So the measurement of price-inflation right now is fraught with methodological and epistemological difficulties, not to mention political interests. There is no 'objective, value-free' way to do it: one has to make decisions about what goods will come in the basket, how much quality of products has improved, one has to take into account substitutions and so on, and there is no 'objective' way to do this. Moreover, price-inflation is not measured in a counterfactual way (prices rose this much more than they would have in the absence of the increase in the money supply) but in a comparison between before and after way.

A professor of mine gives this as an example of why economics is not a value-free, objective science. But of course measuring price-inflation is one very specific problem that is not part of what Austrians would call pure theory, and the reason why price-inflation is usually measured is because the government has to adjust the level of benefits, wants to use monetary policy, and so on. And companies and employees and consumers too will use price-inflation-indexes to demand or respond to demands for higher wages, adjusted for inflation and what not. but the only reason they have to do this is because the government created the new money in the first place.

That said, in a totally free market, there would be price-deflation (likely), and so it seems that companies and employees would still have to measure price-deflation for wage-negotiations and what not, and so the methodological and epistemological problems of measuring it would still exist. is this the case? Such measurements would still not be part of the pure economic theory, but an example of 'empirical economics'. But still, would deflation have to be measured in a free society, or would e.g. wage-negotiations take place without such information about the level of deflation? Employers might say: 'I'm giving you a 1 percent pay decrease because there was 2 percent deflation and you became a tiny bit more productive'.

I guess my problem is this: wages are determined by supply and demand. One element of the employees and employers wishes in negotiating a contract is the purchasing power of their currency. But do they need to measure the purchasing power or will the wages through competition automatically be bid down to new levels adjusted for deflation?

I mean, when the government creates money employees and employers try to *anticipate* the trickle down effects (rational expectations). Would they also need to anticipate price-deflation, or would it be profitable to try to do this, in a free market, or would this adjustment occur automatically and quickly and 'evenly' (other than the countervailing inflationary force of new gold being dug up and entering the economy) so that there is not much point in trying to anticipate price-decreases because the bidding process itself would take care of it.

Stewart, Static and possibly Danny, answer me!

Let me try to rethink this: I make a subjective judgement about how much money I would need to buy and do the things I want to do, and take that into account in my wage-negotiations (for how much am I willing to do this work). then the question is: how do I make this subjective estimate? Is it worth my while to have a measurement of overall price-deflation (or even price-deflation re the sectors I want to spend money on) in making this estimate? (Actually, it should be the expected price-deflation) Or does it not really matter what my estimate of price-deflation is because through the competetive bidding (for everything) wage rates would adjust automatically? But even then, in all those biddings people may use estimated price-deflation, so this would only be pushing the problem one step back.

Okay, another attempted re-think: would measuring price-deflation be an important job in a free market? Would there be bureaus doing that sort of thing? Would they have lots of customers? What would customers use the measurement for?

another response would be to say (as somebody did):

Quote:

who cares about price deflation as an aggregate tho? Say the price of bananas are going through the roof, but I never eat them. Do I give a crap? Each person would have a view of deflation based on what they cared about purchasing. Each of us would have our own personal CPI

and yes, that's a good point. Right now governments do need such an aggregate figure (cuz they have to make decisions based on the 'interests' of all the people), but in a free market people would only have a need for their own personal CPI.

Okayk, then the question becomes: how do they measure that? do they consciously measure that, hire the services of a bureau, or is all this already taken into account in the competitive bidding for jobs/salaries (because there is now less money available for the same good (because other products or products of higher quality were created elsewhere in the economy and are sold for money there)

sorry, I am completely obsessed with this question now

Hmmm...it seems to me that the importance of having a CPI in the first place would be a little questionable in a market with a relatively stable money supply. In such a marketplace, we would expect prices to drop consistently over time as the total social product increased. The fluctuations in specific prices in such a marketplace would actually be able to perform the task that they're supposed to perform: communicating information about relative scarcity to market participants. Overall price levels wouldn't seem that relevant; they would largely just reflect changes in "overall output," the velocity of money, and the quantity of money. I'm not sure what we would learn by measuring the price level that we wouldn't see more clearly than by measuring the component factors individually.

