Possible Insight

(Price) Inflation Is All In Your Mind

with one comment

I apologize for the non-existent blogging the past few weeks.  I’ve been really busy with my new company.  I’m going to try blogging more short items rather than my trademark essays in the hope that reduced barrier to entry will result in more supply.

First up is a provocative post by the ever-interesting Scott Sumner.  Rafe in particular should read it because Sumner starts from one of Rafe’s favorite premisse that “laws” of nature are purely cognitive constructs.  We should measure them by their usefulness and not ascribe to them any independent existence. So Newton’s laws of motion are useful in certain contexts.  Einstein’s are useful in others.  But neither are ground truth.  Moreover, we will never find ground truth.  Just successively more accurate models.

Sumner uses this bit of philosophy to justify abolishing inflation, not, “…the phenomenon of inflation, but rather the concept of inflation.”  More specifically, price inflation. He explains why this concept is ill-defined and not only unnecessary, but confusing, for understanding the macroeconomy.  He asserts that we should expunge it from our models.  It doesn’t really exist anyway, so if models do better without it, we won’t miss it in the least.

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Written by Kevin

August 3, 2009 at 10:46 am

Posted in Economics, Models

Tagged with ,

One Response

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  1. Kev, what’s your take on this essay?
    Price and Money: Wag the Dog?

    Rafe Furst

    August 30, 2009 at 10:41 am


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