The Chimera of Macroeconomics

  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 ...

  We have the monetary inventory equation owing to William Baumol : M d = ( b ∙ T / 2 i ) 1/2 . T , for the aggregate monetary expenditures per annum , includes spending for GDP ( P ∙ Y ), intermediate goods, production factors, physical assets, human educations, financial instruments and the like.   Monetary Transmission Mechanism . The essence of fiscal policy or monetary policy is supplying “incremental money” ( Δ M ) to the private sector. On the other hand, we are very much well aware that the raison d'être of money is in spending.              As all of us try to get rid of the annoying thing, additional due to monetary policy, as soon as possible, some combination of the following will happen without fail: 1)      More products ( ΔC ) and fresh assets ( ΔI ) are created, and an increase in GDP ( ΔY ) follows. 2)      Prices of some products are raised. The...

  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...

  Nothing good comes for free: We must sacrifice all the other opportunities for the purpose of getting a certain utility as benefit. We do conduct cost-benefit analysis to make the most beneficial choice at each and every step forward, the “marginal” step as called in economics. In general, we choose the single best at the opportunity cost of  second best .              Gregory Mankiw among other macroeconomists proposes that the opportunity cost of “ liquidity preference ” is the fed fund rate (e.g. Macroeconomics of any edition). In effect, he and they regard “the opportunity to make a deposit at the Fed” as the single best opportunity forgone of all. Believe it or not!              We the lay people have instead indefinitely many opportunities open to us which depend upon the situation at the time of choice: the first best followed by the second...

    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 ...