The Chimera of Macroeconomics

  The rest of us now arrive at Political Economy , which is more like an art than a science.                As we discuss earlier, there is only one motive of “ money hoarding ,” that is, in preparation for monetary transactions in the near future ; on the flipside, money is useless until we spend it (Irving Fisher from New Haven, 1930). [Auto-suggestion #1: “ Preferred liquidity ” is nowhere fluid or current; it always is in forms of solid legal tender or thin-airy deposits.] [Auto-suggestion #2: The future is uncertain to everybody except for certain macroeconomists in the “ money market .”]              With regard to transactions with money, William Baumol from Princeton devises the convenient formula in “The Transactions Demand for Cash: an Inventory Theoretic Approach” (1952): M d = ( b ∙ T / 2 i ) 1/2 , where b stands for financial transaction...

  If history is any guide, metaphorical illustrations and thought experiments are useful as a way of illustrating a law or theory to, among others, school children. According to conventional wisdom , on the other hand, children sometimes work as a great teacher to grownups.   A Thought Experiment . Suppose that with the aggregate wage in 1937 stuck to that in 1936 the nominal GDP ( P ∙ Y ) decline by 10% PA, quite conventional in depression, across July 1 st of the respective year. According to the macroeconomic rule of thumb , on the other hand, the one-year run is half the standard length of “ short run .”              All in all, we have seen Δ(P∙Y )= -0.1 ∙ ( P∙Y ) in the undisputed “short run” between the two July 1 st ’s, or per annum so to speak. Enter the “Cambridge Quantity equation.” First of all, thou shalt have Δ M= 0 as before the advent of “ fiscal multiplier .” Second of all, with the “const...

    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 ...

    According to Irving Fisher from New Haven, money does its job while moving across two hands (L -1 , L for length in space dimension). As a natural consequence, each piece of legal tender sometimes called “ liquidity ” makes a certain number of turns per annum (T -1 , T for time). The aggregate pieces at all different rates of moves would yield the growth domestic products per annum ( Y in macroeconomics) Spending to Turning . The gravity on Earth creates energy by attracting an object before getting a work done, while the gravitating force of legal tender calls in utilities for human survival and higher-level welfare. The object (“M” for mass in dimension) never dies naturally; much likewise legal tender (U ∙ m) never fades away tenderly. Oh, we mean the principle of conservation!              Where there is spending, there is getting spent. When anyone in the meantime eats, wears, burns or prints any ...

  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...