The Chimera of Macroeconomics

  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...

  “In the short run, we are not all dead.” As such, the rest of us must take the velocity of money ( V in macroeconomics ) into account as far as the earthly economy is concerned. If history is any guide, by the way, we may learn more from other people’s failures than from their successes. Before looking for velocity, we quickly review how conveniently it is lost in Cambridge Macroeconomics . Constancy of Velocity. By being assumed to be “constant” as in the “ Cambridge Quantity equation ,” M = k ∙ P ∙ Y , the velocity ( V= 1/ k ) plays no role whatsoever in macroeconomics. More simply, the velocity does not only lose its citizenship in Cambridge but also its identity rendered by the Classical quantity identity, M ∙ V ≡ P ∙ Y . By design of macroeconomists, then on, the economy-wide issues are all about M , P , and Y .              On the other hand, the rest of us are more than well aware that macroeconomics is for ...

  To be fair, the velocity of money ( V for velocity) is a non-issue in Cambridge Macroeconomics . Probably, that is the single greatest mistake ever made in Cambridge. As far as the real economy is concerned, “velocity of money” is far more relevant than “ liquidity preference .” To be truthful, the latter is an oxymoron at best.              According to Irving Fisher from New Haven, “Money is of no use to us until it is spent” (1930, p. 5). He is not alone: Paul Samuelson from Cambridge and William Nordhaus from New Haven second, “Money is useless until we get rid of it” (2010, p.458). Worse, money when preferred is in solid legal tender or thin-airy demand deposits, far from liquid, fluid or current.              At any rate, the rest of us as non-macroeconomist couldn’t agree more with the three great names. In the first place, we are legally forbidd...