Money Illusion in the Twenty-First Century
Money Illusion in the Twenty-First Century
The starting point for any consideration of inflation is that wages (and interest, profits, and rents) are prices. Every transaction has two sides, and one person’s price is another’s income. In the aggregate, leaving aside international complications, inflation can’t have either a negative or positive effect on aggregate real income. After this, you can explore issues of distribution, inflation’s effects on planning, and so on.
Money illusion is the name given to the failure to recognize the income-expenditure identity. Your introductory economics textbook, if you were exposed in high school or college, defines the problem as one of recognizing changes in your nominal income but not the prices of the goods you buy. It leads to the mistaken view that inflation makes you better off.
But people have gotten wise to price increases, if only because the media explode with concern when any potentially inflationary tremors are felt. If anything, paranoia about inflation has become the norm.
This is also a form of money illusion, but a reverse of the first: people recognize the rise in prices but not that this also entails the rise in their incomes. They rally in support of politicians who promise to reign in any hint of inflation, thinking that if prices stabilize they can fully enjoy the increase in their incomes, which they expect to continue unabated. In my own, oddball textbook I call this “Type II Money Illusion”.
From a pure theory standpoint, these two forms of illusion have an identical basis, but one is railed against in every basic macroeconomics class while the other goes unmentioned. Ever wonder why?
Other ways to think of inflation include demand pull, wage push, and cost push. We are now experiencing a bit of all three, not just from post pandemic frictions working against the post pandemic recovery boom, but also underlying frictions from peak oil, climate change, and globalization. When frictions require relative prices to change, then inflation is the grease.
Back in the 70’s the people I worked with were well aware how wage increases and inflation tied together, if only because of the discussions around COLA clauses in union contracts. Today there are so few unions and COLAs that wage increase’s association with inflation can be ignored.
do we have a money illusion illusion?
there is no “in the aggregate” that means anything to individuals, which is in fact what people are. inflation is good for debtors, bad for “savers” (lenders, or exploiters of debtors). inflation is bad for people of fixed income, or wages that lag price increases. inflation is bad for whole countries “in the aggregate” as is seen from time to time. deflation is said to be worse, but not often as bad. (paradox intended).
i do think there may be a “Basic Economics” illusion.
hick-fil-A “Eat Mor Chikin” Cow Parachutists
[Solution for meatflation]
any report on the cows? or were they just cattle from heaven?
funny thing is I don’t eat chicken, but because one of my dogs has a serious illness and can’t eat steak, i have to feed her about a chicken a day. i think you may not want to know how they keep chicken so cheap.
Coberly,
Chickens have a shorter life cycle to maturity than cows, but all steers do not get treated any better in the end. Temple Grandin literally wrote the book on humane beef livestock slaughter, so there is that for those that follow her advice. Chickens appear to lack such an advocate.
This week my wife and I are getting four meals out of a 1.5 pound marinated top round with two heads of cabbage, eight potatoes, 3 cans of kidney beans, and two jars of gravy. Tonight we finish it off and tomorrow night we have Manwich sloppy Joes made with burger crumbles and a can of small young peas. Kellie leaves Friday and for three days I will be chowing down on black bean chili made with burger crumbles. This is to say that meat is a garnish more than a staple at our house.
well, i looked at the you tube version. next up was a person more humor challenged than i am explaining the chick film ad campaign. and after that, the guy who trained the cows.
so i’m assuming it was all done by photoshop.
no wonder nobody beiieves anything any more.
your cooking sounds mouth watering, but i guess we all have to make sacrifices. it i was a real man of my beliefs i’d get my own chickens and my own axe, and give the kids a decent life before i fed them to my dogs.
long time ago my daughter kept free range chickens (and a dishonest dog). i told her it was all I could do not to chase the chickens myself.
then i met the rooster. obnoxious beast. i was ready to chase him for entirely different reasons. but i had to admit he took care of his girls. first to walk out of the barn in the morning. looked around for hawks and foxes and then signaled the all clear so the ladies could come out and scratch.
i might mention that since the Boskin convention, we have seen that inflation is also a political construct, by which inflation can be reduced by switchint from steak to chicken and chicken to turnips.
chick film is spellcheck for chick fil a. insisted. so wotthehell.
Just a Question for Coberly (Nov 9). Will you check with the mother of the kids you feed to the dogs, or will this be a unilateral decision?
grammer police
i too am among the humor challenged, so i can’t tell for sure
but i suppose if i were man enough it would be a unilateral decision.
as it is, some of my best friends are homicidal maniacs so i go to the grocery store and buy them chickens who were glad to give up their lives for their country…and to escape a life of hell on a “poultry farm.”
i know this rewards the poultry farmer and the “processor”, but in this fallen world the half-life of a dog left to find his own dinner is about 24 hours. so there are choices to be made.
on the other hand I have been told that in the next world the lion will lie down with the lamb, and the tiger will lie down with the veal.