The Chimera of Macroeconomics

  One of the most vicious names in economics is “ equilibrium .” As a matter of simple fact, no organism can be in equilibrium until post mortem . That’s the very definition of “organism,” as opposed to “mechanism”: There in an organism indefinitely many parts act, react and interact and that incessantly so as to allow no room for equilibrium.     What the Price Means . Economics is no more “empirical” than physics is. In other words, “science” starts from abstraction also called idealization. For instance, the Newtonian gravity theory never applies as is to the reality where all different things, the observer-cum-researcher included, coexist with the apple and the Earth. Don’t get Sir Newton wrong, either: Owing to Eugene Fama from Chicago, in the first place: “Theories are approximations. Nothing is completely anything.” The great Theory of Gravity is a rough, and very rough in fact, approximation to the reality.         ...

  If history is any guide, metaphorical illustrations and thought experiments are useful as a way of illustrating a law or theory to, among others, school children. According to conventional wisdom , on the other hand, children sometimes work as a great teacher to grownups.   A Thought Experiment . Suppose that with the aggregate wage in 1937 stuck to that in 1936 the nominal GDP ( P ∙ Y ) decline by 10% PA, quite conventional in depression, across July 1 st of the respective year. According to the macroeconomic rule of thumb , on the other hand, the one-year run is half the standard length of “ short run .”              All in all, we have seen Δ(P∙Y )= -0.1 ∙ ( P∙Y ) in the undisputed “short run” between the two July 1 st ’s, or per annum so to speak. Enter the “Cambridge Quantity equation.” First of all, thou shalt have Δ M= 0 as before the advent of “ fiscal multiplier .” Second of all, with the “const...

  In a sense, the great tragic comedy of macroeconomics starts from “so many” misconceptions to as many stillborn names. Macroeconomists shall heed to the Confucian saying two millennia and a half ago, “Masters get the names correct before trying to teach or lead people” ( 正名 , zhèngmíng ).              If you, for instance, shout “ Adrian ” while intending to call “ Private Ryan ,” thou shalt not be able to save him ante Eternity of both. Wake up!   Factory, Market vs. Economy . By naming, the firm resides on one side of the market facing the household on the other side. “Natural” or otherwise, “ sticky wages ” never equal to “sticky prices”: the former must also affect the demand curve and subsequently the latter. Don’t forget to remember that the household and the firm are legitimate residents in the community including the cities of Cambridge and affect one another. If you ever forget, you are destined to ke...

  To be fair, macroeconomics , supposedly “empirical,” was conceived by a certain thought leader who first differentiated the run between “short” and “long.” Afterwards come forward numerous models of “ equilibrium ”  (T 0 )  have.              Alas, 千慮一失 ( qiānlǜyīshī ) ! Master and disciples do take the metaphorical run (L for length in the space dimension) for the real run (T for length in the time dimension). Providentially in Cambridge , the time flies literally like an arrow over the space (L -1 ).              Down (0) with the time dimension (T)!              Ever since in Cambridge, any race when longer than the 50 m dash can be named as “the long run” upon the choice of convenience; 100 m is longer, 400 m is still longer and the like indefinitely. Such naming surely is true a...

  If history is any guide, there are two types of masters: 1)      Type one: He explains simple things in as complex and complicated a way as possible. Not to mention, he speaks a language alien to the residents innocent. 2)      Type two: She explains complex and complicated things in the simplest way possible in vernacular friendly to most every listener.     The Sophist. The SRAS curve (for short-run aggregate supply) is horizontal because all prices are sticky . The LRAS curve (for long-run AS) is vertical because all prices are flexible .              In the medium run , some prices must be sticky while the rest flexible. Now, for the sake of convenience, suppose the economy comprises of two products, widget and gadget . Further on, the price of widget is fixated at 12 dollars while the price of gadget is at the flexible P ; the natural level of output is ...

  Some macroeconomists differentiate themselves with the name “ new Keynesian ” from other macroeconomists. Most typically they imagine the so-called “sticky price model of AS-AD” for the medium run, which must fall between the short and long runs. Their Sophistic Way. The model is often described with the following equation: P= s∙ EP + (1– s)∙[P+ a ∙ (Y– Y*)] , where EP is the expected price level (“sticky prices”), “ s ” the fraction of firms stuck to EP , Y* the natural level of output, and “ a ” a positive coefficient. Procrustean Bed . See We Told You So: P= [a ∙ (1– s)/ s]Y + [EP– a ∙ (1– s) ∙ Y*/s] . The AS curve is upward sloping!              Wonderful, but for reminding us of the super “classical” Greek mythology: Tailor, and that Swift, the customer’s feet to the bed! A Greek Equation . To emulate Eugene Fama , a Chicago boy, “No similarity is completely similar.” The SPM (for sticky price model) and the PB...