Category Archives: Explanations

The money illusion – explanations

Illusion image
Thinking about money and society

Put simply money illusion is the propensity to respond to changes in money magnitudes as if you were were responding to changes in real magnitudes.

For example, if we increased your income by 100% from now, but also increased the cost of all the goods and services you used or purchased by 100%, and you were already buying the optimum goods or services for your needs, then you could go on acquiring these at previous rates of consumption. (Any goods or services that you previously couldn’t buy, you still could not afford).

However, the money illusion, in essence, is when your income rises and you ‘feel’ richer, consequently you purchase more luxury or non-standard goods or services because of that feeling and purchase less of the staples you previously bought.

Individuals fail to grasp that their real income has not risen. (Your real income is measured by dividing your money income by an appropriate and consistent index of prices…see below…).

You can see therefore in mainstream economic practice that the banks ability to quite literally print money, to increase it’s own money magnitude at will – remote from real lives and economic behaviour, or for an individual to regularly value and revalue their property portfolio on a rising market, can lead to financial disaster for the individual.

The economist Irving Fisher deliberated long and hard about the high value of stocks immediately before the 1929 Wall Street crash, ands produced many of the indices of value that we still use to measure, or second guess, market ‘fluctuations’ today. This thinking has not prevented economic juddering in recent decades either.

We would wish to argue that a rational social economy, based on business outputs that are focused on social outcome, not individual wealth or shareholder value as a predominant driver, are one way to counterbalance the money illusion.

Taking out the thirst for dis-proportionate personal wealth and dedicate outputs to a wider social good – replacing the feeling of ‘riches’ for the feeling of ‘community’ – is a perfect way to achieve a new economic equilibrium.

Boost the social business market, starve the illusion!

Explanations is an occasional Mining the SEEM piece to explain economic and financial thinking in a clear and understandable way. If you have a term to be explained, or even to tell us when we haven’t been clear, then contact the Editor at Mining the SEEM and let us know.

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Ethical business with a social dimension…
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Fiscal drag – explanations

Fiscal drag  - a definition
No holding back the social economy

As we leave the summer holidays behind in 2013 we will be adding a new occasional feature to Mining the SEEM. Explanations.

Part of our social finance mission at SEEM is not only to make finance more accessible to communities and social business, but also to help that constituency understand and be more usefully equipped to negotiate their way through  their financial development,

Explanations will be our way of developing that understanding. Taking a key concept, phrase or idea in economics, banking or social finance and offering up a classic definition for it.

Part of the problem with technical definitions is that technicians and technocrats also use even more technical language to define their concepts – perhaps obfuscating the idea even further.

If key concepts are used in the definition we will also add some supplementary explanation in plain English to frame the definition we have created. You can see an example of this occasional journal entry below – Fiscal Drag.

(If you come across a classic piece of finance speak or strangulated phrases in banking drop our editor a line and we’ll tease out a clearer view and publish the definition for you.

Contact us at editor (at)   )

Fiscal Drag – a definition

The restraining effect upon the growth of demand and output that results from increases in the effective rates of taxation under inflation. This happens where progressive tax rates and increased wages and salaries bring people into higher tax brackets, even though real income may be falling…

Supplementary definitions:

Inflation: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. (See more about inflation on here. )

Progressive tax: The term is frequently applied in reference to personal income taxes, where people with more income pay a higher percentage of that income in tax than do those with less income. (Read more about progressive tax concepts on Wikipedia here.)

Real income: Income, as of a person, group, or country, that has been adjusted for changes in the prices of goods and services. Real income measures purchasing power in the current year after an adjustment for changes in prices since a selected base year. ( Read more about real income calculation on the pages of the Free Financial Dictionary here. )

The SEEM Team – working with interesting ideas

Ethical business with a social dimension...
Ethical business with a social dimension…
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