Velocity Wanted: More Whimsical Than Money Stock
Money used to be “veil” in the discipline of economics. Somehow, money aka “ liquidity ” has become the “crown jewel” in the “ empirical science ” of macroeconomics ever since a particular book and a particular article in the second half of 1930s. The equation in the book is M= L(r) (1936 p.168), while that in the article is M= k ∙ I ≡ [k ∙ P ∙ Y] (1937). One of the first things we the lay people can hardly understand is the fact that the two theories based on the two equations are mutually contradictory: the interest rate is the cause defined from outside in the first “model,” so to speak, while the effect to be determined inside the second “model” (of the money market or the IS-LM). The two would not coexist if in economics as an abstract science. Therefore, macroeconomics is no economics. The “ Cambridge Q...