The Chimera of Macroeconomics

  When we purchase pieces of paper representing partial ownership of Nvidia, we must sacrifice the interest rate on “savings” or pay the interest rate on “borrowings.” So the following is popular narratives in macroeconomics as regards the shape of investment curve in the “loanable funds” market: Investment depends on the … 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. (N. Gregory Mankiw, Macroeconomics ) On the other hand of the so-called “market” is the saving function. When we save money with the bank, or lend money to the bank, we can expect the benefit of the interest rate thereon. Macroeconomists would explain: Saving depends on the interest rate because the interest rate is the benefit of lending . The saving function slopes upward: when the interest rises, more saving projects are profitable.   Armed with the two hands of investmen...

  We often refer to 5W 1H. With us (Who) and the community (Where) given, we usually ask the Why question first, followed by What, When and How.   Question 1 . Why do we make investment? Is that for the future return or in avoidance of “the opportunity cost” now? Anyone in the right mind would choose the former. More specifically, investment is for the return per dollar (1) per period (1), or the rate of return in percentage per annum . The percentage is nothing other than certain numeric per 100 , where the unity (1) is indexed to 100. “The rate of return” in Finance is somehow called “the interest rate” ( i for nominal, r for real) in Economics.   Question 2. What do we invest in? The most probable answer would be: the best- expected return after deduction of all transaction costs (including risk premiums of various types). Question 3 . What is the most urgent thing you would like as alternative to your investment decision? How often, if ever, would it be “...

J.M. Keynes once commented, or is said as such, that he was the only non-Keynesian in the room. Probably he was right.              First, he in the 1936 book suggests the liquidity preference function, M= L(i) , to the effect that the interest rate is the cause and “money demand” the effect. Strangely however, his Disciples rebut that the interest rate is to be determined endogenously of their model even as they before anything else buy into “liquidity preference.” The unintended consequence: One of the two causal directions of contradiction must be wrong.              Second, the Master discredits in so many words the classical loanable funds “theory” of interest rate. The following year and on, J.R. Hicks and Alvin Hansen, among other macroeconomists, resurrected the so-called “theory” to use it as another pillar of the “fairly well working” IS-LM model. As for...