half a dozen units of apples per week.

F3. There is no such thing as demand for money. In the monetary economy, all demand pays and all supply is paid with money. We never purchase money with or provide money in return for money.

F4. There is no such thing as demand for money. There is no way other than earning or borrowing money. We never regard earning or borrowing as trade in “the market” as defined in economics

F5. The demand curve must be defined in terms of benefit. By nature, nothing good comes for free. A cost follows benefit: we never purchase anything because the price is such and such.

F6. The marginal purchasing power, the benefit, of money is always and everywhere one dollar. If anything, the so-called “demand curve” would be horizonal at the unity (1).

F7. There cannot but be only one monetary aggregate at each and every moment: the quantity of money is the quantity of money, period. Incidentally, like zero in algebra “the moment” does not really exist.

F8. The whole scheme of “the money market” is preposterous. When we already know the interest rate as an opportunity cost, why in the world would we be bothered with the money market just to find out the interest rate. Why with the IS-LM, well-working or otherwise?

F9. Here, as opposed to Eternity, neither the quantity nor the rate can be named without a presumed accounting period. Like other macroeconomists, G. Mankiw does not seem to be interested in the time period, explicit or implicit.


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