Nature of Competition: Machine Power Rental 03

Through the last couple of decades in the 20^th century, “outsourcing” was one of the buzz words in business. The implication: More often than not, “buy” from outside was more efficient (M∙U∙T^-1) than “make” it inside, notwithstanding “the Nature of the Firm.”

             At any rate, “Rational People Think as the Margin.” Subject to: ①the fully-functioning machine is the marginal unit, as opposed to the infinitesimal thereof; ②the divide between “to invest or not to invest” is the rate of return 2% PA; ③“make or buy” is a judgement call after thinking at the margin.

 

Free to choose. At the capital budgeting, the firm has, again, two alternatives, insourcing the machine and outsourcing the machine. Likewise is upon internal construction; that is, renting it in and selling it out.

             In the Republic on the basis of free will and under the rule of law, everyone is free to move internally and externally of the firm. If anyone will, she may think of a couple of 2x2 matrixes: one, the degree of freedom vs the degree of the rule of law; the other, the kind in sourcing of in and out vs the kind in disposing of in and out. 

The price of machine as asset. When would a firm supply the new asset, purposefully or as a way of opting out of self-rental, in asset market? The Harvard macroeconomist Gregory Mankiw, a new Keynesian, gives the final clue: “The market value of the final machine” is supposed to be the defining divide as for the people of rationality.

             A professional constructor would supply the final asset after comparison to the marginal cost of construction. A would-be self-renter will change the mind and choose to sell the finished machine in the market when the “market value” is higher than the present value (PV) (of all the expected “cash flows” therefrom).

             With everyone always and everywhere free to choose under the Hayekian rule of law: We can infer that the price of the machine as asset gets the momentum around the PV from the rental market of the machine. And that’s the way it is! Wait, we the nameless would call the momentum a “trend” in the long run of time. (We come back to this with “arbitrage.”)

             If anyone is interested in the so-called “natural rate,” she may revisit the gross national value of time, say 2% PA. Here, we may note that if in macroeconomics money is “nominal” while time is “real” As for the rest of us, the correct name is “the value of time,” which can plausibly cycle around the “2% PA” as a long-run trend; wherein both time and value are at the same time real and “real,” of course.

 

Principles in macroeconomics. Alas, the principles as above never apply to Macroeconomics which was duly conceived in and born for “the short run.” By design, the price when in the super-shiny IS-LM model is nowhere named. Consequently, the price (U∙m) is of no use to us until “we are all dead.” Until then, the rest of us would be clueless how to find the rate of return without the price.

             Did a celebrity macroeconomist not suggest that the price be the baton of the invisible hand? Eureka! The government shall overtake so as to “dig a ditch and refill it” with the dead hand therein.

             Among the rest of us, “the invisible hand” is a metaphor of the market is metaphor of the economy. While the Economy is diligently running in the short or in the long (T^-1) to create values, Finance moves created values for the short or for the long (L^-1). The two can be happy together only in the heavens where the time everywhere stops lapsing but always keeps flying. RIP, or Move in Tranquility (T⁰∙L^-1)!

The marginal interest. Consequentially or otherwise, macroeconomists are rather marginally interested in the aggregate investment (I= Y– C≡ S). Such an “I” sometimes dwells in periphery of the Cities of Cambridge while other times thrown into the sea, upfront or far away. After all, “Private Saving” equals leaking, as showcased in the so-named “Paradoxe de L'épargne.”  

Tail to wag the dog. Needless to say, the “primary market” for newly constructed assets (“I”) is just a drop in the ocean of the “secondary market” for the wealth of the nation.

             With that said, is the economy-wide interest rate determined in the so-called “several interacting markets” of “IS-LMmentary” (blogpost of a super-celeb, 2011)?

             Poof! When bored, wag the dog with the tail, instead. Such wagging takes energy and time, of course. Umm, no fun comes for free, except for certain macroeconomics professors.  

 

A matter of naming. In economics, money is veil and funds are irrelevant. In finance, funds are always real and everywhere monetary. In macroeconomics, funds are everywhere nominal but for in the “so-interacting” markets. Funds shall be real to be admitted to the so-called “several markets” in particular and to Macroeconomics in general. Yep, it’s the “real funds. Sirs.”

             Honestly or dishonestly, did you know that “financial (T⁰) economics (T^-1)” is an oxymoron? Would you ever care “Who M.F. (for Macro Freakonomics or otherwise) was”? If you will, you may refer to NYRB, Mar 29, 2007.

Clueless (1995)