The Chimera of Macroeconomics

  In economics, obtaining a unit of utility is called: a gain, a pleasure or a benefit . A gain is sometimes metaphorically called “having a cake.” On the flipside, losing a unit of utility is called: a loss, a pain or a cost . A cost is often called a price , but we hereinafter reserve the latter for the meaning of “market price” in the currency unit.              Two millennia and a half ago, Confucius would have said, “There are yin (-) and yang (+). Thou shalt not con-fuse them but fuse them right.”   Enemies and foes. As the conventional wisdom has it, “We cannot have the cake and eat it, too.” Another: “No pain, no gain.” Still another: There is No Such Thing as a Free Lunch ( Milton Friedman ). The other: “People Face Trade-off” ( Gregory Mankiw ).              Let us take on the metaphor. The cake when eaten renders a special kind of utility, ...

  Come to think of it, there in the corner of economics is a hidden cross, utile or useless.   The Cross in Consumer Choice. For the purpose of giving some sense to the so-claimed “price” of x good ( p x ) in the consumer choice model, certain economists put the budget for “all the other goods” on the y axis (e.g. Samuelson and Nordhaus 2010, p.88; Hal Varian 2010, p.114). In this case, the total household income becomes the budget constraint.              Alas, they fall prey of fallacy of composition Paul Samuelson talked about as early as in 1948 ( Economics , p.9). Suppose apples on the x Axis of John Doe’s coordinate, and the weekly income on the Axis of y . Further suppose that the apple sells @ $0.5 and that Doe’s income, or spending budget, for all purposes is $5,000.              Question 1 : How many units of apples could Doe buy per week,...

  As regards the gross domestic investment ( I for investment in national-income accounting), we quote the following from Chapter 3 of N. Gregory Mankiw, Macroeconomics : Investment depends on the real interest rate because the interest rate is the cost of borrowing . The investment function slopes downward: when the interest rises, fewer investment projects are profitable.   Yes, we’ve got it: I= I(r), where Δ I/ Δ r< 0 .   After eight chapters, eight diagrams in the Chapter, so many convenient hypotheses, so many equations and “so many words,” N. Gregory Mankiw, “for the sake of” suggesting the IS curve, effectively verifies:              Y= Y(r), where ΔY / Δ r< 0 . Or, “The IS function slopes downward.” The only regret therein is no reference at all to the gross national saving ( S ).   Most probably, such an IS curve is no news at all to the rest of us who have already learned: ...