The Chimera of Macroeconomics

  The horse is utile and fertile. The donkey is utile and fertile. The mule is utile but infertile. According to a celeb (ex)-columnist, the IS-LM model “makes a lot of sense.” “Sense,” in what sense is it? Probably he means “utile and fertile.” Alas, such a sensible saying as “The sun rises in the east” might be conventionally utile but “empirically” futile. No more is the supposedly “sensible” IS-LM! Frictions and Transaction Costs. By naming, a product, good or service, means utility for the present while an asset for the future. As David Ricardo from London illustrates, on the other hand, “trade after specialization of production” is the first of “win-win strategies” as called in business. [Auto-correction: That’s a compromise , not a strategy; by naming, there is only one winner in every war .]                In theory, we don’t need money at all according to the Ricardian “theory” as such. In a sligh...

  One of the most vicious names in economics is “ equilibrium .” As a matter of simple fact, no organism can be in equilibrium until post mortem . That’s the very definition of “organism,” as opposed to “mechanism”: There in an organism indefinitely many parts act, react and interact and that incessantly so as to allow no room for equilibrium.     What the Price Means . Economics is no more “empirical” than physics is. In other words, “science” starts from abstraction also called idealization. For instance, the Newtonian gravity theory never applies as is to the reality where all different things, the observer-cum-researcher included, coexist with the apple and the Earth. Don’t get Sir Newton wrong, either: Owing to Eugene Fama from Chicago, in the first place: “Theories are approximations. Nothing is completely anything.” The great Theory of Gravity is a rough, and very rough in fact, approximation to the reality.         ...

  Let us recall the IS-LM model , which a certain famous-yet-infamous Nobelist calls “a model of several interacting markets, which will make a lot of sense.” Depending upon what he means with “making a lot of sense,” the model would be right or wrong. Here, we do not mean true or false, because the model can by no means be true: Very much surreal is the presumption therein that the price level ( P ) remains indefinitely “constant”.                 Incidentally, “right or wrong” is to an opinion what “true or false” is to a theory. And, the time period is un-defined (T 0 ) in association with GDP ( Y ) on the abscissa or the interest rate ( i , r , both, either or neither) on the ordinate of IS-LM. Rule of Thumb . I bring an umbrella when it feels like rain. If the central bank pump-primes money, GDP is likely to stabilize. Voila, the time is irrelevant (T 0 )! Conventional Wisdom . The sun rises in the ...

    The Theory by Goliath . For the sake of convenience, we copy from somewhere else:   (Quote) (i)    The Income-motive . –One reason for holding cash is to bridge the interval between the receipt of income and its disbursement. … (ii)   The Business-motive . –Similarly, cash is held to bridge the time of incurring business costs and that of the sale-proceeds …. (iii)    The Precautionary motive . –To provide for contingencies requiring sudden expenditure and for unforeseen opportunities of advantageous purchases …. (iv) There remains the Speculative-motive . … [Experience] indicates that the aggregate demand for money to satisfy the speculative-motive usually shows a continuous response to gradual changes in the rate of interest…. (Unquote)              First of all, the first two are of the same nature, and often named collectively as “the Transactional motive.” After ...

  “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 ...

  David Hume or his disciples might well have named “quantity equation” as “quantity identity.” As predicted by Confucius ( 孔夫子 , Kǔng Fū-dž in pinyin ), the misnomer, seemingly trivial, has misled people particularly in Cambridge and let them suggest the “Cambridge Quantity equation” as keystone of macroeconomics (e.g. John R. Hicks , 1937).              As a matter of semantics, after all, an “equation” can represent a theory, but an “identity” cannot until the time of crossing the River. Frame of Reference. In mathematics jargon, an “equation” consists of multiple “variables.”   The “velocity of money” could be called “a variable” if in the “quantity equation,” that is, M ∙V = P ∙ Y (as opposed to M ∙V ≡ P ∙ Y , an accounting identity).              Unfortunately, there exogenous to imagination is no such thing as “velocity” of money. The re...