Measurement Problems

Scott Sumner writes,

economists don’t even know that they don’t know what inflation is. They talk as if it’s some sort of objective fact, like the height of Mt. Everest, which we ascertain with ever more accurate measurements.

I agree, and by the same token, we do not know the rate of productivity growth. The aggregation problems involved in trying to characterize the economy as a GDP factory are just too daunting.

11 thoughts on “Measurement Problems

  1. Nobody says gasoline is “easy gas” or “tight gas.” The price can be low or high, decreasing or rising while OPEC can be pushing or pulling. Measuring the price of gas as a function of expected future price of gas would also be problematic.

  2. Fortunately, the frontrunner for the Republican presidential nomination assures us that, contrary to some digitally-based speculation, there is no measurement problem with his manhood.

  3. Most economists DO know what inflation is — a general rise in prices.

    What is not standardized is the definition of a “general rise”, and thus there is no standard measure. In fact, once the (inconsistent) measuring method is specified, inflation does become an objective fact, and can be compared to other facts.

    The lack of agreement on a single standard doesn’t mean the phenomenon doesn’t exist.

    • Tom G,

      I agree with you about inflation. Milton Friedman used the well-known definition of inflation. The problem with Milton’s monetary theory was that his definition of money was subject to an unobservable criterion (that aggregate for which there was a stable demand!). And Scott has had the same problem to make sense of his NGDP story.

      I fully agree with DeLong’s point on the indictment of measures quoted by Scott in his post, but it does not apply to all measures and inflation is one of them. To make things worse, in his post Scott says that he “had always assumed that inflation was the increase in income (actually consumption) required to maintain a constant level of utility.” Indeed, his assumed definition does not make sense at all because none will ever be able to aggregate utility over individuals and measure it and I do not remember anyone ever suggesting it. Scott has yet to find some justification for his NGDP story, one based on a terrible measure of output or income or “aggregate demand”.

      • By the standards we have been using for some time, yes we can measure inflation as a general rise in prices. You can always argue that our current measures are far from perfect but in comparison with national accounts, balance of payments, fiscal accounts, monetary and financial surveys, employment, and many other statistics, we know that our measures of inflation are good proxies for most purposes. We can know when governments cheat on their general price indices but hardly when they cheat on other statistics.

        FYI, I have been analyzing those statistics since 1961 first for Argentina (my birth country) and then for several other countries, including China.

  4. I think it was Hayek who stated that the “facts” of economic inquiry were themselves theoretical concepts. Nevertheless, economists march on, measuring everything with micrometer precision.

    After I read Diane Coyle’s book on GDP, I had even less faith in economists’ ability to measure it.

  5. Honey, why is the office door locked?

    I’m just checking the TIPS spreads, be out in 2 mins pumpkin!

  6. As Milton Friedman and many others before and after him, Scott Sumner is committed to save the world, that is, to rely on Economics to save it. Today, my impression is that well over 95% of Ph.D. economists are committed to the save the world and they are too eager for “useful knowledge” to that purpose. Why are so many economists interested in becoming social engineers (to borrow the term in the sense that Jim Buchanan used it 50 years ago)? What shortcuts are those economists willing to take in order to become “savers of the world”? How different are those economists from the charlatans that don’t have any formal training in Economics but still make similar promises to save the world?

    Measurement problems should be considered in that context. “Captain America” candidates need data to persuade people of their power. Yes, unfortunately, too many economists are too eager to take Janet Yellen’s position to manipulate markets.

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