Procrustean Art of Backtracking: “Money Demand Downward”

 

Opening a text book on Principles of Economics, one of the first things we come across is “Demand.” Fact one, demand is for marginal benefit, or utility per unit of the product. Fact two, the value of utility is accounted for in the sovereign currency unit. Fact three, the demand exists with no regard to the Supply and a price. The price would be the “opportunity cost” of grabbing the unit of good or service.  

             Fact four, “Demand” is periodic (T^-1, or per period) because no household would buy any product once and for good. This is taken for granted and rarely specified in textbooks. Incidentally, each and every one of us has by creation blind spots in our visionary system. Consequently, we in general and macroeconomists in particular often miss the periodicity out, with or without FOMO.

             Now let us put “Demand for Money” on the table. Question one, why do we demand money? To eat, to wear, to burn or to use it as shelter? No, never. “Money is of no use to us until it is spent” (Irving Fisher, 1930, p.5). Aha, money is to spend! Then, the marginal benefit of money must be the marginal “purchasing power.”

             Question two, what is the marginal utility of the piece of paper (75% cotton 25% linen, to be precise) with the face of George Washington on the face? Are you kidding? The MU, or the purchasing power per unit, is one dollar sharp, no more or no less: the marginal benefit of one dollar is one dollar. The “money demand curve” would when in Economics be horizontal at the numeric 1, period. In other words, the value, price or cost of the one-dollar bill is constant at  one dollar  (without any regard whatsoever to the interest rate).

             Question three, how do we gratify our demand for money? The answer might depend upon whom we ask the question of. In the textbook of Economics, as opposed to Finance, the only way is working hard at the job site for a while. Not to mention the period of the “while” depends on our efficiency of working also called “the wage rate.” (Note: Economics is to income statement what Finance is to balance sheet.)

             Question four, where is the market for money? Well, the market is everywhere except for in the reality on Earth. When is the market? It’s Now or Never (T⁰).  

            

Let us go visit the so-hypothesized “money market” as in “macroeconomics.” We quote among others 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.

The Harvard economist Mankiw goes even before locating a market to the market for the sake of finding "the" opportunity cost. At best, such a narrative is customized to his Pride and Prejudice.  At worst, it’s a case of “placing the horse before the cart.”