Saving “the Market” out of Cambridge: Folly of “Money Market”

 

Implicit or explicit, macroeconomists conceive that the so-called “liquidity preference” (L≡ Md) and “money supply” (M≡ Ms) comprise “the money market.” This market is often opposed to the “product market” of the real investment (I) and the real saving (S). As well known to students, the two of L and M join forces to produce the LM curve. Umm, the one out of the IS-LM model!

            Unfortunately, there cannot be anything like the LM curve. First, the time (duration), more than critical to the rest of us in Here on earth, is completely missing in the curve. Second, all the relevant terms, demand, supply, “liquidity preference” and the like are misnomers.

            As expected the LM curve is misconceived and stillborn so as to be firmly fixated in a textbook. 

 

Reality #1. John M. Keynes illustrates the “liquidity preference” function: M= L(r) (1936, p. 168). More specifically, “demand for money” is determined by ““the complex of rates of interest on loans of various maturities and risks” (1936, p.28) all across the nation. At any moment (T0) of real time, there shall be only one rate as such.

            Apparently M is toward the future while r from the past. Thus, the interest rate must at best be treated as a parameter. In other words, the rate cannot vary continuously endogenous of the “money market.”

Reality #2. There on earth is no way for the rest of us to vary “liquidity” aka money in hands as per our preference. If we print money, or if we destroy money by way of eating, wearing or burning, we shall visit at least one out of the two places, the penitentiary and a hospital. The sunshine let in, there always is only one M*, in M0, M1, M2, M3 or whatever.

Reality #3. John R. Hicks proposes the Cambridge Quantity equation”: M= k∙P∙Y in his Nobel winning “Mr. Keynes and the ‘Classics’; A Suggested Interpretation” (1937). The liquidity preference as at a moment be a constant fraction of the GDP, or more specifically the gross national income over the unknown year. Again, he takes the income as a parameter.

 

Fact #1. When the interest rate is exogenous, why do we in Here go to the “money market” only to find the interest rate of Eternity? Among the rest of us, there in the world cannot be such a thing as the interest rate because any rate of return is speculative and personal.

Fact #2. Money demand is as at a moment (T0) while GDP is over the year (T-1). The two might at best meet once per annum. Well, a non-ticking clock would tell the time correctly twice a day without fail.

Fact #3. When the GDP is exogenous, why do we pay tuition to learn about the LM model?

Fact #4. With M* known and k constant, the relationship between P and Y is hyperbolic, or P∙Y= ξ.                     Uh, is that not the AD curve as appears in macroeconomics?

Fact #5. Technically speaking, the rest of us cannot build a model only with parameters.

Fact #6. There is a Keynesian rebel without a cause: Keynes says the complex rate while his disciples including Gregory Mankiw and Ben Bernanke mean the fed fund rate. The distance between the two rates is indefinite, if not infinite. Between you and me, indefiniteness and none of relationship are when in a science twins.  


Hair - Let the Sunshine In

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