Velocity Wanted: Infertile Like the Mule

 

The horse is utile and fertile. The donkey is utile and fertile. The mule is utile but infertile. According to a celeb (ex)-columnist, the IS-LM model “makes a lot of sense.” “Sense,” in what sense is it? Probably he means “utile and fertile.” Alas, such a sensible saying as “The sun rises in the east” might be conventionally utile but “empirically” futile. No more is the supposedly “sensible” IS-LM!

Frictions and Transaction Costs. By naming, a product, good or service, means utility for the present while an asset for the future. As David Ricardo from London illustrates, on the other hand, “trade after specialization of production” is the first of “win-win strategies” as called in business. [Auto-correction: That’s a compromise, not a strategy; by naming, there is only one winner in every war.] 

             In theory, we don’t need money at all according to the Ricardian “theory” as such. In a slightly twisted way, we would purchase anything else on demand with a kind of thing in hand. After all, Sir Isaac Newton does not take frictions into account when he proposes the Gravity Theory.

             Unfortunately or rather fortunately, we do not only have frictions on surfaces but also transactions costs in trade. Suppose there were no frictions in Here. What would happen, a paradise? Yes, a paradise in Eternity where time flies across (L^-1). If there were no transaction costs, everybody on Earth would live mostly in solitude while the time lapses over (T^-1)

             Blessed with frictions and transaction costs, we can be and are happy together in Here. After all, frictions make life feasible while transaction costs make our life dynamic and progressive. Remember no risk no return? [Auto-suggestion: Risk premium due to uncertainty is the most common cost of transaction.] With no uncertainties, incidentally, Romeo could not and would not have met Juliet, for better or for worse.  

Economics. To be fair, economics is all about production to consumption of utilities, which everywhere except for in Cambridge and Eternity Adam Smith declares with full authorities. Economics is specifically on efficiency, or the maximum utility per period (M∙U∙T^-1).

             In economics, the function of money is limited to the GAME for generally accepted medium of exchange. Money is veil! More specifically, money exists for the sake of saving (in vernacular) “commercial transaction costs” in trading a kind of real utility for another (M∙U). We can easily imagine how costly and inefficient barter trade as in Ricardo's would be.  

             At any rate, trade is nothing more than the secondary means after production to the end of consumption. More specifically, second-hand purchase is an efficient alternative to first-hand production. All in all, the market trade creates the “communal surplus” per accounting period (M∙U∙T^-1). Lo and behold, the consumer wins while the producer wins!

Finance. We invest in assets, human and physical, for the sake of reserving and preserving utilities for “the long run,” or “so many decades” until “we are dead.” On the other hand, we sometimes need utilities above current means. Blessed are we that we can sell assets forward to the bank. If we will, we can in financial “markets” trade “credit” backed up with assets, human or physical. [Auto-suggestion: Deposits are the GAME sold backward.]

             To be fair, “trade of credit” is named by us, a macroeconomist or not, as “finance.” Money is handy in saving “financial transaction costs” which we surely incur in transforming an asset into the GAME. You know what? We never consume the asset directly: There is a supply chain before consumption; namely, Asset→ GAME→ Demand in the market→ Product at the household→ Consumption. Please do not miss the fact that the asset is a stock at the moment while consumption is a flow over the period. [Auto-suggestion: “Stock variable” is an oxymoron; the stock is the consequence (T⁰) of variation (T^-1).]

Macroeconomics. An high-school boy, not necessarily in Chicago, would know that finance is to the balance sheet (T⁰) what economics is to the income statement (T^-1).

             Somehow, the so-called “macroeconomics” is conceived or misconceived in Cambridge and born as a child healthy or stillborn. The “Cambridge Quantity equation,” M= k∙I [=k∙P∙Y]: Lo and behold, Finance on the left-hand side and Economics on the right!

             Great job deserving geo-celebration! Only regret, alchemy has never worked ever since the beginning of CE. Yes, mule and liger are sometimes created but infertile, much like a conventional wisdom. The fatal mistake, at any rate, in the Cambridge equation is that the velocity of money V= 1/ k is gotten lost in the name “constant.”

             Macroeconomics is a conceptual chimera or an empirical alchemy. Whodunit?