Fallacy of Composition: A Keynesian Cross vs Another on the Road

 

When you come across a fork on the road, what are you gonna do? Take it, or so says Yogi Berra. What if a cross on the road? Just take it, stupid, or so would Berra say. What if it’s a Keynesian Cross? Umm……, please ask someone else, or so would even Yogi say. .

             Many innocent students of macroeconomics have hard time understanding the Keynesian Cross. Don’t worry; be happy, “You are not alone.”

             Generally speaking, macroeconomics is for the heavens; naturally, it is not only unknowable to each student but also arcane to the rest of us all. Particularly, we’ll never know what the shiny “Keynesian Cross” is like until post mortem. We begin with another lackluster cross.

 

The Cross in the Market. Probably, most finance-savvy high-school students of modern times are well aware of the demand and supply curves.

             Now, the demand curve: It is based on existence of indefinitely many units of a defined kind of utile good or service, such as the apple or the orange. We think of the demand curve as if lining up from the highest to the lowest all the marginal utilities form apples or oranges supposed to be appreciated by the households in the community. The curve slopes downward, or so said.

             Much like wise  is the upward sloping supply curve of firms. Again, the key is in the increasing marginal production costs from the lowest to highest.

             The two never fail to make a cross in the market. See, I Told You So, the humble cross to be observed even at high schools. 

The Keynesian Cross. “It was many and many a year ago, In a kingdom in the sea, That a city there was which you may know By the name of Cambridge.” There conceived and reconceived was the super-celeb by the name “marginal propensity to consume,” or MPC for short.

Magic 1. There they go; they had as many units of consumptions as, say, apples at Cambridge. In the given short run (T-1, or per annum) of 1936, for instance, they could choose this unit of consumption (C1) over so many others (Cn where n is greater than 2 but without any budget limit). Oh wait, there were so many GDP’s (Y1 to Yn) of 1936 preconceived in 1935 or earlier.

Magic 2. People thought at the margin of the dot (L0) anywhere on the line (L1). The line was continuous in the first place and consequently subject to nice differentiation in the second place.

Magic 3. The marginal propensity to consume were constant, i.e. MPC=dC/ dY= k much like the k in the “Cambridge Quantity equation,” M= k∙I , of Sir J.R. Hicks (1937).

Magic 4. Practically as well as virtually, the expectation got separated from the reality under the commitment to see each other ex-post-but-ante-mortem at a Cross.

Lo and behold, the Keynesian Cross! There they were together as engaged; the AS of real Y and AD of planned Y hand in hand at such a glamorous Cross. The elite Ycross was chosen out of so many Y’s jumping here and there from Here to Eternity.

So far, so good but for: Have we ever seen expectation and realty with arms crossed? 

            Where is the Cross? Well, possibly across the River! Hallelujah! 

 

Hasta mañana!

Many Many a Year Ago in the West

 


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