Let's Put Indexing on the Index
BROCKWAY, GEORGE P.
The Dismal Science LET'S PUT INDEXING ON THE INDEX BY GEORGE P BROCKWAY THE REAGAN Administration is finally taking a sensible and practical (though partial) step toward solving the inflation—and...
...Measuring the value of the dollar means comparing it with the "market basket" of the Consumer Price Index or something similar...
...The world of economics is not natural...
...Despite the fact that the contents of the market basket can be changed by executive or legislative or merely professional fiat, the basket seems real, while money seems only nominal, or, as Marx called it, "a purely ideal or mental" form of value...
...And in the field of economics he trumpeted the old-time laissez-faire line until August 15, 1971, when he bowed to the public opinion polls and suddenly imposed wage and price controls...
...When the calculation was first made with reasonable accuracy, by Eratosthenes in the third century b.c ., the basic unit was the stadium, which may or may not have been equal to 600 of somebody's feet...
...For it was the CPI—and what he did about it—that did him in (if it hadn't been for Iran, he wouldn't even have been renominated...
...Davis Cup tennis doesn't use the tiebreaker...
...without it we have no economical world...
...It is not physical...
...Nor is the basket the same in different historical situations...
...If all prices went up (or down) in precise lockstep, there would be no point to trying to freeze them with an index...
...These ways of speaking seem to assume that money has value, like any good or service, and that this value can be measured...
...It did not merely happen to come into existence with money...
...I'll assent to that...
...As I say, however, revising the CPI isn't quite enough to satisfy me...
...and it is more important to a builder at present than it was before the elevator and the electric light made skyscrapers possible...
...The Dismal Science LET'S PUT INDEXING ON THE INDEX BY GEORGE P BROCKWAY THE REAGAN Administration is finally taking a sensible and practical (though partial) step toward solving the inflation—and maybe even the stagflation—problem...
...But how long is a centimeter...
...Spatial units define space...
...Well, a centimeter is 1/100 of a meter, which is 1/1000 of a kilometer, which is 1/10000 of the surface distance from either pole to the Equator or one-quarter of the vertical circumference of the earth...
...But today food is so much smaller a part of the family budget, and bread so indifferent a part of the diet, that all the bakeries in the land could shut down tomorrow without causing much more inconvenience than the air controllers' strike...
...Spatial measuring, however, is necessary...
...In it things are done...
...I want to abolish it, because the whole business of indexing rests on a confusion as to what measuring—any measuring—is...
...And I do make the empirical observation that the three modern economies with the worst inflation experience—Weimar Germany, Brazil and Israel—have all been comprehensively indexed...
...Am I saying that inflation is not really a problem, that we wouldn't even be aware of it if we didn't have indices, and that it would go away if we abolished indices...
...SUCH DIFFERENCES and changes are occurring all the time...
...As everyone who has had a little Latin or Anglo-Saxon knows, many ancient peoples counted wealth in terms of cattle, as the Masai still do...
...it is some going up much faster than others, with the result that last year's values are not this year's, to the delight of some people and some countries, and to the dismay, or even the distress, of others...
...The scoring systems of sports are conventions...
...it is ethical...
...No market basket is the same to different individuals at any given time (my wife and I set up housekeeping a number of years ago...
...You might just as well start right out and say—as we actually do say?that the distance between two scratches on a certain platinum bar in the Bureau of Standards is a yard, and no fooling...
...And most go on to say that a market economy, through constant shifts in the relative prices of goods and services, is the most efficient way of accomplishing the allocation...
...Yet this is not the case at all...
...Of all the things in the basket, the price of bread is sometimes urged as basic, and it was indeed central in the French Revolution...
...This distance is calculated from various observations, which themselves depend on measuring, not only of angles but of distances, so that the meaning of a centimeter is ultimately a function of whatever units of measurement are used as the basis of the calculation...
...More recently, before the introduction of the metric system, the unit was the yard, or the length of some king's stride...
...consequently that, too, went through the roof, dragging all indexed wage scales and transfer payments along with it in a self-sustaining escalation...
...The same holds true for the GNP Deflator: The price of steel is far less important to me, a book publisher, than it is to a builder of office buildings...
...That wasn't all, but it was enough to send Carter back to Plains, where, if he is given to second thoughts as well as second birth, he must marvel at the Reagan magic of controlling the rate of inflation by changing the way the rate is calculated...
...You can't use the metric system to calculate the circumference of the earth, for your argument would be truly circular...
