The word “real” has an extremely tangled and messy history in economics. Because of economist’s penchants for price level indices and the constant division of monetary sums by price level indices, this is a common implication of the word real. However, economists ALSO love talking about the “veil of money” and looking at the “real” things that are going on. Further, economists have historically been interested in barter economies and the existence of a “neutral money” that would provide a common method of transaction (dealing with the “inconveniences of barter”) without any effects on how the economy functions. This still gets attention (as I’ve written about previously here ) in the notion of a “natural” rate of interest and is if anything having rising policy influence. Thus economists mean by real both the exchange value ie the relative prices of various forms of output that are also sometimes summed together AND the underlying use values and physical structures that underlie the economy. Thus real wages can mean a sum of money a worker receives deflated by a price level OR the basket of output a worker is paid or both at the same time. As the reader can Imagine, this causes enormous confusion (I wrote about this last year here here.
I personally think (as I’ve written before) that deflation by composite price level indices is extremely overused and that ratios of flows to stocks, flows to flows and stocks to stocks should come more in vogue. These ratios do much to contextualize nominal sums in a way that makes sense and does so without having to mess around with price levels. A nominal to nominal ratio has the same value as a real to real ratio and a nominal to real ratio is invalid. Price level indices are also used without any true grasp of what underlies them, as Morten Jervens has shown in his both hilarious, infuriating and depressing work around african national statistics and their abuse by western mainstream economists. For example asking the question of how price level movements could improve the household income to household debt ratio would lead clearly to the notion that it is not inflation that workers need but wage increases and the deflating debt sums is a fun exercise with no practical meaning. It tells you nothing about the worker’s experience. Saying the “real” value of the debt is decreasing or increasing because you’re dividing it by a price level is like saying the temperature value of the debt has risen or fallen because the temperature rose or fell.
For all these reasons I will be using the term biophysical in the places most mainstream economists (and even some heterodox economists) use the term real to refer to underlying input-output relationships, production processes, physical amounts of output etc. I’m attracted to the term biophysical because it is precise, clear and because it reminds the reader that monetary economies where production decisions are made in monetary terms have impacts on the world in which we live and on the consumption of resources, both renewable and nonrenewable. It also is aimed at reminding the reader that any argument in nominal terms which implies impacts on the biophysical world that violate the laws of thermodynamics are prima facie invalid even if the assumptions are all otherwise consistent in balance sheet terms.
I will refer to price level deflated sums as price level deflated sums as economics has not developed an adequate alternative. Alternatively direct payment in biophysical goods will be referred to as a “basket of goods”. If anyone has an alternative pithy word for price level deflated sums please let me know!