Tuesday, May 22, 2012

What is the Money Illusion?

The current concept of the Money Illusion means that people think in terms of the nominal value of money, rather than its real value.  However, the truth of the Money Illusion goes much deeper than that.  The truth of the matter is that real value of money is nothing at all.  In short, the illusion is that money has any value at all. 

Seeing beyond the Money Illusion, we realize that money is nothing but a trick to gets us to cooperate.  Money is both the stick and the carrott, in that it inspires both the fear and the greed to get us motivated.

The existence of money is not even necessary to the function of the economy.  Just imagine what would happen if all money disappeared tomorrow: all cash, all plastic, all bank balances, everything, just magically erased.  What would happen if everyone's wallet was completely empty, and every bank vanished?   Most people agree, if it happened in the real world, human civilization would pretty much end rapidly in a violent conflagration.   

But... what if.... instead of going Mad Max in collapsing economy... what if everyone just PRETENDED they were exchanging money.  You go to the store, the cashier pretended to ring you up.... and you pretended to giver her money.  You buy items from your vendors, and pretend to pay their invoices...  Your clients pretend to pay you...  so on and so on. 

In other words, what if everyone just went on doing what they normally do, but WITHOUT the MONEY???  Viola, Mad Max apocalypse averted!  If everyone would just fulfil their role in the economy as if money didn't matter, in truth, money wouldn't matter, and the economy would go on quite nicely without it. 

Of course, the average listener objects, if you could just "pretend" to pay for stuff, why would you work?  Well, yeah, that is the rub, human nature.   Stands to reason, some people would shirk off and refuse to work, and if enough people did it, the economy would collapse. 

But my point is not to suggest a model for a real-world working "cashless" economy.  Rather, I just wanted to give a concrete example of the true depth of the Money Illusion.   The fact is, money is totally unnecessary to the function of a real economy. 

If people could just be trusted to do something productive everyday and give it away, we could totally dispense with money.  THAT is the Money Illusion, the idea that money is anything necessary or worthwhile at all.  In reality, it is just a big trick to get us to work together and limit our consumption.   If we could agree to work together and limit our greed CONSCIOUSLY, we wouldn't need money. 

Arguments about the Type of Money

The Money Illusion also manifests in our arguments about what TYPE of money to use, especially among the Austrians, who have an irrational attachment to the use of gold as money.   What really matters when it comes to defining our standard of living is our overall level of PRODUCTIVITY.  The type of money we use is complete incidental, and the only argument we should have about money is how to make it facilitate the highest level of communal wealth. 

This is where the Austrian gold-fetish is revealed at its most primitive.   A solid, stable, tangible FORM for money is all-important to this strange mindset.   Whether it is most condusive to the creation of social wealth is totally irrelevant to the Austrian; the most important thing is its constancy, its permanency.

Ironically, it was the rise of the limited Money Illusion that proved the death knell of the modern gold standard.   Modern workers in the early 20th century fought hard for union power, higher wages, and guaranteed contracts.   All of these were totally incompatible with the operation of the gold standard, which required constant deflation of wages and prices (as greater productivity was piggy-backed into the static supply of money).  Workers, however, would not be contented with falling nominal wages, even if they were assured that it was part of the natural process of economic balancing under the iron discipline of the gold standard!  Deflation and mass unemployment are not a good combination in the modern, urban, industrial economy, and thus ended the gold standard era.

This is why Austrians are viewed as kooks and cranks in the modern economic milieu.   Everyone ELSE sees through the Money Illusion and is discussing the advanced theories of wealth creation and social stability, EXCEPT the Austrians.  It is like trying to make Christmas plans with someone who insists you have to be in bed at midnight for when Santa arrives.  Or trying to make travel plans with someone who insists you can't travel too far across the ocean because the earth is flat and you don't want to go off the edge, do you???   I mean, really, there is nothing you can do with such a person but ignore them and go about your normal plans despite their irrational beliefs.   Which is exactly how Austrians are treated. 

In the end, Austrians are left alone in the corner, muttering about hyperinflation causing the collapse of the economy.   We just pity the poor chaps, totally locked in to their irrational beliefs, unable to see through the Money Illusion.    They honestly can't separate the collapse of a currency with the collapse of the economy itself, and are totally flummoxed trying to imagine that money is just a tool to be used for the social good.  The very idea is offensive to them!

Mainstream economics is hardly better.  In fact, it is probably even more odious, being used to obfuscate, beguile, and confuse the public, through a massive smoke screen of jargon and faux-complexity, serving only to mask the exploitation of the masses by the parasitic Money Elite. 

1 comment:

mojo.rhythm said...

I couldn't possibly agree more. Austrian economics has probably the most undeserved online following of all time. They have not come up with anything original since Hayek.