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Constant comments on Open Thread June 2010, Part 3 - Less Wrong
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Comments (606)
James_K:
You're talking about the "real" figures being "less certain," as if there were some objective fact of the matter that these numbers are trying to approximate. But in reality, there is no such thing, since there exists no objective property of the real world that would make one way to calculate the necessary price index correct, and others incorrect.
The most you can say is that some price indexes would be clearly absurd (e.g. one based solely on the price of paperclips), while others look fairly reasonable (primarily those based on a large, plausible-looking basket of goods). However, even if we limit ourselves to those that look reasonable, there is still an infinite number of different procedures that can be used to calculate a price index, all of which will yield different results, and there is no objective way whatsoever to determine which one is "more correct" than others. If all the reasonable-looking procedures led to the same results, that would indeed make these results meaningful, but this is not the case in reality.
Or to put it differently, an "objective" price index is a logical impossibility, for at least two reasons. First, there is no objective way to determine the relevant basket of goods, and different choices yield wildly different numbers. Second, the set of goods and services available in different times and places is always different, and perfect equivalents are normally not available, so different baskets must be used. Therefore, comparisons of "real" variables invariably involve arbitrary and unwarranted assumptions about the relative values of different things to different people. Again, of course, different arbitrary choices of methodology yield different numbers here.
(By the way, I find it funny how neoclassical economists, who hold it as a fundamental axiom that value is subjective, unquestioningly use price indexes without stopping to think that the basic assumption behind the very notion of a price index is that value is objective and measurable after all.)
If some price indexes are "clearly absurd", then they apparently have some value to us - for if they were valueless, then why call any particular one "absurd"? If they yield different results, then so be it - let us simply be open about how the different indexes are defined and what result they yield. The absence of a canonical standard will of course not be useful to people primarily interested in such things as pissing contests between nations, but the results should be useful nonetheless.
We commonly talk about tradeoffs, e.g., "if I do this then I will benefit in one way but lose in another". We can do the same thing with price indexes. "In this respect things have improved but in this other respect things have gotten worse."
Constant:
Sure, but such an approach would deny the validity of all these "real" economic variables that are based on a scalar price index. In particular, it would definitely mean discarding the entire concept of "real GDP" as incoherent. This would mean conceding the criticisms I've been expounding in this thread, and admitting the fundamental unsoundness of much of what passes for science in the field of macroeconomics.
Moreover, disentangling the complete truth about what various price indexes reveal and what they hide is an enormously complex topic that requires lengthy, controversial, and subjective judgments. This is inevitable because, after all, value is subjective.
Take for example two identically built houses located in two places that greatly differ in various aspects of the natural environment, society, culture, technological development, economic infrastructure, and political system. (It can also be the same place in two different time periods.) It makes no sense to treat them as equivalent objects of identical value; you'd have a hard time finding even a single individual who would be indifferent between the two. Now, if you want to discuss what exactly has been neglected by treating them as identical (or reducing their differences to a single universally applicable scalar factor) for the purposes of constructing a price index, you can easily end up writing an enormous treatise that touches on every aspect in which these places differ.