The Chimera of Macroeconomics

    Suppose the product “widget” to be traded in the market of Mini-polis with a certain limited number of households. We assume the accounting period is the month. We additionally imagine for the sake of convenience the demand curve and the supply curve as illustrated in textbooks.              We certainly have the “equilibrium price” which would clear the market in the month of April. We might call such a price as “the price of market average,” which we can figure out ex post if in reality. At any rate, the market has been “cleared.” Or, the market has ended up “in equilibrium” except for this regret: The “equilibrium price” will surely be different in May as long as the market is awake.   What Opportunity? In the marketplace, there are prices. In the market, there is “the price.” There is one commonality among a price in reality, the price of imagination and all the other different prices as realis...

  Macroeconomists , by birth or by training, take “the price” or “the interest rate” as the determinant “variable” in their hypothetic equations and diagrams incl. the shiniest IS-LM and AS-AD models. They at best fall in the trap of “ fallacy of composition .” More weird is that they often in building hypotheses refer to Paul Samuelson who famously warned against such a fallacy at the dawn of macroeconomics ( Economics , 1948, p. 9).              To begin, with the term “the price” we mean “the equilibrium price ,” so to speak, not the sacrifice or cost we must pay in return for a benefit. Sacrifices are “individual,” but the price must be “collective”: the former for “each” participant the latter for “all” the market.                 To be fair: ① We presume an accounting period of limited duration so as to make plausible such calls as the qu...

  To begin, we quote from The Conscientious Liberal: So, the first thing you need to know is that there are multiple correct ways of explaining IS-LM. That’s because it’s a model of several interacting markets, and you can enter from multiple directions, any one of which is a valid starting point. My favorite of these approaches is to think of IS-LM as a way to reconcile two seemingly incompatible views about what determines interest rates. One view says that the interest rate is determined by the supply of and demand for savings – the “loanable funds” approach. The other says that the interest rate is determined by the tradeoff between bonds, which pay interest, and money, which doesn’t, but which you can use for transactions and therefore has special value due to its liquidity – the “liquidity preference” approach. (Yes, some money-like things pay interest, but normally not as much as less liquid assets.) How can both views be true? Because we are at minimum talking about *...

  As regards the gross domestic investment ( I for investment in national-income accounting), we quote the following from Chapter 3 of N. Gregory Mankiw, Macroeconomics : Investment depends on the real 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.   Yes, we’ve got it: I= I(r), where Δ I/ Δ r< 0 .   After eight chapters, eight diagrams in the Chapter, so many convenient hypotheses, so many equations and “so many words,” N. Gregory Mankiw, “for the sake of” suggesting the IS curve, effectively verifies:              Y= Y(r), where ΔY / Δ r< 0 . Or, “The IS function slopes downward.” The only regret therein is no reference at all to the gross national saving ( S ).   Most probably, such an IS curve is no news at all to the rest of us who have already learned: ...

  Opening a text book on Principles of Economics, one of the first things we come across is “Demand.” Fact one, demand is for marginal benefit, or utility per unit of the product. Fact two, the value of utility is accounted for in the sovereign currency unit . Fact three, the demand exists with no regard to the Supply and a price. The price would be the “opportunity cost” of grabbing the unit of good or service .                Fact four, “Demand” is periodic (T -1 , or per period) because no household would buy any product once and for good. This is taken for granted and rarely specified in textbooks. Incidentally, each and every one of us has by creation blind spots in our visionary system. Consequently, we in general and macroeconomists in particular often miss the periodicity out, with or without FOMO.              Now let us put “Demand for Money”...

  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...

  Theory from Science. Scientific theories are all about causality: A cause results in the effect. If we set the end, we might find a means to have the end obtained. If a self-claimed scientist, abstract or empirical, gets the causality wrong, he shall convincingly confuse innocent citizens, domestic or alien. As such, we may call “reverse causation” the first sin of science. All Correlations are Not Equal . In practice of concurrence , most anything is correlated nearly everything else. In that sense, “correlation” is a matter of degree . I the Meanest do not   only share the same period of time with a little less mean family but also with all different kinds of celebs. Alas, I cannot with the closest related and most honorable parents of mine!              On the contrary, causality of different direction results in a great difference in kind , such as a plan of highest feasibility versus a pipedream. In gener...