Our Phony Economy

[$cirisme]

Ty, see joel's post above with a thread where that discussion has gone. Thanks.

[Zeluvia]

Ty, see joel's post above with a thread where that discussion has gone. Thanks.

we don't want him in our thread either !! = )

[$cirisme]

that's your problem now

[joel]

Earlier we were talking about how statistics like the GDP aren't very meaningful.

I'm reading the book Human Action by Ludwig von Mises, and I came to this section where he makes a compelling argument that price indices also are not very useful statistics--particularly that they cannot accurately measure changes in the purchasing power of money across time or space, which is their very intended purpose. He does not argue that we need to use better methods, but that any method of attempting such measurement is necessarily arbitrary and inaccurate.

"The pretentious solemnity which statisticians and statistical bureaus display in computing indexes of purchasing power and cost of living is out of place. These index numbers are at best rather crude and inaccurate illustrations of changes which have occurred. In periods of slow alterations in the relation between the supply of and the demand for money they do not convey any information at all. In periods of inflation and consequently of sharp price changes they provide a rough image of events which every individual experiences in his daily life."

Also, the very idea "implied in the inappropriate term level of prices, as if --other things being equal--all prices could rise or drop evenly, is untenable."

So I recommend reading this section at the link below. To provide a bit of context, just before this section he refutes the common misconception that stable prices are natural or necessarily good. Rather, the real world of human action entails constant change.
http://mises.org/humanaction/chap13sec1.asp

[joel]

I'm reading The Failure of the "New Economics" by Henry Hazlitt, published in 1959 (http://www.mises.org/books/failureofneweconomics.pdf), which critiques John Maynard Keynes' General Theory. In chapter 27, he discusses statistics such as price indices and gross national product. On page 413 I came across something interesting to this thread. He points out that as supply increases, price drops (all else being equal). Thus a larger GDP or national income measure does not at all imply that things are more abundant than they were; in fact, it may reflect things being more costly due to things being scarcer than before.

"There is one further factor that distorts and falsifies comparative national income figures. It is a factor I do not recall ever having seen discussed in connection with these figures, yet it goes to the heart of the whole problem of measurability.

"Larger crops often have a smaller total dollar value than smaller crops. (Hence crop-restriction schemes.) But this merely illustrates a wider principle. Economists have pointed out since the time of Adam Smith that it is not "value-in-use," but scarcity, that determines 'Value-inexchange, " or money price. Water is an indispensable commodity that ordinarily commands no price at all. If more and more things became plentiful (except dollars), the national income, as measured in dollars, might begin to fall. If we could imagine a situation in which everything we could wish for was in as adequate supply as air and water, we might have no (monetary) national income at all!"

He goes on to present a simple example of an economy of beans and potatoes, and how an increase in production can either increase or decrease the total product measure, because exchange ratios tend to change.