The Chimera of Macroeconomics

  John M. Keynes illustrates the “liquidity preference” function: M= L(r) (1936, p. 168). Next year, John R. Hicks in “interpretation of Mr. Keynes” comes up with the money demand “equation of Cambridge Quantity”: M= k ∙ P ∙ Y .              To be fair, they like us “demand” money to spend in the near future primarily because “Money is useless until we get rid of it” (Paul Samuelson and William Nordhaus, Economics , 2010, p.458); such getting rid of can never be “now or in the past.” On the other hand, both the interest rate and GDP are already given from outside (read: already determined ).              In mathematics jargon, the interest rate and GDP are a parameter as opposed to a variable. By definition, the parameter is exogenous, while the variable is supposed to be determined in, or “exogenous” of, the market. Wait, a mathematical parameter does not...

  Implicit or explicit, macroeconomists conceive that the so-called “liquidity preference” (L≡ M d ) and “money supply” (M≡ M s ) comprise “the money market . ” This market is often opposed to the “product market” of the real investment ( I ) and the real saving ( S ). As well known to students, the two of L and M join forces to produce the LM curve. Umm, the one out of the IS-LM model!             Unfortunately, there cannot be anything like the LM curve. First, the time (duration), more than critical to the rest of us in Here on earth, is completely missing in the curve. Second, all the relevant terms, demand, supply, “liquidity preference” and the like are misnomers .             As expected the LM curve is misconceived and stillborn so as to be firmly fixated in a textbook.    Reality #1. John M. Keynes illustrates the “liquidity preference” function: M= L(r) (1936, p. 168)...

John M. Keynes proposes a liquidity preference function, M= L(i) (1936, p. 168). The function is partly true. Some of us would keep larger money in cash or bank deposits than usual when there is no opportunity whatsoever from which to expect a positive return or interest receipt. Unfortunately, however, “Half knowledge is more dangerous than ignorance.”              Whose fault may it be, the equation has long been over-relied, way too much, in Cambridge macroeconomics. Particularly, the equation is one of the four pillars in the IS-LM model, which is “pretty-well working” according a famous and infamous Nobel laurate.              First and foremost, there on earth is no such thing as the interest rate. As well known in elementary finance, interest rate is very specific to the investor, the asset, the time horizon, the portfolio, and the social, political and ec...