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Mike Moffatt

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By Mike Moffatt, About.com Guide to Economics

Inflation as an Arbitrary Concept - Part II

Thursday November 12, 2009

A continuation of Inflation as an Arbitrary Concept.

Peter G. Klein left a comment that indicates that Scott Sumner and I are not the only economists leery of the concept of inflation:

Mike, you and Scott have some distinguished predecessors. Gottfried Haberler made
the same argument in his 1927 book _The Mean of Index Numbers: An Inquiry in the
Concept of the Price Level and the Methods of Its Measurement_. E.g.: "The relative
position and change of different groups of prices are not revealed, but are hidden
and submerged in a general index. Not the movement of the general price level, but
the chronological succession of special price and price combinations ... are regarded
as significant for the waves of business life.... Such a general index rather conceals
and submerges than reveals and explains those price movements that characterize and
signify the movement of the cycle."

I have to admit, my knowledge of the history of thought in economics is quite limited, so I quite enjoyed learning this (it was new to me). I decided to do some additional research (a.k.a. a Google search), and found Gottfried Haberler: A Centenary Appreciation, a summary of the man's work. I found it quite enlightening.

I figure there have to be more economists to take this view - any other names to add to the list? I still suspect, though, that we are in the minority. Too many textbooks treat the concept of inflation as an objective concept that we try our best to estimate. It is not, because our basket of goods changes over time and any attempts to account for this are based on subjective 'judgment calls'.

Comments

November 12, 2009 at 2:28 pm
(1) Greg Ransom says:

Hayek showed that a “stable price level” (i.e. ‘no inflation’) was a mirage — a “stable price level” could contain within it an dis-equilibrium set of prices that must produce disequilibrium effects over time, unemployment, business failures, etc.

That said, try going to any high inflation country and tell them there is no such things as inflation.

As an empirical phenomena in a world, inflation is real.

It’s important to remind ourselves not to reify the mistakes of economists.

But it’s also important to get out of the ivory tower now and then.

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