Appearance and Reality in Economics
BROCKWAY, GEORGE P.
The Dismal Science APPEARANCE AND REALITY IN ECONOMICS BY GEORGE P BROCKWAY A delusion appears from time to time in philosophy whereby appearance and reality are so separated that, as Charles...
...real wages, not money wages: These investigations seem sensible and down to earth...
...He noted further that no specific wage negotiation can have a great enough effect on the general price level to make the latter worth considering by either party...
...The nominal interest rate is what the banker was going to charge you...
...Thus we hear much talk about the real interest rate, and how--regardless of what you thought when you talked with your friendly banker about a loan--until recently it was very low, or even negative...
...The mere fact that the CPI is not the all-purpose market basket for all seasons, and that other indices (including many of the same items) have to be devised, indicates that the alleged reality shifts as the sands...
...Even though we may not like what is being done to us, it is for our own good...
...In this I am no different from the in' vestor (or speculator) who resists a reduction in money interest...
...Why then should I not join other workers in resisting a reduction in my money wage...
...In particular, they don't make long-term investments because they fear that when they get their money back it won't buy as much as it does today...
...Some of them I'd not give house room to, except for their sentimental association with the great man who once owned them...
...Like the unfaithful servant in the parable, he can bury his money, but that won't help him...
...The market basket of the CPI includes many items I would not give house room to and many others--entertainment, for example--that can be connected with a labor theory of value, or with any other "reality," only by dint of the most laborious of gyrations...
...You may have wondered who was keeping score...
...the real values of either commodities or paintings had nothing to do with the case...
...Considering what has been done so far, it's hard to imagine what remains to be done, yet we need not doubt that pressure will be steady to reduce taxes in the higher brackets and to reduce income in the lower...
...They investigate the "real" GNP, not the "nominal" GNP (the quoted terms aren't the same as those of medieval philosophy, but they give rise to similar difficulties...
...High wages in Detroit have a slight and remote effect on the prices of the food and clothing automobile workers (and automobile magnates) buy...
...and the more money I have, the more things I can buy...
...Moreover, if your tax bracket was, say, 30 per cent, he probably noted that your tax deduction for interest paid would amount to almost 5 per cent, putting you ahead of the game...
...A theater ticket can be counted in the CPI because it is bought, that is, because it has money value...
...A corresponding delusion suffered by many economists is that there is a real economic world underlying the actual one in which we live and have our being...
...In the end, he will compare the results of various investment strategies in accordance with the amounts of money they earn...
...The few I know seem to fancy buying extra con-dos here and there, and that seems like a long-term investment to me, but let that pass...
...But the money value, as he anticipated, changed dramatically...
...The real value of the paintings he bought for himself and urged others to buy was not about to change and, by definition, could not change...
...Here Reaganomics has a stock answer: Make the rich richer...
...Nor are the paintings unique...
...Classical economists are especially prone to talking about the real world rather than the actual one...
...He used his winnings for (among other purposes) buying paintings at the Degas auction in 1918...
...At the very start of The General Theory, he showed why labor is concerned with money wages, not with real wages, to the bewilderment of classical economists...
...Keynes satisfied his tastes for old books and new paintings by speculating, mainly in commodities and currencies...
...I will say that it does not...
...In the actual world, where we do our actual buying and selling, it is money values that we do--and should--pay attention to...
...Money, after all, is only good for what it can buy...
...real interest rates, not nominal ones...
...Conservative businessmen nevertheless argue for "reality," and not only in labor negotiations...
...Regardless of the so-called real rate, his choice is between the money rate and nothing at all...
...The Dismal Science APPEARANCE AND REALITY IN ECONOMICS BY GEORGE P BROCKWAY A delusion appears from time to time in philosophy whereby appearance and reality are so separated that, as Charles Peirce observed, their connection is like that of a freight train held together only by a feeling of good will between the engineer and the brakeman in the caboose...
...If in 1980 you screamed when your banker reluctantly offered you a 16.5 per cent mortgage, he could sweetly point out to you that, what with inflation then running at 13.5 per cent, he was really asking you for only 3 per cent (plus, naturally, several mysterious fees and "points...
...He needed money to pay the money price for the paintings before it went up...
...Chairman Volcker replies that he could do so for a short while by increasing the money supply, but that resulting fears of inflation would send the long-term rate through the roof and would soon drag along the short-term rate, too...
...The anonymous White House and the palpable Representative Kemp (R-N.Y...
...say in addition that the Federal Reserve Board should reduce the interest rate...
...In any event, like Keynes with his paintings, I need money to buy the things I want out of the baskets...
...To check on this argument, we must look a little more closely at the meaning of "realism" in economics...
...and to value them in terms of Smith's or Ricardo's or Marx's labor theory would be ridiculous, as it would be ridiculous to attempt to apply Keynes' wage unit to them...
...At this writing, when the real interest rate as calculated by your banker is at an all-time high, those with money to lend are (they would be shocked to learn) following Keynes in allowing not for present, but for future, inflation, which they evidently guess will increase...
...Does it in fact make sense to disregard money values and concentrate on real values...
...Messrs...
...They don't count...
...Regardless of the rise or fall of real values (whatever they might be thought to be, and however they might be determined), I'll be able to buy more if I have more money...
...What its real value may be is beyond calculation...
...And of course it is impossible to say what the real value of those paintings was or is...
...Or he can spend it, and that will help the economy...
...Realism has nothing to do with it...
...As far as the Consumer Price Index (CPI) or the GNP Deflator is concerned, the value of the paintings is nil...
...Since there is imperfect mobility of labor," he explained, "and wages do not tend to an exact equality of net advantage in different occupations, any individual or group of individuals who consent to a reduction of money wages relatively to others will suffer a relative reduction in real wages, which is sufficient justification for them to resist it...
...Martin Feldstein and Donald Regan, Paul Volcker and Jack Kemp, all chant in unison that the economy suffers because rich people don't have enough incentive to save...
...But if he wants to invest, he'll have to follow the money rate of interest...
...It was one of the marks of John May-nard Keynes' genius that he saw through at least some of the confusion this causes...
...In brief, it is argued that the lenders' search for real interest would make the nominal interest rate too high for anyone to borrow...
...the real rate is generally determined by subtracting the rate of inflation from it (Keynes reasonably thought the deduction should be for future inflation, but that is obviously a guessing game and so not properly scientific...
...Since there is no way of saying what their real value is, it seems quixotic to insist that they have any in economic terms...
...The competing architects of the mishmash that is Reaganomics are agreed that your banker was correct in his reasoning...
Vol. 66 • December 1983 • No. 24
