Reflections of Money Illusion

Money is seen as the most powerful thing in the world by the individuals, which is quite right. But most of the time they overlook the situation of money. The trouble lies in the illusion that money creates in our minds. The remaining part of the essay will exhibit some arguments for the irrationality of masses and need for external intervention for abnormalities in markets when it comes to perspective towards money.

As it can be observed from graph, our nominal wages in terms of Turkish Lira have been skyrocketing and GDP Per capita and real wages with respect to dollar has been decreasing. Which shows us, most of the people tend to evaluate the money in terms of quantity rather than the purchasing power (I assume that Turkey is dependent on foreign commodities). It can be interpreted as we (or our politicians which we elect) couldn’t handle the situation of devaluing Lira. As John Maynard Keynes who was the father of heterodox economics tradition put it in his General Theory of Employment, Interest and Money “Now ordinary experience tells us, beyond doubt, that a situation where labour stipulates (within limits) for a money-wage rather than a real wage, so far from being a mere possibility, is the normal case. Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the price of wage-goods. It is sometimes said that it would be illogical for labour to resist a reduction of money-wages but not to resist a reduction of real wages. But, whether logical or illogical, experience shows that this is how labour in fact behaves.” (Keynes, 1936) It simply demonstrates that while we, as illogical and irrational creatures, resist reductions of money-wages (which we call it sticky-wages), when it comes to inflation, the increasing prices of commodities or devaluation of currency, we are not so responsive to this fact.

 (Asgari Ücret) (The World Bank)

And next thought will be the negative correlation that can be observed by graph between two variables: Nominal Wages and Real Wages. As it was in first paragraph, I would like to give a quote from General Theory again. “It would be interesting to see the results of a statistical enquiry into the actual relationship between changes in money-wages and changes in real wages. In the case of a change peculiar to a particular industry one would expect the change in real wages to be in the same direction as the change in money-wages. But in the case of changes in the general level of wages, it will be found, I think, that the change in real wages associated with a change in money-wages, so far from being usually in the same direction, is almost always in the opposite direction. When money-wages are rising, that is to say, it will be found that real wages are falling; and when money-wages are falling, real wages are rising. This is because, in the short period, falling money-wages and rising real wages are each, for independent reasons, likely to accompany decreasing employment; labour being readier to accept wage-cuts when employment is falling off, yet real wages inevitably rising in the same circumstances on account of the increasing marginal return to a given capital equipment when output is diminished.” (Keynes, 1936) Even though Keynes emphasised the case in short run, the long run numbers are appropriate with the assumption. However, we cannot demonstrate his explanation of the reason of rising real wages and falling money-wages due to opposite direction that our variables have. But, in case of Turkey, the rising nominal wages can be attributed to the pressure of citizens (nearly %50 of citizens are minimum-wage workers) towards political powers and it is an incentive tool that political candidates use for their interests. It is similar to the case of stagflation (occurrence of both inflation and stagnation), which is a situation refuted the assumption of inflation will stop the stagnation. So, my proposition will be that minimum wages (Nominal Wages) shouldn’t be so inclined to change as in our country, rather government should try to find some other ways to keep equal or increase the welfare of people, except the minimum wages. And raising minimum wages should be the last tool for governments to solve the economic problems. Because of our irrationality can be used as political advantage in return of diminishing buying power of citizens.

The conclusion would be that we have a tendency to evaluate the money case in terms of quantity rather than real terms. Because of this fact, the government should be more prudent when it comes to minimum wages. However, this case doesn’t demonstrate that wage-led growth is not a decent decision in general, in fact the rising nominal wages didn’t happen discretionary, rather It took place because of the pressure from public.

References

Asgari Ücret. (n.d.). Retrieved from Çalışma ve Sosyal Güvenlik Bakanlığı: https://www.csgb.gov.tr/asgari-ucret/

Keynes, J. M. (1936). THE POSTULATES OF THE CLASSICAL ECONOMICS. In J. M. Keynes, The General Theory of Employment, Interest and Money.

The World Bank. (n.d.). Retrieved from GDP per capita (current US$) - Turkiye: https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=TR