Economist Attacks Ron Paul

Recently,  Ron Paul wrote  a important piece, Chained CPI Chains Taxpayers. In the piece, Dr. Paul explains how the chained CPI "is an effort to alter the perceived impact of inflation via the gimmick of 'full substitution.''"

Economist David Henderson objects to this view. He writes:

By using the words "gimmick" and "perceived," Paul makes it sound as if the purpose of the chained CPI is to trick people into thinking that their cost of living has not gone up as much as the old CPI said. That's not true. The purpose of the chained CPI is to get a more accurate read on how much the cost of living has gone up.

But how can chained CPI not be a distortion? Henderson, himself, writes:

 When the price of one good rises a lot and the price of another good rises a little or not at all, and those goods are, in many people's minds, substitutes, people will tend to substitute out of the good whose price has risen more and into the good whose price has risen less. So the purpose of the chained CPI is to take account of that in order to estimate the cost of achieving a given level of utility.

First off, if the price of one good rises and therefore I substitute a lower priced good, my standard of living has indeed been altered. If I like steak, but the price of steak rises beyond my budget and I substitute a Mrs. Stouffer's television dinner, Henderson may not see the decline in my standard of living that has occurred, nevertheless in my mind as consumer, the decline is pretty damn obvious. I have made a substitution, not because I see the two products as nearly identical but because the price increase for steak has pushed it out of my budget. Henderson is wrong in implying that because I am substituting one good for another that I see the two products as early identical.

Second, Henderson pulls out of his hat the use of "utility" as though it were somehow a calculatable cardinal number. There is no such calculatable number. Austrian economics teaches us that all we can do is rank our values on a value scale.

As Murray Rothbard put it:

It is important to realize that there is never any possibility of measuring increases or decreases in happiness or satisfaction. Not only is it impossible to measure or compare changes in the satisfaction of different people; it is not possible to measure changes in the happiness of any given person. In order for any measurement to be possible, there must be an eternally fixed and objectively given unit with which other units may be compared. There is no such objective unit in the field of human valuation.

The individual must determine subjectively for himself whether he is better or worse off as a result of any change. His preference can only be expressed in terms of simple choice, or rank. Thus, he can say, "I am better off" or "I am happier" because he went to a concert instead of playing bridge (or "I will be better off" for going to the concert), but it would be completely meaningless for him to try to assign units to his preference and say, "I am two and a half times happier because of this choice than I would have been playing bridge." Two and a half times what? There is no possible unit of happiness that can be used for purposes of comparison and, hence, of addition or multiplication. Thus, values cannot be measured; values or utilities cannot be added, subtracted, or multiplied. They can only be ranked as better or worse. A man may know that he is or will be happier or less happy, but not by "how much," not by a measurable quantity.[...].

Human actors value means strictly in accordance with their valuation of the ends that they believe the means can serve.[...] it must be emphasized that "utility" is not a cardinal quantity subject to the processes of measurement, such as addition, multiplication, etc. It is a ranked number expressible only in terms of higher or lower order in the preferences of men.

All that we know, when a person substitutes  product A for product B, because the price of product A has gone up, is that the new state of affairs must be a situation that is worse off for the consumer, because he chose against such selection of goods he, when the price of product A was lower.

Thus, Dr. Paul's charge that chained CPI is a gimmick that distorts the true impact of rising prices is a legitimate charge.

(ht William Hardwick)