The Chimera of Macroeconomics

  When macroeconomists refer to “empirical science,” they might unwittingly think of Eternity. Take the “ Cambridge Quantity equation ” M= k ∙ I (John R. Hicks, 1937) of liquidity preference ( M d for “ money demand ” in macroeconomics) for example. Then, we juxtapose for the sake of comparison the same with to the popular proposition “ The money supply M is an exogenous policy variable chosen by a central bank, such as the Federal Reserve ” ( Gregory Mankiw , Macroeconomics ); “money supply” is often denoted as M s . By definition, both demand and supply are as at a moment (T 0 in the time dimension).              Let us step into the so-called “money market.” What if the market is not in “ equilibrium ,” or M s ≠ M d = k ∙ I ? Oh, that’s a peanut: The “I ” (for the “nominal” GDP) as the only “endogenous free variable” momentarily varies so as to push the money market back in equilibrium. Got that? The Truth ...

  Two millennia and a half ago, the great Chinese philosopher teacher Confucius ( 孔夫子 , Kǒngfūzǐ in pinyin ) preached, “Masters shall get the names correct before leading people” ( 正名 , zhengming ). The maxim could not be more relevant to Cambridge Macroeconomics which abounds with such misnomers as liquidity preference, money supply ( M for the outstanding balance of money), fiscal policy and general equilibrium model.              To begin, the “fiscal multiplier” is a fatal conceit if not a deadly deception. First, the almost almighty MPC (for marginal propensity to consume) is a data from cross-sectional survey (L -1 , for across households) which is not supposed to be applied over-time changes (T -1 , for over  time) of the economy , or the aggregate economic activities all across the nation. Since before the time began, time has never flied but it has been lapsing. Moreover, the assertion of multiplier is...

  According to Paul Krugman , among other Nobel Laurates, the IS-LM is “a model of several interacting markets.” As he updates, “IS-LM stands for investment-savings, liquidity-money — which will make a lot of sense if you keep reading.” (“IS-LMentary.” NYT blogpost , 2011)   Going for Details . With the above said, we quote among other Cambridge macroeconomists from N. Gregory Mankiw ( Macroeconomics , 8 th edition). I nvestment ( I ) as Demand for Loans. The quantity of investment goods demanded depends on the interest rate , which measures the cost of the funds used to finance investment. … The firm makes the same investment decision even if it does not have to borrow… but rather uses its own funds. … It slopes downward, because as the interest rate rises, the quantity of investment demanded falls. (pp. 63-4) Savings ( S ) as Supply of Loans . [This] equation shows that national saving depends on Y [as fixed by the factors of production] and the fiscal-polic...

  We already know that the Phillips curve of tradeoff between the inflation rate (T -1 , or per period) and the unemployment ratio (T 0 , as at a certain moment) makes little sense. Other than the curve, we never plainly compare the driving speed to the driving distance: the two are different in the time dimension.                 Somehow, we have the Baumolite equation in hands: The wanted stock of money for expected transactions of all purposes M w = ( b ∙ T / 2 i ) 1/2 . (We avoid the denotation M d because “money demand” is a fatal misnomer.) Now, we do purposefully move from transactions in general to the nominal gross expenditures ( P ∙ Y ) in particular, together with the convenient assumption T= k ∙ (P ∙ Y) , where k is constant of course.                   Then we can derive this equation: g= 2m+ Δi/ i – π – Δ b ...

  One of the reasons for the macroscopic blunder of macroeconomics is richness in misnomers and misconceptions. As a natural consequence, many models are stillborn. The IS-LM is one   and the AS-AD another.              The one out of so many misnomers is “stock variable.” To be true, the “stock” is the quantity as of a certain moment and by definition cannot “vary.” Basically, macroeconomists take mathematical variations without the time dimension (T 0 , or as at the moment) for economic changes over time (T -1 , or per period). For them, time flied across space (L -1 but T 0 ) in the first place.              “Money supply” and “money demand” are two others. To be true, money is to the market what time is to life. Both time and money as currencies are beyond our control and anything but demanded; for instance, time is to Robinson Crusoe what “money” i...

    Macroeconomists propose there be three rationales why we keep money free of interest  in cash or deposits. First, the “transactional motive” is in preparation for personal or corporate exchanges. Second, the “precautionary motive” is supposed to be from “the desire for security” via risk diversification or as a buffer just in case. Third, the “speculative motive” be particularly of those prescient speculators who can pick the best time to buy fixed-income securities .             In other words of theirs, there are three “variables” to define “money demand” ( M d ). Probably, on the other hand, they know that “money supply” is fixed as at the moment ( M s ,  T 0 ).               What would happen if the “money market” is not in equilibrium as of now ( T 0 )? Which should vary, M s or M d ?   The Rest of Us . We might have no clue i...

  According to a Korean maxim in Chinese characters, “The darkest is right under the lamppost” ( 燈下不明 ). Often times, the answer to an age-old trouble is of simple or rather naïve ideas around us for long, sometimes even longer than the trouble in hands.              Getting out of the popular framework of reference tangled with vested interests, we often find an incredibly short answer as in: 1)      “ Eppur si muove .” 2)      “The Emperor in naked!” 3)      The “equation of monetary inventory” by William Baumol (1952) is all that we might refer to at the very beginning of an economic downturn .   To “keep things simple,” we copy the following from somewhere else:              ( Quote ) The household has to conduct cost-benefit analysis for the decision how much money to hold ( M d ...