Money illusions

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Economists consider an illusion of money to be an erroneous assessment by most people of the nominal value of money, or rather the perception of the presence of a certain amount in the wallet as the real value of bills. In fact, the valuation of money is an assessment of its purchasing power.

Despite the fact that money illusions are more related to economic issues, the perception of the money supply lies in the plane of psychologists. This happens because a person himself forms his own idea of ​​the amount of monetary income in terms of their amount that falls into his wallet.

And he perceives exclusively their nominal value, absolutely not linking banknotes in the mind, with a change in their ability to acquire something in connection with inflation and increasing price dynamics. That is, people are well aware that there are concepts of purchasing power and inflation, but their perception does not correlate them with banknotes in their hands, which is a special kind of illusory sensation.

A money illusion arises in the mind of a person, because there is no independent value that fiat money represents. Namely, this term, coined at one time by the economist John Keynes in the twentieth century, denotes the real value of a monetary unit - the possibility of exchanging banknotes for services and necessary goods.

And it was Kane who introduced the purely economic concept of "money illusion" into circulation, not suspecting at the time that its basis lay in the field of psychology. To this day, this term exists, both in the economic and psychological sense.

From an economic point of view, the term "fiat money" refers to legal tender, monetary units, the nominal value of which is set, secured and guaranteed by the state with the help of its power and authority. This money does not have an independent value, or it does not correspond and is incommensurable with the indicated denominations.

A person is subject to a monetary illusion, because a long-term habit of comparing the denomination of ten or twenty years ago with today leads to this. That is, people can more easily form in their minds the memory that yesterday they had, for example, 100 rubles in their hands, and today - 200.

The numbers indicated on the banknote are transformed in the human mind in arithmetic terms, and acquire an illusory character. As an example of the psychological component of the money illusion, one can cite the pleasure that many people get at the moment of the usual recalculation of money (including small change).

Until the 60s, economists considered the monetary illusion to be a common phenomenon, but the emergence in the sixties of many erroneous theories about the rationality of economic calculations and the rejection of the role of the psychological effect in the illusory perception of the monetary denomination, completely changed the macroeconomics of many countries.

The classic of the economic world, Irving Fisher, tried for many years to prove the existence of the price index, and the instability of the real value of the dollar. If at one time he had managed to combine the psychological research of scientists and his economic achievements, then the theory of monetary illusion would have taken a different path, and perhaps the number of ruined townsfolk and tragedies associated with the denial of inflation risks would have been significantly less.

Fischer was not the only economist of the last century convinced that people were susceptible to money illusion. John Maynard Keynes also attributed the income distribution process to the assumption that people are not used to negotiating the possibility of indexing wages when starting a job according to changing inflation rates.

But times changed, and opposite opinions began to prevail in analytical studies, and the topic of monetary illusions became practically forbidden, in any case, they were not taken into account in the calculations for a long time.

Today, the principles of money illusion are used in behavioral economics and behavioral finance, as a rule, to clarify the constantly emerging discrepancies between the theoretical calculations of a rational approach and real processes taking place in practice.

The point is that the influence of the nominal prices existing in the markets on the perception by the consciousness of people of the real value of money. Many of them continue to perceive the nominal value of money, as described in the media, as their actual existing purchasing power.

Among the reasons for the erroneous perception of real denominations, experts name two economic reasons - the existence of a low level of financial literacy, and a certain slowdown in nominal prices for many goods and services. There are also subjective reasons for the emergence of monetary illusions of a psychological nature, first of all, it is an established habit of trusting the leading media.

In addition, if a person's salary increases by 7% with the existing 9% inflation, he has the illusion that this is the most successful option than reducing the existing salary by 2%, but with inflation equal to zero.

In this example, the concepts of "increase / decrease" and simple arithmetic of numbers become "magic" words for a person. This is also a vivid example of a money illusion, since in reality these two options are equal for the purchasing power of the money supply (the actual wages are reduced by 2%).

In this case, the monetary illusion lies in the perception of the nominal wage when it rises as a positive factor (despite the negative real wages due to inflation). In other words, changes in the higher side of a person's personal salary are much more important to him than the general tendencies of rising inflation in the economy as a whole.

Money illusion is described in the book by Irving Fisher "The Money Illusion" (1928), which provides a complete and detailed psychological description and definition of concepts. And also the author in his work analyzes the specific experiments carried out on this subject, which confirm not only the direct existence of the monetary illusion, but also its influence on the country's economy.

For example, Fischer argues that in the economy of any country the effect of a monetary illusion is always manifested in three identical ways.

1. Even during the period of the highest inflation, there are signs of some slowdown in changes in nominal prices. One example of this phenomenon is the fact that wages in the short term rarely change at the same rate as the real (actually existing) cost of labor.

2. Contracts and laws almost never record the possibility of inflation (that is, the indexation of prices and wages is not taken into account), and all provisions are operated, as a rule, on the basis of nominal prices.

3. In the media, the concept of real (valid in any time period) value of money, real profitability is practically not used, which creates the preconditions for the use and application of simpler and more understandable concepts by a person in everyday life, such as nominal price and nominal yield.

In such ways, the price illusion is being exaggerated and heated up in society, since no matter how cynical it may sound, the economy of any country in different periods of development is beneficial to the existence of small inflation (within 1-2 percent).

In such cases, employers can increase their wages by the same 1-2 percent per year. But, naturally, in its nominal values, thus provoking, due to the monetary illusion, the perception by employees of this situation, as such, that their well-being is increasing, although in real terms the purchasing power of banknotes handed out does not change.

Unfortunately, most people around the world continue to live in monetary illusions, and poorly distinguish the line between monetary reality and illusion, since they still trust their perception, in this case, the nominal value of money, and do not assess their purchasing (real) power ...

Simply put, the digital denomination of banknotes is a monetary illusion for a person, and it is very difficult to change this position of matter, since it is provided by the state (this is the main reason not only for monetary illusions, but also for various political fluctuations in societies).

Most susceptible to monetary illusions are people living in those countries where for many years they have been provided with a stable salary, since it is hardest for them to understand that this phenomenon was paid for by someone and somehow, in an incomprehensible or unknown way. ...

The stability of the constantly unchanging material base was also ensured by the monetary illusion (someone worked for a pittance, and someone received banknotes secured by the labor of the first, and could "exchange" them for goods or services).

Monetary illusions help the state to more easily redistribute the fruits of human labor and material wealth, in other words, money becomes illusory when its amount ceases to be controlled by its limitation.

Most people are not able to understand that the increase in wages and prices does not bring real benefits, since this is just a manifestation of an integral part of the process, which in fact provokes the creation of a monetary illusion of an increase in welfare.

In reality, an improvement in life and an increase in well-being with a normal increase in wages is impossible, since at the same time there is an increase in the wages of other people, which is accompanied by an increase in prices.

Watch the video: The Illusions of Age, Money, and the 9 to 5 Work System


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