Procrustean Art of Backtracking: “Art of Monetary Policy”

 

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 not only “politically incorrect” but also against GAAP. Every entry, fiscal or domestic, is once and for all to the books.

             Second, the “fiscal-policy preference” is highly misleading. A bit to oversimplify, “fiscal policy” comprises of two sides as usual, the debit and the credit, or G (for governmental outlays) and T (for incoming tax revenue). The effect of a reduction of T (-ΔT), often called “the helicopter drop” (cf. Ben Bernanke), is pretty much the same as monetary policy: that is, incremental money (ΔM) provided to the private sector.

             The saying of fiscal spending (ΔG) “for the purpose of spending” (e.g. a former president as quoted in Gregory Mankiw, Macroeconomics) is the polar opposite of the providential guideline of economizing on the time (T, for time period), the ultimate currency of all creatures. “Thou shalt not create a white elephant!” Much less “dig a ditch just to refill it”: that is not anything other than waste of time, one of the most original sins.  

             Third, almost by definition the organism, as opposed to mechanism, is beyond modelling if not cloning. Is the macro-economy an organism? Well, as usual the answer depends on whom you ask the question of.

             Let us get down to everyday life of the rest of us. We have some expectation about our bodily condition in the short run, a day to a week yet to come. First, the expectation is never made in a vacuum but on the basis of the present condition, the present living environment and probable changes of both. Second, the expectation rarely comes true as “the short run” arrives primarily because the body and the environment are organic. Third, then on we try to do this and that, or improvise, in order to keep our bodily condition as good as possible. Here in this regard, please never ever mention “equilibrium.”

             The above paragraph is “pretty well describing” what the central bank does for the sake of keeping the economy “politically correct.” In other words, the same is “precisely the sort of discretionary fine-tuning” (from Paul Krugman, 2007) by the central bank as regards monetary policy. Ur, if so, is macroeconomics not political economy, more of an art than an “empirical science”?

             Icing on the cake, as a rule of thumb for the art, or “fine-tuning” if you will, we have the equation owing to William Baumol from Princeton (1952): g+ π= 2m. If the private sector, or “the market” if we will, fails to grow the economy twice as fast as the monetary growth, all of us will have inflation.

             Incidentally, the “inflation,” never the “growth,” must be called by macroeconomists “a market failure.” Confucius might think different.