Velocity Wanted: “Sticky Price,” a Child of “Multiplied” Misconceptions 02
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 1st
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 1st’s, or per annum so to speak. Enter the “Cambridge
Quantity equation.” First of all, thou shalt have ΔM= 0 as
before the advent of “fiscal multiplier.” Second of all, with the “constant
coefficient k” as a “documented” resident in the equation, there is no
alternative to this answer: ΔI= Δ(P∙Y)=0.
In
the beginning of the day, we have Δ(P∙Y)=
-0.1∙(P∙Y).
At the end of the day, we find Δ(P∙Y)
=0. Ergo,
-0.1∙(P∙Y)= 0.
Remember that a day is the infinitesimal run (T0) as compared to the
short run (T1) of annum?
In mathematics, in the first place, 1/
360≒
0. (Q.E.D.) A corollary: Metaphor when
for the sake of convenience equals reality.
Case Study #1.
The national income accounting is conducted on the base of so much rough survey. Consequently, the “10%
decline of nominal GDP” shall be the stillborn of a survey with an inflated margin of error; or, ±10% <MOR. The real business is just as
usual at the natural level of P∙Y.
Hurray!
Don’t
even think about the D word!
Case Study #2. In
the IS-LM where ΔP= 0 and with Δ(P∙Y)=
-0.1∙(P∙Y)
given from the accounting, there is no alternative to this answer: Δ(P∙Y)≒ ΔP+
ΔY= ΔY= -0.1(P∙Y).
Ergo, real equals nominal.
A
trivial question: What are the “sticky wages” spent for? Which would be the
greater, AD or AS in the year 1937? According merely to arithmetic, AD> AS. The AS-AD model for
the sake of searching a cross, Keynesian or otherwise, must be a chimera. .
Simple
arithmetic is sometimes more correct than Greek geometry or sophistic calculus. Much in a similar vein, nobody but a naïve child can make such a call “The Emperor is naked!”
Case Study #3.
The “10% decline of nominal GDP” is a virtual image, as opposed to real,
to people with glasses of a kind or various kinds. In other words, the nominal
GDP appears to decline by 10% per mile (L-1), not per annum (T-1). The real
economy is at the level as natural in 1937 as in 1936.
To Here from Eternity: Velocity
or money is never constant over the time dimension (T-1). The
inflation is always and everywhere matters and that more so in the short run
than in the long run. After all, inflation makes a difference in kind with
no regard to degree.
The
real and the nominal interest rates per
annum, as defined by Irving Fisher from New Haven, cannot coexist in the
same plane if exogenous to either Cambridge or the heavens.
From Here to Eternity. The greatest misnomer of all is “equilibrium of the economy.”
Like
any other organism, the national economy can be in equilibrium only post mortem. Amen, Rest in Peace!
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