From Cambridge to Eternity: “Fictitiously Real”

 

Confucius say, “Masters (君子, jūnzǐ in pinyin) shall get the names correct (正名, zhengming) before leading people.”

            The rest of us might name “nominal” and “real” as two great cases of misnomers. In modern times, we when away from home usually measure the value of product, a good or a service, in the currency unit (specific to the commonwealth). As such, the value in the monetary unit in general and the price of a product in particular are very much practical, actual and realistic. In a word, the market price is “real,” at least virtually. Weirdly somehow, quantities in monetary price is called “nominal,” or “in name only,” if in macroeconomics.

            Take the “real interest rate” (r in macroeconomics) for another example. To begin, what naturally exists in the reality is “the interest” in a monetary sum. The interest represents an over-time change in the price of a certain asset on the table. Just like the price in “the market,” the interest in the asset market must be denominated in the sovereign currency unit. Therefore, the interest is always and everywhere monetary. All in all, there we have the interest rate, usually stated in terms of % PA. In other words, we with the term “interest rate” mean the annual percentage change of the asset price (Δlog p_a/ Δt, where p_a the asset price).

            Now enter “the real interest rate” as in macroeconomics. Conceptually such a rate represents the natural interest rate after the inflation rate: or r= i- π. Alas, the so-called “real rate” is fictitious in various respects. First, the rate starts from calculation of “the rate” as is, which is by definition “imaginary” as oppose to real. Second, there are indefinitely many ways of calculating an inflation rate. Third, adjustment for the inflation effect is only for the sake of someone’s or some people’s convenience.  

            Correcting wrong names, there seem to be two kinds of rates, the interest rate and the effective interest rate (of convenience). The baseline: Interest rates in financial “markets” are monetary but never “nominal”; on the flipside, “real interest rates” are everywhere fictitious except for in the IS-LM model. Frankly among the rest of us, we do not know what the ordinate of the IS-LM is supposed by macroeconomists to mean.                

 

Utilities to Welfare. The key to our collective economic life is the aggregate welfare in the commonwealth. On the hand, welfare, well-being or prosperity must be measured with the aggregate net utilities created, value added, or communal surplus from market trade. Any of the three  names  must be accounted for in the thaler as the currency unit of our choice.

            By providence, the market is to change. By nature, the economy is to change. The quantities in all different metrics of convenience are to change. The prices in the national  currency unit are presupposed to change. Again, if anything finishes changing, it is finished.

            Now we have always and everywhere the inflation rate except for in the IS-LM model. If so, the effective level of welfare might well be measured with the percentage change in the monetary GDP adjusted by the inflation rate. That might be incomparably more effective than variations of what is on the abscissa of the IS-LM. 

            All across the commonwealth, after all, the change in real life is one the variation in mathematics is another.