This is an impossible question to answer because the complex long term contractual relationships that you are trying to address have only come to exist in societies that have monetary monopolies. In other words the specific types of contracts that we use are features of the specific sort of monetary regime that those contracts exist in.

We can consider what contracts would look like in other monetary regimes but then I would have to question one of your implied assumptions: That in a free market there would be one currency for which inflation could be measured explicitly assuming you had enough information.

In a completely free market multiple currencies would have to compete for usage. Some would be based on explicit debt (like current fractional reserve money but without all the blurred definitions) and some would be based on hard assets. In such an environment there really is no such thing as "currency" in the sense we think of it now, there are just assets. The important question now concerns relative exchange rate levels rather than price levels.

The idea of there not being any "the price level" seems strange at first, but this is exactly what multi-national entities deal with today. If GE deciding which good to manufacture, then it has to consider that good A might be sold in country X for currency x, whereas good B will be sold in country Y for currency y. We all have the same choice without recognizing it. We could ask to be paid in foreign currency, or we could convert our paychecks into foreign currency as soon as we deposit them.

So basically my answer is that in a world where it is possible to get government influence out of money, there will be many other things that are dramatically different as well. To make any sort of plausible prediction we have to look at that world holistically. Wondering what today's economy would look like if we had free market money is like asking what Microsoft would look like if it operated in Zimbabwe. Huge successful companies don't and can't exist in Zimbabwe. Likewise, many of our monetary conventions only exist with a central authority mandating a single currency and a world without that central authority looks completely different.

Go ask Alice... when she's ten feet tall.

Jefferson Airplane, Surrealistic Pillow wrote:

WHITE RABBIT One pill makes you larger And one pill makes you small And the ones that mother gives you Don't do anything at all Go ask Alice When she's ten feet tall And if you go chasing rabbits And you know you're going to fall Tell 'em a hookah smoking caterpillar Has given you the call Call Alice When she was just small When men on the chessboard Get up and tell you where to go And you've just had some kind of mushroom And your mind is moving slow Go ask Alice I think she'll know When logic and proportion Have fallen sloppy dead And the White Knight is talking backwards And the Red Queen's "off with her head!" Remember what the dormouse said: "Feed your head Feed your head Feed your head"

- NonE

Say goodnight Gracie!

Conrad, changing price levels are already something that we have to deal with in our current economic circumstances. The large difference would likely be that the stickiness of wages would favor wage earners with a consistently falling price level, instead of employers as is the case with a consistently rising price level. But if the wage earners' contributions to their companies were growing at the general rate of economic growth, then their constant wage level wouldn't be a problem. The changing price level would only become a problem with stagnant laborers or companies, and these would be the ones who we would hope would eventually fall by the wayside so as to free up resources for more productive uses.

Static, I'm not sure why you draw those conclusions about a "deflating" currency. With price deflation due to increasing overall production, each dollar would come to hold greater purchasing power the longer it was held. It's not clear why someone would want to switch from that sort of currency to a currency that they knew would be constantly debased (that is, a non-"deflationary" currency). (That is, unless the debasement were being done so that additional funds were allocated proportionately to currency-holders -- this would only seem possible with an electronic currency. But in that case, you'd end up with price certainty at the cost of asset certainty; you'd never know how much money you were actually going to have in the future). It would seem to me that if anything, people would rush into the "deflationary" currency, which would further increase the value of each unit of the currency and push prices in terms of that currency even further down!

Just seems like it would be a matter of negotiation and relative bargaining position just like everyone else. I suspect, though, that there would be a strong tendency to simply keep nominal wages stable and to treat the accumulated increase in real wages as a sort of automatic raise. After all, nobody likes to see their paycheck drop, even if they're actually making the same amount in terms of buying power. Or alternatively, we might see more prevalent profit-sharing schemes between corporations and employees; if firms saw their nominal profits decreasing, they might pass some of the losses in performance to their employees as part of a collective bargaining agreement. Or perhaps we would see an increase in stock-based compensation, which would similarly make employee benefits contingent on the company's performance. I would be pretty surprised to see wages tied to a macro index, since the economy as a whole shouldn't be relevant to the bargaining between employees and employers