The Chimera of Macroeconomics

  According to Paul Krugman , among other Nobel Laurates, the IS-LM is “a model of several interacting markets.” As he updates, “IS-LM stands for investment-savings, liquidity-money — which will make a lot of sense if you keep reading.” (“IS-LMentary.” NYT blogpost , 2011)   Going for Details . With the above said, we quote among other Cambridge macroeconomists from N. Gregory Mankiw ( Macroeconomics , 8 th edition). I nvestment ( I ) as Demand for Loans. The quantity of investment goods demanded depends on the interest rate , which measures the cost of the funds used to finance investment. … The firm makes the same investment decision even if it does not have to borrow… but rather uses its own funds. … It slopes downward, because as the interest rate rises, the quantity of investment demanded falls. (pp. 63-4) Savings ( S ) as Supply of Loans . [This] equation shows that national saving depends on Y [as fixed by the factors of production] and the fiscal-polic...

  Opening any textbook, we come across the AS-AD model. The framework has the price level ( P ) on the ordinate (the y axis) and the “real” GDP ( Y= Y N / P , where Y N supposedly for this year’s “nominal” GDP) on the abscissa (the axis of x ).              First of all, there is a great technical problem that the abscissa ( Y N / P ) is defined to be a function of ordinate ( P ). Most macroeconomists, not to mention the rest of us, would have difficulty traveling in such an unusual coordinate system.             Second of all, with the stock of money ( M* ) and the velocity of money ( V* ) “assumed” to be constant in the model as usual “for the sake of convenience,” the rest of us would have a couldn’t-be-simpler equation P ∙ Y ≡ M* ∙ V*= k with k  again “assumed” constant. The relationship is hyperbolic whether called the “AD curve” or the “AS curve.” ...

  The following is copied from somewhere else and then slightly modified.              Under the assumption that some firms hold their prices sticky, certain macroeconomists including the influential Harvard economist Gregory Mankiw ( Macroeconomics , 8 th ed. § 14-1) illustrate the AS curve to be P= s∙EP+ (1– s)∙[P+ a∙(Y– Y*)] , where EP is the planned price level (“sticky prices”), “ s ” the fraction of firms stuck to EP , Y* the natural level of output, and “ a ” is a coefficient. Incidentally, the coefficient has a very complicated metric but nevertheless has little meaning as a link between indexes.              The equation has many flaws in addition to dimension aberration and being a relationship of indexes of little meaning on their own. First among other additional defects, firms cannot “set” their prices without affecting their outputs. In the ...

  Scene #1. Paul Samuelson and William Nordhaus, Economics (19 th and final ed.), p.159 Some goods or productive factors are completely fixed in amount, regardless of price. There is only one Mona Lisa by da Vinci. Nature’s original endowment land can be taken as fixed in amount. Scene #2 . Gregory Mankiw, Macroeconomics (8 th ed.), p.508 Panel (a) of Figure 17-5 shows how the … price of housing P H … is determined by the supply and demand for existing stock of houses. At any point in time, the supply of houses is fixed.   Really amazing is how on Earth those household-name economists have so powerful blind spots in their eyes.   Blindness #1 . There is no way to trade what is in the inventory aka “stock.” For instance, we, if not they, can by no means purchase Mona Liza or “the fixed stock at any point in time.” In the first place, the object must be put on the block possibly to be purchased. Blindness #2. In the second place, there in the world does ...

I quote the following from Chapter 11 of N. Gregory Mankiw, Macroeconomics : The underlying reason is that the interest rate is the opportunity cost of holding money. ….   The demand [for money] is downward sloping because a higher interest rate raises the cost of holding money and thus lowers the quantity demanded.   Really amazing is that according to what I learned as a sophomore merely two sentences as above contains numerous fallacies. Fallacy No. 1. The opportunity cost of holding money is what we need most desperately at the particular accounting period of time. Over all else, some would choose apples while others movie-going.  F2. There is no such thing as demand for money. Demand represents the quantity of a certain object wanted in the accounting period of the narrator’s interest: for instance, half a dozen units of apples per week . F3. There is no such thing as demand for money. In the monetary economy , all demand pays and all supply is paid with...