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...

  Opening a text book on Principles of Economics, one of the first things we come across is “Supply.” Fact one, the supply is at the marginal cost of production. Fact two, the value of cost is accounted for in the sovereign currency unit .              Fact three, the supply schedule of the product exists with no regard to the Demand and a price. The price would be the opportunity “benefit” per unit in compensation for all the money and time spent for the supply. It’s more or less “weird” that no economist has ever referred to opportunity benefit , the mirror image of opportunity “cost.” Again, the article “the” means the single highest value of all opportunities forgone.              Such a narrative as the opportunity cost of “liquidity preference” is the interest rate is fatally misleading. To most everyone other than a macroeconomist, the opportunity ...

  Opening any textbook on Principles of Economics, we see the diagram of market with the price ( p ) on the abscissa and the quantity traded ( q ) on the ordinate. Further: 1)      The demand representing the marginal utility in the currency unit slopes downward. 2)      The supply representing the marginal production cost in the dollar slopes upward. 3)      There surely is a cross near the right end of the diagram. 4)      There we go, the equilibrium price ( p* ) and quantity ( q* ). Easier than eating the cake (and having it too)!              Don’t get it wrong. The framework simply is a metaphor; the metaphor by definition is not reality. In addition, the equilibrium price and the quantity traded can be known ex post .                 The market never really works as per...