I am new to Austrian Economics and have just purchased a copy of Human Action (scholarly edition of course) but have not yet begun, so forgive me if this is well documented. But I was thinking how the mainstream economists and government determine the rise of price levels and the corresponding effect it has on our standard of living. Using CPI, the Federal Reserve (I suppose not technically government run, but certainly mainstream) argues that a steady increase of price levels by 2%-3% a year helps us avoid the “ills” of falling prices. I understand the fallacies with this, but had a new thought today. They assume (at least) two things: falling prices are bad and that CPI is accurately measuring the rise of price levels (I say falling and rising prices because I realize they improperly define inflation and deflation as related to price levels rather than money supply). However, as I believe Mises pointed out, prices should be falling, not rising. Therefore, to properly assess the rise in cost of living, should one not just consider the rise of prices in contrast to previous levels, but rather from the drop in price that would have otherwise taken place? I realize this would be nearly impossible to calculate, but it just made me realize that the CPI (which doesn’t really account for price fluctuations properly anyway) is used to evaluate a rise in price levels only against past prices, not the value of the product, which would have fallen.
Yes, they’re using a corrupt absolute (old prices determined by non-free instead of free markets) to detemine something, ie inflation. It’s like using a poorly calibrated ruler.
If they started with a price set in 1990 and followed it to 2000 and the avg increase is 3%:
1990: 1.00
1991: 1.03
1992: 1.06
1993: 1.09
1994: 1.13
1995: 1.16
1996: 1.19
1997: 1.23
1998: 1.27
1999: 1.30
2000: 1.34
If they started with a price set in 1990 and followed it to 2000 and the avg decrease is 3%:
1990:1.00
1991: 0.97
1992: 0.94
1993: 0.91
1994: 0.89
1995: 0.86
1996: 0.83
1997: 0.81
1998: 0.78
1999: 0.76
2000: 0.74
10 yr period:
0.74 compared to 1.34 = +81%
1.00 compared to 1.34 = +34%
1.00 to 1.34 compared to 1.00 to .74 = +34% compared to -26%
A $20,000 car:
$20,000 + 34% = $26,800
$20,000 - 26% = $14,800
$26,800 - $14,800 = $12,000
I’m sure the premise of my elementary calculations is seriously challenged, but it’s an interesting exercise.
What say you Miseans, Austrians or any formally trained economists about Mr. freewheeler’s ‘new thought’? Like 99.99% of all thoughts, they’ve been thought before and thought by someone with a much greater capacity for thinking. I’d guess this ‘new thought’ has been highly circulated and to varying degrees accepted and rejected.
I would imagine relative pricing, between two goods, could be somewhat enlightening. But interventionist policies affect goods at varying degrees. Government is the master distorter. It is THE lie and the author of all lies. It is the devil. Listen, oh ye children of the Devil, ye slaves of the state:
John 8: 44-47 http://www.biblegateway.com/passage/?book_id=50&chapter=8&version=31&context=chapter
You belong to your father, the devil, and you want to carry out your father’s desire. He was a murderer from the beginning, not holding to the truth, for there is no truth in him. When he lies, he speaks his native language, for he is a liar and the father of lies. Yet because I tell the truth, you do not believe me! Can any of you prove me guilty of sin? If I am telling the truth, why don’t you believe me? He who belongs to God hears what God says. The reason you do not hear is that you do not belong to God."
Even though I believe the bible, I’m listing this verse as a metaphoric way to address price distortions. Yes, I’m schizoid and apologize for the drama.
And as well Mises showed that prices are ordinal. It is not math-theoretically tenable to add, subtract, average, etc. However the entrepreneur needs an estimate of the coming (future) environment (incl. prices). But that activity is more an art than a science. Often entrepreneurs do calculate with the ordinals anyway, but seldom without a surrounding set of ideas indicating reasonability, if only (and often only) to themselves.
IAC, standard, mostly govt-inspired attempts are less than effective. In general, AE doesn’t do prediction in that sense.