The Chimera of Macroeconomics

  We cannot have the cake and eat it too. In order to get a nice thing, we have to sacrifice another good thing. That’s easy, but for “another” being an uneconomic term. Economics is not only ordinal but also cardinal .* Consequently, we in economics usually say the opportunity cost in the meaning of the other good thing.                  *Note: Some economists speculate that cardinality may not be needed in economic reasoning (e.g. Paul Samuelson and William Nordhaus , Economics , 2010, p. 89). Alas, they fall into the trap of “fallacy of composition” (ibid, p.9).              To begin, we discuss “ disutility ,” as opposed to “ an opportunity cost.”   Disutility. Every rose has its thorns. This world is not everywhere wonderful, full with utilities. There are many matters of disutility in themselves, or equivalently painful i...

  In economics, obtaining a unit of utility is called: a gain, a pleasure or a benefit . A gain is sometimes metaphorically called “having a cake.” On the flipside, losing a unit of utility is called: a loss, a pain or a cost . A cost is often called a price , but we hereinafter reserve the latter for the meaning of “market price” in the currency unit.              Two millennia and a half ago, Confucius would have said, “There are yin (-) and yang (+). Thou shalt not con-fuse them but fuse them right.”   Enemies and foes. As the conventional wisdom has it, “We cannot have the cake and eat it, too.” Another: “No pain, no gain.” Still another: There is No Such Thing as a Free Lunch ( Milton Friedman ). The other: “People Face Trade-off” ( Gregory Mankiw ).              Let us take on the metaphor. The cake when eaten renders a special kind of utility, ...

  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...

  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...

  Nothing good comes for free. In other words, we have to pay a price for anything desirable. That’s the Principle No. 1 of the Harvard economist Gregory Mankiw in his super-selling Principles of Economics : “People face trade-offs.”              By the way, did you know that the book of economic principles has a 50-year Millite cycle? The cycle starts with J.S. Mill, Principles of Political Economy , 1848, to Alfred Marshall, Principles of Economics , 1890 to Paul Samuelson, Economics , 1948 to Gregory Mankiw, 1998 to Author You, Understanding Economic Correctly , 2048.                Suppose a boy named Donald. He has a long list of girls in order of preference as candidate of soul mate, lifetime or otherwise, subject to monogamy from Constitution: Audrey, Elizabeth, Kate, Natalie, Ann, Ivo ñ a, Mila ñ a, Stormy, Jean and all the way down to l a ni ñ a...