Money illusions

Money economists consider erroneous evaluation by the majority of people of the nominal value of money, or rather the perception of the existence of a certain amount in the purse, as the real value of the notes. In fact, the valuation of money is an assessment of their purchasing power.

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

Money illusions

And perceives only their nominal value, absolutely not tying money in the mind, with a change in their ability to acquire anything in connection with inflation and the increasing dynamics of prices. That is, people know perfectly well that there are concepts of purchasing power and inflation, but their perception does not correlate them with money signs in their hands, which is a special kind of illusory feeling.

The monetary illusion arises in the mind of a person, because there is no independent value, which is represented by fiat money. Namely, this term, once led by economist John Keynes in the twentieth century, denotes the real value of a monetary unit – the ability to exchange banknotes for services and necessary goods.

And it was Kane who brought into circulation a purely economic concept of “monetary illusion,” not suspecting at the time that its foundation lies in the field of psychology. To this day, this term exists, both economically and psychologically.

From the economic point of view, the term “phiatic money” means legal means of payment, monetary units, the nominal value of which is established, guaranteed and guaranteed by the state with the help of its authority and authority. This money does not have an independent value, or it does not correlate and is incommensurable with the denominations designated.

A person is subject to monetary illusion, because this is the result of a long-standing habit of comparing the denomination of ten, twenty years ago with today’s moment. That is, people more easily form in their minds the memory that yesterday, in their hands were, for example, 100 rubles, and today – 200.

The figures indicated on the money bill are transformed in the mind of man in the arithmetic plan, and acquire an illusory character . As an example of the psychological component of monetary illusion, one can cite the pleasure received by many people at the time of the usual recalculation of money (including trifles).

Money illusions

Until the 1960s, economists considered monetary illusion to be a mere phenomenon, but the appearance 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 monetary value completely changed the macroeconomics of many countries.

Classic of the economic world Irving Fisher has tried for many years to prove the existence of the price index, and the volatility of the real dollar price. If he had succeeded in combining the psychological research of scientists and his economic achievements, the theory of monetary illusion would have followed a different path, and perhaps the number of ruined philistines and tragedies associated with the denial of inflation risks would have been much smaller.

Fisher was not the only economist of the last century, confident in the people’s exposure to monetary illusion. John Maynard Keynes also explained the process of income distribution by the assumption that people are not accustomed to negotiate the possibility of indexing wages according to the changing level of inflation when they go to work.

But times changed, and in the analytical studies the opposite opinions began to prevail, and the theme 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 monetary illusion are used in behavioral economics and behavioral finance, as a rule, to explain the constantly emerging discrepancies between the theoretical computations of the rational approach and actual processes taking place in practice.

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

Money illusions

специалисты Among the reasons for the erroneous perception of real values, experts call two economic reasons – the existence of a low level of financial literacy, and some retardation of nominal prices for many goods and services. There are also subjective reasons for the emergence of monetary illusions of a psychological nature, above all, it is an established habit of trusting the leading media.

In addition, when a person increases his salary by 7% with the existing 9% inflation, he has the illusion that this is the most successful option than a 2% reduction in the existing salary, but with inflation equal to zero.

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

The monetary illusion is in this case in the perception of nominal wages when it increases by a positive factor (despite a negative real salary due to inflation). In other words, changes in the big side of a person’s personal salary are much more important for him than general trends of increasing inflation in the economy as a whole.

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

So, for example, Fisher argues that in the economy of any country the effect of monetary illusion is always manifested in three identical ways.

1. Even in the period of the highest inflation, there are signs of some inhibition of changes in nominal prices. One example of this phenomenon is the fact that salaries in the short-term future rarely change with the same speed as the real (really existing) cost of labor.

2. In contracts and laws, the possibility of inflation (that is, the indexation of prices and wages) is almost never recorded, and all provisions are operated, as a rule, based on their nominal prices.

3. In the media, the concept of a real (real time cost) value of money, real profitability is practically not used, than prerequisites for the use and application in everyday life of a person of simpler and more understandable concepts, such as nominal price and nominal yield, are created.

Money illusions

In such ways, the price illusion is exaggerated and heated in the society, as far as cynically it does not sound, but the economy of any country in different periods of development is beneficial for the existence of small inflation (within 1-2 percent).

Employers in such cases can increase their employees’ salaries by the same, most 1-2 percent per year. But, naturally, in its nominal values, thus provoking, due to monetary illusion, the perception of the employees of this situation as such, that their welfare increases, although in real terms the purchasing power of banknotes issued in the hands does not change.

Unfortunately, most people around the world continue to live in monetary illusions, and do not distinguish between the realm of reality and illusion, as they still trust their perception, in this case, of the nominal value of money, and do not evaluate their purchasing (real ability.

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

люди People who live in countries where they have been provided with a stable salary for many years are most prone to money illusions, as they are most difficult to understand that this phenomenon was still paid for by someone and somehow they do not understand or in an unknown way.

The stability of the constantly unchanged material base was also ensured by a monetary illusion (someone worked for a pittance, and someone received money bills provided with the labor of the first, and could “exchange” for goods or services).

Money illusions help the state to more easily redistribute the fruits of human labor and material wealth, in other words, money becomes illusory when their quantity ceases to be controlled by their limitations.

Money illusions

Most people are not able to understand that raising wages and prices does not bring real benefits, since this is just a manifestation of the component part of the process, which actually provokes the creation of a monetary illusion of wealth growth.

In reality, it is impossible to improve life and improve well-being with the usual increase in wages, because at the same time there is an increase in salaries for other people, which is accompanied by a rise in prices.

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