Economics Dictionary of ArgumentsHome
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| Money illusion: According to Keynes, money illusion describes the tendency of people to confuse the nominal value of money (e.g. the number of euros) with its real value (its purchasing power). For example, a wage increase is perceived as a gain, even if inflation has risen at the same time and the real value of the wage remains unchanged. See also Purchasing power, Keynesianism, Keynes, Inflation._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Dictionary of Arguments. | |||
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John Maynard Keynes on Money Illusion - Dictionary of Arguments
Rothbard III 783 Money Illusion/Keynes/Keynesianism/Rothbard: Keynes believed that while other elements of the economic system, including prices, were set basically in real terms, workers bargained even ultimately only in terms of money wages - that unions insisted on minimum money wage rates downward, but would passively accept falling real wages in the form of rising prices, money wage rates remaining the same. Unemployment: The Keynesian prescription for eliminating unemployment therefore rests specifically on the "money illusion" - that unions will impose minimum money wage rates, but are too stupid to impose minimum real wage rates per se. Unions, however, have learned about purchasing-power problems and the distinction between money and real rates; indeed, it hardly requires much reasoning ability to grasp this distinction.(1) >Unemployment/Keynesianism, >Unemployment/Rothbard. Inflation/VsMoney illusion: Ironically, Keynes' advocacy of inflation based on the "money illusion" rested on the historical experience (…) that, during an inflation, selling prices rise faster than wage rates. Minimum wage: Yet an economy in which unions impose minimum wage rates is precisely an economy in which unions will be alive to any losses in their real, as well as their money, wages. >Minimum wage/Rothbard. Inflation: Inflation, therefore, cannot be used as a means of duping unions into relieving unemployment.(2) RothbardVsKeynesianism: Keynesianism has been touted as at least a "practical" system. Whatever its theoretical defects, it is alleged to be fit for the modern world of unionism. >Unions/Rothbard. RothbardVsKeynes: Yet it is precisely in the modern world that Keynes' doctrine is least appropriate or practical.(3) KeynesismVsVs:The Keynesians object that to allow rigid money wage rates to become flexible downward would further Iower monetary demand for goods, and therefore monetary income. But this completely confuses wage rates with aggregate payroll, or total income going to wages.(4) That the former falls does not mean that the latter falls. On the contrary, total income is,(…) , determined by total expenditures in the previous period of time. Lower wage rates will cause the hiring of those made unemployed by the old excessively high wage rates. The fact that labor is now cheaper relatively to land factors will cause investors to expend a greater proportion on labor vis-å-vis land than before. And the employment of unemployed labor increases production and therefore aggregate real income. Furthermore, even if payrolls also decline, prices and wage rates can adjust (…) . 1. Cf. Lindahl, "On Keynes' Economic System—Part I," pp. 25, 159 ff. Lindahl's articles provide a good summary as well as a critique of the Keynesian system. 2. Furthermore, inflation is, at best, an ineffcient and distortive substitute for flexible wage rates. For inflation affects the entire economy and its prices, while particular wage rates will fall only to the extent necessary to "clear" the market for the particular labor factor. Thus, freely flexible wage rates will fall only in those fields necessary to eliminate unemployment in those particular areas. Cf. Henry Hazlitt, The Failure of the "New Economics" (Princeton, N.J.: D. Van Nostrand, 19 59), pp. 278 ff. 3. Cf. L. Albert Hahn, The Economics oflllusion (New York: Squier Publishing Co., 1949), pp. 50 ff., 166 ff., and passim. 4. Cf. Hutt, "Significance of Price Flexibility."_____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. "Vs" indicates differences in content, not necessarily the chronological progression of a controversy. If a German edition is specified, the page numbers refer to this edition. |
EconKeyn I John Maynard Keynes The Economic Consequences of the Peace New York 1920 Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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> Counter arguments against Keynes
> Counter arguments in relation to Money Illusion
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