Peter D. writes:
>
>I disagree with Rudy F about inflation being a mechanism that lowers real
>wages, either logically or historically. Logically, of course, the circular
>flow indicates that aggregate purchasing power remains unaffected, and the
>main distributional effect of greater-than-expected inflation will be from net
>creditors to net debtors.
I know that this is what the circular flow indicates. That's the problem
as far as I am concerned. While it may be true that aggregate
purchasing power remains unchanged when there is inflation
the purchasing power of workers is usually reduced. The difference
between expected inflation and actual inflation is worthless
as far as I am concerned. Even if I could perfectly predict
what inflation will be next year I can't force my boss to give me
a raise. A basic problem with the aggregate supply and demand
framework is that it is totally devoid of any class content.
> Historically--well, plot the rate of change of real
>wages against price inflation during the post-war period. What do you see?
>Of course, if there are constraints against lowering nominal wages (a taboo
>that has been dropping before our eyes) at least some inflation is required to
>cut real wages. (This is not exactly true: a change in the composition of
>wages can do this without price level changes.) But there is no reason that
>*more* inflation should be associated with *more* reduction in real wages. As
>I mentioned before during an exchange on AS-AD, I regard the battle against
>money illusion (both types) to be a major task of intro macro. Any argument
>that complicates it should be looked at very closely...
>
I will not argue that higher rates of inflation are associated with
with larger declines in real wages, at least not until I look at the
data. But I don't think that is the main issue. Keynesian argue that
the reason for unemployment is that real wages are too high. If
workers would only realize this and take a wage cut, full employment
would be restored. Why won't workers take money wage cuts? Answer,
according to the Keynesians is money illusion. I believe in money
illusion about as much as I believe in the tooth fairy. The
reason why workers won't take cuts in money wages,
unless they are forced, is because they are
smart enough to know that prices will not stop increasing and there is
no mechcanism to guarantee them a job.
I believe that monetary authorities, representing capitalist class
interests, conciously promote a certain level of inflation to
cut or keep real wages in check. However, they don't want inflation
to get too high because it would undermine the role of the $
as international money which would destablize the world economy.
Rudy
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