The Chimera of Macroeconomics

  Amongst the rest of us, all “real variables” as named in Cambridge macroeconomics are surreal, if not outright deceptive.   7) Real Variables of Quantities              We never consume apples and oranges for their own sake (M for mass), but we buy into their utilities (M ∙ U). Due to the difference in kind there is no way to add utilities directly of the two products. Owing to the sovereignty, blessedly, we have the common utility metric called “the unit of account” as printed on legal tender; if in the US, for instance, the $ sign is the unit (U) and the dollar bills are the legal tender (m ∙ U).              Now with legal tender as the proxy of all different utilities (M ∙ U), we can add, indirectly notwithstanding, oranges and apples as traded in the respective market over multiple accounting microscopi c periods; all the way to the national i...

  Quiz with the unit dollar up for grabs: What would be the word for winning in the competitive war to become California’s Air Hub between LAX (LA international airport) SFO (SF airport)? Hopefully, nobody other than me would come forward with the word “ connectivity ” as the answer.             Suppose LAX has 2,000 ( N 1 ) flight connections (to other airports) while SFO 1,000 ( N 2 ). On the other hand, “connectivity” means a bi -lateral relationship between two spoke airports via the hub. Now, what will be the aggregate number of connectivity through LAX vs. through SFO?             Most of us would have the answer: C lax =N 1 ∙ (N 1 - 1)/ 2= 2,000 x 1999/ 2 vs. C sfo = 1,000 x 999/ 2 . To generalize, C= N ∙ (N-1)/ 2 . Then on, we can make a speedy guess that C ≒ N 2 / 2 when N is larger than, say, 100. This is the network effect , sometimes called “Metcalfe’...

  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...