From Cambridge to Eternity: “Marginal Propensity to Consume 04”

 

More or less arguably, the first textbook of macroeconomics is written by Prof. Paul Samuelson (Economics, 1948). He starts off by warning against “fallacy of composition.” Namely, “What is true for each is not necessarily true for all; and conversely, what is true for all may be quite false for each individual” (p.9 of pp. 622). In short, the market may not be like the economy and conversely.

             Alas, we as human are prone to err. In the first place, each and all of us are created with “blind spots.” Macroeconomists not excluding Paul Samuelson as  human are prone to fall in the trap of the very fallacy. An interesting question by the way of commonwealth: What are the “several interacting markets” (to a  geo-famed celeb) of macroeconomics like?

Fallacy of Composition. At each moment, the money stock is “fixed” by the central bank, or so is claimed by household-name macroeconomists. As some in the economy prefer money, in solid cash or airy deposits, the rest all across the nation must dis-prefer; otherwise, there at each moment must be a macro-fight for money as “fixed.” Where in the “money market” is the “beef” of equilibrium? Subject to: The “fixed” stock must not be “variable”; if varying, the stock is not a stock anymore.  

             Now, let us regard money as a gargantuan “veil,” so to speak. In other words, we are in “real” with the “veil” unseen. By now, on the other hand, the rest of us are very much well aware that Y≡C+ I, where “I” represents “spending” for newly constructed assets, and S≡ Y- C. Listen macroeconomists, incidentally, with MPC and MPS down where is the “marginal propensity to invest” (MPI)? Seeing through the “veil,” is it not MPY≡MPC+ MPI≡MPC+ MPS= 1.00?

             The naked truth: The rest of us in the “rational” mind do never ever throw anything utile into the sea or into the ditch for that matter. For better or for worse in this regard, we may refer to Thomas Malthus (1836) and John Maynard Keynes (1936 in general and p.395 in particular).

Unblessed Economies. Everywhere on Earth, money is easy to hide for the purpose of pretending to be free of wealth. Particularly in “Failed Nations” (from Acemoglu and Robinson) where the rule of law is extinct and “tax’ is constantly “abused” (cf. Malthus, 1836), the only way of saving for the future is “hoarding money.”

             Again “fallacy of composition” (of micro-version): “Nominal” saving under the mattress is possible, but “real” saving is not possible even in the farmer’s camouflaged barn. In other words, “real” saving (S) must everywhere be in real assets, that is, investment (I).

             In “real quantities,” aggregate demand (AD) on Earth is never a problem. On the contrary, it’s the supply side (AS) in general; in particular, our desires are checked only by the ineffective aggregate creative power of the nation. Needless to say, such power comes from the national wealth from our historic saving (S from t_-∞ to t₀).   .   

Externalities of “Saving” Money. Basically in modern times, we live in a commonwealth; our money hoarded naturally affects innocent neighbors. According to the old-fashioned quantity equation, M∙V≡ P∙Y, as the money standing out there decreases in Failed Nations, so must P∙Y. We don’t even need to prove it because all identities are named to be true.     

             The only remaining question: Which of the two, P and Y is destined to “decrease”? The answer is given by three Nobel laurates in 2024; that is, a shrinking economy in “real quantities.” In extreme, the chain reactions might be: Saving money of the economy→ declining investment, nominal and real, until a total extinction thereof, that is, I= 0, year in year out→ ever diminishing national wealth→ accelerated “failure” of the nation→?    

             A lining in the cloud: As predicted in macroeconomics, savings are non-spending from the beginning so as to prove a hypothesis of “throwing into the sea” by the nation.

The Case of Billionaire. True, MPC of billionaires are usually small. Nevertheless, do not worry but rather be happy (all the more); they invest in physical assets, including intellectual properties, and help enhance the aggregate efficiency (M∙U∙T^-1) of the nation.  

The Case of Warren Buffett. He as Oracle of Omaha famously holds an unusually large sum of money. The outstanding behavior of his is not because he prefers liquidity but because he prefers investment opportunities of later to those of now. The more uncertain the times are, the larger his cash-holding becomes.

The Great Pretender