Tuesday, March 20, 2007

Inflation and Real Income at the Time of Voltaire

One of the benefits of having access to a number of economic journals is serendipity. I am on the circulation list for a copy of the Journal of Political Economy (JPE) published by the University of Chicago. While I admit I frequently don't understand many of the articles, I always enjoy the back cover.

The back cover of the JPE always has a literary excerpt that illustrates an economic concept. The February 2007 issue (Vol. 115, No. 1) has a piece on Labor Markets and Monetary Policy taken from Voltaire's The Age of Louis XIV. It is an excellent illustration of the relationship between, money, inflation and real wages.

"[W]hile everything else has increased, the sum total of the currency, the quantity of gold and silver bullion, the price of commodities, nevertheless the soldier's pay has remained the same as it was two hundred years ago; foot soldiers receive five sous in cash just as they did in the time of Henry IV. Not one of all these ignorant men, who sell their lives so cheaply, is aware that, taking into account the raising of the currency and high prices of food and commodities he is receiving about two-thirds less than the soldiers of Henry IV. If he knew it and demanded an increase of two-thirds of his pay, he would have to be given it; in that event every European power would maintain but one-third of its present troops, the forces would remain in the same proportion, and agriculture and manufactures would profit by it."

This piece illustrates a number of points. You may point out that a depreciation of 66% over two hundred years is not extreme. You may find many who would agree with you, but it still significant. The explanation may be that an inflation rate that low is barely noticeable over the working life of a soldier of the time. Nevertheless, it is still illustrative.

Additionally, I would point to the last sentence. The idea of all the powers of Europe reducing their armed forces by two-thirds but maintaining their proportional strength, while maybe not likely is an interesting mind exercise. And the secondary effects are also important. If the standing armed forces are reduced, this has the possibility of increasing productive labor and with it, national wealth. (I won't even go into lost wealth due to pillage - a method of increasing one's military pay, at the time.)

As always, your comments are welcome.

Posted by TSchilling at 1:57 PM Comments (0)

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