...Democrats, of course, will regard the maneuver bitterly, for it is another example of Republicans changing the rules of the game, and getting away with it...
...without them the physical world is formless, and everything we make is impossible...
...It does not exist without money, because it depends upon measuring, and economic measuring is done with money...
...today and will be the same next year or next century...
...Nevertheless, people speak of the purchasing power of money and call attention to the declining value of the dollar...
...But if we take that approach, we should not kid ourselves—as I fear our econometri-cians do—into thinking we have established a "constant dollar...
...so we are now relatively unconcerned with the price of furniture...
...I'm far from saying that there are no distortions in the economy, or that we can do nothing about them...
...Work is under way on revision of the Consumer Price Index...
...For example, by laying a metric ruler across this magazine you determine that the page is about 21.6 cm...
...In short, the precision of the length of a centimeter depends on a foot or a yard, or cubit or rod or league or something, and that something has to be absolute...
...Possessing a touching engineer's faith in statistics and an upwardly mobile boy's awe of the wisdom of rich men, Carter thought the CPI was real, and that "business confidence" (actually bankers' and brokers' greed-induced blindness) required the appointment of a hard-core monetarist as Federal Reserve Board chairman...
...the normal temperature of the human body is 98.6?F...
...It is the same with money...
...It is also in direct conflict with the system it pretends to serve...
...Our civilization cannot exist without money...
...Thenaturalworldisonrfwitff be constant...
...The relation between measuring stick and thing measured is not reciprocal...
...they don't simply happen...
...It does not matter whether we measure in yards or meters or cubits...
...Characteristically, he muddied discussion from that day to this by proclaiming, " We are all Keynesians," though you will search The General Theory in vain for recommendations for wage and price controls...
...it is historical...
...He built his political career around claiming the Democrats had lost China, and then triumphantly discovered that Mao and Brezhnev weren't the same fellow after all...
...Most economists say that the subject matter of economics is the allocation of scarce resources...
...It would be better to abolish the CPI altogether, and the Wholesale Price Index and the GNP Deflator along with it...
...There is nothing necessary about them, because (painful as it is for me to admit it) there is nothing necessary about tennis...
...But the interest rate is a large factor in the CPI...
...Inflation goes on unchecked because one must add enormous increments for depreciation onto wages and prices alike, and these in their turn work in such a manner that the depreciation provided for actually occurs through the inflation thus caused...
...most tournaments use lingering death...
...Jimmy Carter has reason to be especially bitter...
...In Coming Issues Barry Gewen on Garry Wills' "The Kennedy Imprisonment: A Meditation on Power" and Francois Kersaudy's "Churchill and DeGaulle" Julie Stone Peters on Margaret Atwood's "Bodily Harm" Indexing—like so many other things economists have done from Adam Smith onward—is an attempt to reduce economics to an automatic happening...
...Please note that I don't say that...
...It is common to talk as though we had a functioning economic system—complete with land, labor, capital, trade, commercial law, liquidity preferences, and the rest of civilization—and then, just to make this system work a bit more smoothly, we added money to it as a sort of lubricant...
...Money measures them...
...my friends and I play the nine-point sudden-death tie-breaker...
...Well, I am saying something pretty close to that...
...These are all conventions...
...But if the value of money is in terms of a market basket, the basket becomes the standard of measurement, and money becomes a commodity...
...This may be clumsy and imprecise, it is not impossible...
...but I'm pleased as Punch to be able to say that at least one step of Reaganomics is pointed in the right direction...
...What is the circumference of the earth...
...Nixon was a master of the trick...
...Inflation is not every price going up simultaneously...
...Although the measuring unit is absolute, it is not a convention...
...To "control" inflation, the Fed promptly sent the interest rate through the roof...
...Attend with humility to the 1923 lament of Hans von Raumer, Minister of Economics in the second Reich: "The root of the evil is the depreciation adjustment [that is, the index...
...Measuring is a comparing of something with some standard...
...Money is not and cannot be "constant," because the economic world is not and cannot be constant...
...But the sole purpose of the CPI—and of all the other attempts to measure with "constant dollars"—is to nullify market price shifts...
...wide...
...but I am saying that these distortions don't just happen, and that indexing only makes them worse...
...we must measure, or rely on the measuring of others, if we are to have a physical world...
...Now, there is no objection in principle to making the market basket, or any part of it, ourunit of account...
Vol. 65 • April 1982 • No. 7
