From Mises Wire at Mises.org, January 4:
Exposing the Price Level Myth
Price inflation statistics were a hot topic in 2023. Official measures, like the Personal Consumption Expenditures Price Index (PCE) and the Consumer Price Index (CPI), rose to levels not seen in over four decades.
These measures were under commentators’ microscopes as recently as last week. The FRED Blog (run by the St. Louis Fed) briefly discussed how these two measures are constructed and how they differ. Paul Krugman compared the change in the “core” versions of the PCE and CPI (which remove components like food and energy) over six- and twelve-month time intervals, respectively. The consensus view is that these measures have unique applications. According to Krugman, “which one you should choose depends on what question you’re trying to answer.”
But if you read Mises, you’ll see a different story. In the Austrian framework, there is no such thing as the price level, and attempting to measure it induces a host of errors.
When people talk of a “price level,” they have in mind the image of a level of a liquid which goes up or down according to the increase or decrease in its quantity, but which, like a liquid in a tank, always rises evenly. But with prices, there is no such thing as a “level.” Prices do not change to the same extent at the same time. There are always prices that are changing more rapidly, rising or falling more rapidly than other prices.
Mises’s criticism of the concept of the price level and price indexes spans much of his work. In this passage, he points out that prices do not change uniformly. Individual prices move up and down constantly. Summing them up as a measurable “level” ignores the reality of markets, in which buyers and sellers meet to exchange specific goods for specific prices.
The context of the above passage is Mises’s analysis of monetary inflation. Money enters the economy at a particular point, so tracing out the effects of money printing must proceed “step by step.” This method shows that some people are able to spend the new money first, by increasing their demands for the given set of goods. Others must wait for their incomes to increase as the new money ripples through the economy, while paying higher prices due to the early receivers’ increased demands. This phenomenon, known as the Cantillon effect, sheds light on Mises’s rejection of the price level concept.
For Mises, there is not one price level, but many individuals facing different price arrays. The first recipients of new money face an array of prices that have not yet been disturbed by the monetary intervention. They have the ability to acquire additional goods on the market at these prices. The later recipients see the prices of those goods increase, and they will either pay the new prices or divert their expenditure toward substitutes. Discussing this phenomenon, Mises writes: “They had to buy less than they did before, to cut down their consumption of better and more expensive foods, and to restrict their purchase of clothing—because prices had already adjusted upward, while their incomes, their salaries, had not yet been raised.”
This individualistic view of price arrays is highlighted in one of my favorite quotes from Mises, in which the knowledge of the housewife is elevated above the “pretentious solemnity” of “statisticians and statistical bureaus.” Mises said, “A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell.”
Thus, monetary intervention is not neutral....
"The Cantillon Effect: Because of Inflation, We’re Financing the Financiers"
....As noted earlier today in the outro from "The Cantillon Effect and Populism":
There are currently no pure-play pitchfork manufacturers and it has been a long-cherished dream (since 2008!) to fill the void and/or live up to my junior high school personal file description: the instigator was....October 10, 2023
"China Considers Stimulus, Higher Deficit Spending To Counter Property Bust"
I smell
OscarCantillon.In which case the thing to do is determine who will get the money first and be that person. If it is not possible for you to quickly become a member of the Chinese nomenklatura determine how to make a portfolio bet on those who are already members of the privileged class. As noted a few years ago:
One of the rules of politics is "if your country goes communist you want to be as far up the apparatchik totem pole as you can get."
Preferably a commissar or above, putting you and yours closer to the commissary.
In a socialist paradise all pigs are equal but Hugo Chavez's daughter is a billionaire.
(actually $4.2 billion)
Ahead of next week's CPI report, this concept of how differently various groups of humans experienced the three years of higher-than-targeted increases in the general price level is exactly the point of the introduction to August 5's "Unless You Deeply Understand How Inflation Hits Different Groups, You Don't Understand Inflation":
When I say 'deeply' I mean having the empathy and imagination to actually 'feel' the emotions that result from having to comparison-shop food prices and then food prices vs other necessities.
It all comes down to financial assets and whether a person benefits from rising asset prices.
Regarding the example below, Denny's, I've never been to a Denny's. Nobody I know goes to Denny's. But there are millions of people who do; when they need something to eat and don't have the time or skill or implements to cook for themselves. And for those people the S&P 500 approaching the old highs literally has no meaning....
March 2021: If interested see also any number of posts on Mr. Cantillon's revelation*:
Cantillon Effect: Why Wall Street Loves Fiscal Stimulus (and you should too)
That is, you should if you have financial assets.
If not, you're doomed to a life of poverty at whatever level the powers-that-be think they can get away with....
*****
*...The key episode in Cantillon's life was his involvement with John Law and his monetary schemes. Cantillon was opposed to the inflationist theories of Law, but he understood how the schemes worked and what their fatal flaws were. Thus, he was able to create a large fortune from the Mississippi System and South Sea Bubble. In the aftermath of these financial debacles, Cantillon wrote his famous Essai, breaking out of the muddleheaded mercantilist thinking of his day to make a pathbreaking contribution to our knowledge of method, theory, and policy. Shortly after writing the Essai, Cantillon was murdered under mysterious conditions, and his Essai remained unpublished for more than 20 years....
Tips For Doing Business In Totalitarian Countries
As this will be an ongoing series I'll keep this introduction brief..
Your overarching goal must be to achieve invisibility. Be the grey man/woman. As Chairman Mao said:
"The guerrilla must move amongst the people as a fish swims in the sea"
One
of the easiest things to do, if you are a citizen, is join the party.
You don't have to be ostentatious about it, just join. And as we learned
studying the Nazis, an earlier number was better than a later one.
As noted in the introduction to "“A Communist Doesn’t Whine — He Shows His Teeth” Communists In Weimar Germany":
One of the rules of politics is "if your country goes communist you want to be as far up the apparatchik totem pole as you can get."
Preferably a commissar or above, putting you and yours closer to the commissary.
In a socialist paradise all pigs are equal but Hugo Chavez's daughter is a billionaire.
(actually $4.2 billion)
As to where you might find opportunity, if your country goes full Weimar with the money printing, pull your beach chair up to a spot beside the fire hose and let the splashes of the sweet, sweet trillions refresh you.
Also smuggling is always a good choice, command-and-control economies tend to create huge distortions in supply/demand dynamics.
Much more to come including case studies from the former East Bloc and the pros and cons of joining the nomenklatura.
