The Chimera of Macroeconomics

  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 sligh...

  If history is any guide, metaphorical illustrations and thought experiments are useful as a way of illustrating a law or theory to, among others, school children. According to conventional wisdom , on the other hand, children sometimes work as a great teacher to grownups.   A Thought Experiment . Suppose that with the aggregate wage in 1937 stuck to that in 1936 the nominal GDP ( P ∙ Y ) decline by 10% PA, quite conventional in depression, across July 1 st of the respective year. According to the macroeconomic rule of thumb , on the other hand, the one-year run is half the standard length of “ short run .”              All in all, we have seen Δ(P∙Y )= -0.1 ∙ ( P∙Y ) in the undisputed “short run” between the two July 1 st ’s, or per annum so to speak. Enter the “Cambridge Quantity equation.” First of all, thou shalt have Δ M= 0 as before the advent of “ fiscal multiplier .” Second of all, with the “const...