The Chimera of Macroeconomics

  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...

  Nothing good comes for free: We must sacrifice all the other opportunities for the purpose of getting a certain utility as benefit. We do conduct cost-benefit analysis to make the most beneficial choice at each and every step forward, the “marginal” step as called in economics. In general, we choose the single best at the opportunity cost of  second best .              Gregory Mankiw among other macroeconomists proposes that the opportunity cost of “ liquidity preference ” is the fed fund rate (e.g. Macroeconomics of any edition). In effect, he and they regard “the opportunity to make a deposit at the Fed” as the single best opportunity forgone of all. Believe it or not!              We the lay people have instead indefinitely many opportunities open to us which depend upon the situation at the time of choice: the first best followed by the second...