Where Economists Should Start

Many well-educated people have an idea about what investments are and have heard it preached by the talking heads on television and other media about the need to save and invest sufficiently for retirement or to build one's wealth. At the same time, a high proportion of the same people have this accusation against economists (largely true) that the study of dry statistics about inflation and interest rates in particular is neither interesting nor useful to them.

In spite of this, the success of many DIY books on investments and building a sizable fortune, shows that accumulating money and building wealth is a legitimate concern for today's professionals in both low and higher income countries. In the contempt for the subject of economics, these investment hungry professionals forget that inflation is real and that returns must be corrected for inflation for the sake of accuracy.

Writing in the New York Times, David Leonhardt explains what the purported record values of the Dow Jones and illustrates the common misconception and failure to recognize that the value of investment returns ought to be calculated in real terms. One of the reasons financial products advisers fail to emphasize this in sales pitches is because it would reveal that a large number of stocks that people purchase often represent mediocre returns in real terms.