Economics Dictionary of ArgumentsHome
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| Price level: The price level in economics measures the average of current prices for goods and services in an economy over a period. It is typically represented by price indices like the Consumer Price Index (CPI) or the GDP deflator. Changes in the price level indicate inflation or deflation, reflecting economic conditions. See also quantity theory, Equation of Exchange, Irving Fisher._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Irving Fisher on Price Level - Dictionary of Arguments
Rothbard III 837 Price level/Fisher/Rothbard: Fisher, attempting to find the causes of the price level, has to proceed further. Cf. Equation of exchange/Fisher. MV = PT. M - Money supply V - Velocity of circulation P – Price level T (or Q) - Expenditures RothbardVsFisher: (…) even for the individual transaction, the equation p = (E/Q) (price equals total money spent divided by the quantity of goods sold) is only a trivial truism and is erroneous when one tries to use it to analyze the determinants of price. (This is the equation for the price of sugar in Fisherine symbolic form.) Fort he whole community: How much worse is Fisher's attempt to arrive at such an equation for the whole community and to use this to discover the determinants of a mythical "price level"! Rothbard: for simplicity's sake, let us take only the two transactions of A and B, for the sugar and the hat. Total money spent, E, clearly equals $ 10.70, which, of course, equals total money received, pQ + p'Q'. Average price level: But Fisher is looking for an equation to explain the price level; therefore he brings in the concept of an "average price level," P, and a total quantity of goods sold, T, such that E is supposed to equal PT. But the transition from the trivial truism E = pQ + p'Q' ... to the equation E = PT cannot be made as blithely as Fisher believes. Indeed, if we are interested in the explanation of economic life, it cannot be made at all. RothbardVsFisher: For example, for the two transactions (or for the four), what is T? How can 10 pounds of sugar be added to one hat or to one pound of butter, to arrive at T? Obviously, no such addition can be performed, and therefore Fisher's holistic T, the total physical quantity of all goods exchanged, is a meaningless concept and cannot be used in scientific analysis. Problem: If T is a meaningless concept, then p must be also, since the two presumably vary inversely if E remains constant. And what, indeed, of P? Here, we have a whole array of prices, 7 cents a pound, $ 10 a hat, etc. Price level: What is the price level? Clearly, there is no price level here; there are only individual prices of specific goods. But here, error is likely to persist. Solution/Fisher: Cannot prices in some way be "averaged" to give us a working definition of a price level? This is Fisher's solution. Prices of the various goods are in some way averaged to arrive at P, then P = (E/T), and all that remains is the diffcult "statistical" task of arriving at T. Average: RothbardVsFisher: However, the concept of an average for prices is a common fallacy. It is easy to demonstrate that prices can never be averaged for different commodities; we shall use a simple average for our example, but the same conclusion applies to any sort of "weighted average" such as is recommended by Fisher or by anyone else. Rothbard III 838 What is an average? Reflection will show that for several things to be averaged together, they must first be totaled. In order to be thus added together, the things must have some unit in common, and it must be this unit that is added. Only homogeneous units can be added together. E.g., 7 cents/1 pound of sugar + 1000 cents/1 hat. Can these two prices be averaged in any way? Can we add 1,000 and 7 together, get 1,007 cents, and divide by something to get a price level? Obviously not. Simple algebra demonstrates that the only way to add the ratios in terms of cents (certainly there is no other common unit available) is as follows: (7 hats + 100 pounds of sugar) cents/(hats) (pounds of sugar). RothbardVsFisher: Obviously, neither the numerator nor the denominator makes sense; the units are incommensurable. Weighted average/Solution/Fisher: Fisher's more complicated concept of a weighted average, with the prices weighted by the quantities of each good sold, solves the problem of units in the numerator but not in the denominator: P = pQ + p’Q‘ + p‘‘Q‘‘ / Q + Q‘ + Q‘‘ RothbardVsFisher: The pQs are all money, but the Q's are still different units. Thus, any concept of average price level involves adding or multiplying quantities of completely different units of goods, such as butter, hats, sugar, etc., and is therefore meaningless and illegitimate. Even pounds of sugar and pounds of butter cannot be added together, because they are two different goods and their valuation is completely different. And if one is tempted to use poundage as the common unit of quantity, what is the pound weight of a concert or a medical or legal service?(1) Equation of Exchange/RothbardVsFisher: It is evident that PT, in the total equation of exchange, is a completely fallacious concept. While the equation E = pQ for an individual transaction is at least a trivial truism, although not very enlightening, the equation E = PT for the whole society is a false one. Neither P nor T can be defined meaningfully, and this would be necessary for this equation to have any validity. We are left only with E = pQ + p'Q', etc., which gives us only the useless truism, E =E.(2) >Equation of Exchange/Fisher, >Velocity of circulation/Fisher, >Quantity theory. 1. For a brilliant critique of the disturbing effects of averaging even when a commensurable unit does exist, see Louis M. Spadaro, "Averages and Aggregates in Economics" in on Freedom and Free Enterprise, pp. 140-60. 2. See Clark Warburton, "Elementary Algebra and the Equation of Exchange," American Economic Review, June, 1953, pp. 3 58-61. Also see Mises, Human Action, p. 396; B.M. Anderson, Jr., The Value of Money (New York: Macmillan & Co., 1926), pp. 154-64; and Greidanus, Value ofMoney, pp. 59-62._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
F.M. Fisher I Franklin M. Fisher Disequilibrium Foundations of Equilibrium Economics (Econometric Society Monographs) Cambridge 1989 Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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