Truck and Barter

The quality of the commodities produced and consumed changes continuously. It is a mistake to identify wheat with wheat, not to speak of shoes, hats, and other manufacures. The great price differences in the sycnchronus sales of commoditieis which mundane speech and statistics arrance in the same class clearly evidence this truism. An idiomatic expression asserts that two peas are alikel but buyers and sellers distinguish various qualities and grades of peas. A comparison of prices paid at different places or at different dates for commodities which technology or statistics calls by the same name, is useless if it is not certain that their qualities—but for the place difference—are perfectly the same (Mises, 1996, pp. 220-1).

Is this really true? Are price indices “useless” if they are taken over commodities of non-homogenous quality? Shouldn’t it be possible to quantify--or describe--the errors involved in the index-number creation process, to separate the signal from the noise? That is Yes, one must explicitly hold quality constant. Only if quality is not measurable or estimable within useful margins is it reasonable to reject the index-number procedure.

[T]here exist different methods for the computation of averages. There are the arithmetic, the geometric, the harmonic averages, there is the quasi-average known as the median. Each of them leads to different results. None of them can be recognized as the unique way to attain a logically unassailable answer. The decision in favor of one of these methods of computation is arbitrary (Mises, 1996, pp. 221-2).

Why is Mises talking about this? He's trying to show that Irving Fisher’s desired adjustment of the quantity of money to meet purchasing power is not a logically proven method. Sure, any method chosen is arbitary, but VERY frequently, the results (of the most popular estimators) yield estimates in the same direction. Some decisions can be made reliably with this data. Others cannot. What is absent in Mises’ formulation is the recognition of the uses of data, to which each average must be benchmarked for appropriateness. The diversity of calculation methods is actually a diversity of estimators of the “middle”, and there exist tradeoffs between these estimators. While there exists no “logically unassailable estimator” for a given population parameter, there do exist minimum variance unbiased estimators and the like.

Mises has a far more potent argument when he insists that anybody’s carefully chosen measurements of their own purchases are just as scientific as index numbers:

A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell. She has little use for computations disregarding changes both in quality and in the amount of goods which she is able or permitted to but at the prices entering into the computation. If she “measures the changes for her personal appreciation by taking the prices of only two or three commodities as a yardstick she is no less “scientific” and no more arbitrary than the sophisticated mathematicians in choosing their methods for the manipulation of the data of the market. (Mises, 1996, pp. 222-3).

Now this is a cute analogy. But what else can one say about this? For Mises, it’s either science, or it ain’t. There seems to be of little point to seeing how much better the average housewife can do than the statistician, even if both are not “scientists”. But one sees why Mises holds this opinion; for Mises, there is stable statistical truth about populations, but market processes destroy (what I'll call) continuity. Index numbers are estimates of discontinuity, and work when estimating large areas of discontinuity, but fail utterly in an attempt to gauge small changes. I think most economists will recognize that when one is trying to measure the average movement of millions of prices, there’s simply no reason that movement must follow a known general pattern.

Hence, choose your index number to favor your ideology; in the end political arguments shift to irreconcilable arguments over statistical methodology:

[N]obody acquiesces in an index number if he does not expect a personal advantage from its acknowledgement by public opinion. The establishment of index numbers does not settle disputes; it merely shifts them into a field in which the clash of antagonistic opinions an interests in irreconcilable. (Mises, 1996, p. 223).

The first sentence above suggests the potential existence of 1) undue influence in the calculation of index numbers, 2) a theory of collective choice over statistics.

The second sentence suggests that a plethora of data exist because production of social statistics is a game—a game in which all sides have every incentive to hide their shoddy calculations. Non-technical individuals have no means to challenge the data. All sides realize this, and now have a “gentleman’s agreement” not to discuss the dirty details—biasedness, large variance, imprecision of population, the unknown applicability to real world problems—of index calculation. Everybody gets their turn to use bad data, and the costs of declaring that your opponent’s data are bad include are having them declare your data are no better.

Yet, there is a system of measurement even Mises could consent to:

A datum of experience and a statistical fact is only a price paid at a definite time and a definite place for a definite quantity of a certain commodity. The arrangement of various price data in groups and the computation of averages are guided by theoretical deliberations which are logically and temporally antecedent. (Mises, 1996, p. 351).

No aprioristic theory exists to determine the exact outcomes of changes in law that apply to the economic system. In fact, Mises is fine with data, as long as you are not trying to construct economic theory out of it. If one is trying to estimate the impact of rule changes, and such changes have occurred elsewhere, Mises would applaud looking at the historical record as a guide for lawmakers and businessmen. But this is not economic theory, and there is no way to determine where—inside or outside the historical range—actual outcomes will lie.

(Regarding) Economics=prediction=forecasting.

As against mathematical economics the request for a dynamic theory is well substantiated. But there is no means for mathematical economics to comply with this request. The problems of process analysis, i.e., the only economic problems that matter, defy any mathematical approach. The introduction of time parameters into the equations is no solution… (Mises, 1996, p 356).

What about the persistent elaboration of the distribution of prices, wages, etc., from one month to another, estimating frequency distributions, and using changes in the parameters of those distributions to view economic change, historically? This is clearly acceptable to Mises, but it does not generate a permanent theory of economics.

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And what of theory? Daniel Bell in Models and Reality in Economic Discourse is all over the map:

Economic theory, unlike physics, is not constitutive of a single underlying reality. Nor can it be, pace Alfred Marshall (and Gary Becker), timeless generalizations about human behavior. In consequence, economics cannot be, as its model in classical mechanics, a “closed system” which ignores change or the effort to discern specific patterns of change. (Bell, 1981, p.80).

Quite frankly, arguments like this get tiring after a while. If I want to construct a static, timeless, and a priori theory, that’s my business. If I want to construct a model that ignores process, that’s my business. And I emphatically deny the following:

[E]conomic theory should not be taken as a “model” (or template) of how human beings behave, for these will always be inadequate, but as a “Utopia,” a set of ideal standards against which one can debate and judge different policy actions and their consequences. That, it seems to me, is the meaningful role of any social “science” in theorizing about human affairs. (Bell, 1981, p. 80).

The idea that economics is a science of benchmarking the frail reality against the impossible ideal has a substantial draw for many. But what if one disagrees with the benchmark? One is left in Mises’ quandary about the best index number to use as a benchmark, with no scientific way to resolve the issue.

[Note 1/13/05 | 15:36: Formatting and verbal changes have been made.]