Products, Assets, and Money: For an Alternative Macroeconomic Narrative

Abstract

Economics might well encompass the asset market, which in turn requires completely new narratives. In addition, money may well be given the single function of the medium of exchange. Then, the defective IS-LM model can be replaced by more logical and simpler explanations: incremental money provision (ΔM) directly promotes consumption spending (C) and asset purchases, a part of which is for newly-produced assets (I). Here, it becomes clear that the interest rate is not the cause for aggregate investment (I) but the effect of asset trade. Another truth is that the price level (P) and the real GDP (Y) are nothing but indexes and totally meaningless by themselves. Therefore, they should be replaced by their growth rates (π versus g) in the AS-AD model. More generally, economists need to pay keen attention to dimensions of various quantities not to commit widely observed “dimension aberration” such as taking the dimensionless percentage gap in GDP (log Y – log Y*) for the gap in growth rates (g – g*) with a time dimension (T-1).