Cambridge Accounting for the Market

 

When “A Time Runs through It,” it become another “River of No Return.” Once gone, forever gone, if in economics. However, owing to Paul Samuelson, arguably the first author of a textbook on macroeconomics, we are alarmed (Economics 1948, p.9): What is true for economics of each market may not be true for macroeconomics of all the markets.

             In macroeconomics, the time is supposed to stick around over an undefined period, particularly in the IS-LM and AS-AD models. Again in science, undefined, indefinite, irrelevant and inexistent are siblings (T⁰). In short, “time is useless until we get” exogenous to Cambridge ( borrowed from Samuelson and Nordhaus, Economics, 2010, p.458).

 

Fallacy of composition. Yes, we in economics freely choose to work for utile quantities over the run, short or long, of time (U∙M∙T^-1). If in the market, exchanges are voluntary all across but for virtually random spots primarily due to “asymmetric information,” which incidentally led some professors to the Sveriges Riksbank Prize in Economic Sciences. (Shh, science is one, engineering is another.)  

             Somehow, we in macroeconomics are forced to walk across the run of space, much like a crab, everywhere “In Search of Excellence” consistently in terms of real quantities per distance (M∙L^-1). The time would everywhere run across, in the short dash (e.g. 5mm) or in the long race (5cm). On the flipside, each time equals all the times like in the Eternity immune from fallacy of composition in time.   

 

Introducing the asset. In the name of advanced accounting, we assume the Golden Delicious after radioactive treatment is never to perish. In addition, we imagine for simplicity that the market consists of two sections, A and B, between which participants are “Free to Choose” without paying meaningful transaction costs. 

             To begin with GAAP, any unsold apples in the period are to change the “nominal” name and the “real” hat into Inventory which sits as an Asset on the debit side of the Balance Sheet. Now, the firm on behalf of the owner-households can or do save some apples and put them in inventory, in each Section of the market. See we the national income accountants told you so, a saving (S) from selling becomes inventory becomes an asset becomes an investment (I).

             So far so good to some, but not to all: “It’s the fallacy of composition, stupid.” 

 

In Section A of the market. Upon closing the books at the end of the year, we have: GCP_A= GCC_A+ GCS_A= GCC_A+ GCI_A, where GC for “Gross Communal.” Or more symbolically, Y_A= C_A+ S_A= C_A+ I_A. Not to mention, “I_A” represents the apples yet to be sold in the short run of time, more probably in the first quarter of the following year than in the second. Heard of FIFO? 

             Then on, we can easily find that the propensity to consume is C_A/ Y_A as the only one, as long as Section A is concerned. By definition, the only one is the only unit, ruling out any other marginal unit.

 

In Section B of the market. Ditto, but for: C_B/ Y_B.

 

In the market as a whole. For the sake of convenience, we idealize C_A/ Y_A> C_B/ Y_B. Then on, we can more or less easily hypothesize, conjecture, theorize or find:

 

1)     The “propensity to consume” (PC) is a piece of cake to “measure.” 

2)     The PC is the larger in Section A than in B.

3)     The communal PC is (C_A+ C_B) / (Y_A+ Y_B).

4)     There is no such thing as a marginal propensity to consume (MPC) as opposed to the average propensity to consume (APC). In the first place of economics, there cannot be such a thing as another year per annum. The accounting year is the (only) year for the sake of accounting. The year is always at the margin, once gone forever gone, all across the macro-economy.  

5)     Probably by chance, the communal consumption in Section B was “ineffective” and that more than less. By the way, we in statistics say “random” for the purpose of meaning “by chance.” The rest of us in real life do not really care about a “random” event. It does not take a village!

 

Macroeconomics as un-economics. Demand (D) is only for consumption (C), possibly because another year yet to come is equivalent to “the long run” of collective death to Eternity: in the first place, “Investment (I) is of no use to us until the future arrives” (partly borrowed from Irving Fisher, 1930, p.5). With investment just irrelevant, the culprit when in recession is everywhere the “ineffective aggregate consumption.” Down with Investment! AD= AC, by definition.

             In the short run of the present year, then on, there are as many propensities to consume (PCs) as the number of sections in the market. Macroeconomists may line up them from the lowest to the highest so as to claim that MPC be constant, ex post nicely differentiating the upward-sloping line. Lo and behold, the Keynesian Cross of Gold! when the line hits another line from the otherworld (at the origin of the coordinate system).

             On the sidewalk of Cambridge, the time (T⁰, nowhere T¹) of the year vibrates up and down all across the nation (L³∙L^-1). In the meantime (L^-1), the macro-economy cycles left and right along the abscissa (IS-LM and AS-AD), or grows high or low on the ordinate (the Solow model). Welcome to Stockholm!

 

The matter of the year. The year is the year. “A couple of years” equals “a couple of years.” A decade is identical to a decade. And, the century is the same as the century. So far is the fact. On the contrary, the statement that the year means a couple of years is false. Factual or false, there is no such thing as “how much false” or “how really true.” True is true while false is false.

             We are all dead in 125 years, no questions allowed. If so and with the distribution random, about 1% of us are dead in this year. A query: Is the year a short run or a long run. We bet you are a classical economist iff the answer is “The year is just as long as a year, no shorter no longer.” Otherwise, you are a macroeconomist at best and nobody at worst.

             If a veil in the long run, money must also be a veil in the short run. The degree rarely changes a name. “For the sake of convenience,” you can idealize the degree; but thou shalt not abstract the kind away no matter what.   

Scott Mckenzie - San Francisco