Critique of Austrian Economics
Part II: The Legacy of Ludwig von Mises
Section XI: The Meaninglessness of Price Indexes
In 1930 Hayek predicted “monetary theory will not only reject the explanation in terms of a direct relation between money and the price level, but will even throw overboard the concept of a general price level” (1967, p. 29).
Yet this general price level is still with us. The 5 March 2003 edition of USA Today reports that, in the past year, prices for gasoline were up 29.3%, fuel oil 21.0%, health care 9.2% and tuition 6.3%, which is bad news because these are all fixed costs that working class Americans are committed to paying. But prices for personal computers fell 20.7%, information processing 11.9%, men’s clothing 3.9% and autos 2.8%, which is also bad news because information processing and the manufacture, marketing and service of computers, clothing and autos are where most people’s jobs are. So what is the response of mainstream economists? They report the arithmetic average of these numbers, 3.3%, and announce that “inflation is under control and there is no sign of deflation.”23
Considering his strong words against price indexes (1966, pp. 219-223), if Mises has kept up on the affairs of the living with a posthumous subscription to USA Today, he must be rolling in his grave. This author also writes about this excessive tendency towards aggregation: “The assertion of mainstream economists that the average level of prices in an economy is a meaningful statistic has done more damage to their credibility than any other assertion they have made.... Such an average is not just ludicrous but it is definitionally without meaning, for one need only ask in what units the result is expressed and one has found a contradiction” (1999, pp. 144,149).
Opposition to an average price level belongs to the legacy of Mises, though it was Hayek who put the question to the English:
[I]f we have to recognize that, on the one hand, under a stable price level, relative prices may be changed by monetary influences, and, on the other that relative prices may remain undisturbed only when the price level changes, we have to give up the generally received opinion that if the general price level remains the same, the tendencies towards economic equilibrium are not disturbed by monetary influences, and that disturbing influences from the side of money cannot make themselves felt otherwise than by causing a change of the general price level (1967, p. 28).
23 Did you hear the one about the three economists who went deer hunting? They spotted a deer standing fully broadside to them. The first economist raised his rifle and fired, just missing the deer’s rump. The second economist fired and sent his bullet zinging past the animal’s nose. The third economist did not fire but jumped up and down shouting “We got it! We got it!”