Was Von Mises a post-modernist?

You may recall that I have frequently argued that inflation is a useless concept.  It’s not that we can’t construct rough estimates of the average rate of price change.  We can.  Instead I argue that there is no “true rate of inflation” out there to be measured.  Any measure is an arbitrary social construct.  So any defense of inflation must rely on pragmatic arguments.  And for almost every use of ‘inflation’ there is a more appropriate variable (usually NGDP growth.)

Von Mises felt the same way.  Here’s Joseph Salerno:

By the time Human Action was published in 1949 (actually, by 1940 when the German-language forerunner to Human Action, Nationalökonomie, was published) Mises had come to recognize that the concept of inflation was completely empty and useless for the purposes of technical monetary theory. For the later Mises, it was impossible to separate the effects on market prices of monetary influences from the effects of “real” influences emanating from the markets for goods. The supply of and demand for money were intertwined with the supply of and demand for every good, because goods and money were ranked together and compared on individuals’ value scales. Any change in the demand for money inevitably affected the relative demands for the various goods, and vice versa.

Just in time for my January debate with Bob Murphy.  (I should have kept this secret, and sprung it on Bob.)

PS.  I said “almost every use” because there is one valid use of inflation.  Take the rate of NGDP growth per capita and subtract out your subjective estimate of how much NGDP growth would have left us equally happy as before.  The difference is inflation.  But inflation still doesn’t have practical value, it’s merely your personal estimate of how much of the increase in NGDP is not “real.”

HT:  Derrill Watson

PS.  I just noticed this in a Nick Rowe post:

And I have sympathy with Scott Sumner’s approach too, in trying to ban the use of the “i-word”, and talk about NGDP instead.

Actually there are three i-words that need to be banned; inflation, income and interest rates.  And they need to be replaced with NGDP growth, consumption, and asset prices.

At first they call you crazy . . . . and in the end they say “we knew that all along.”  (I can’t recall the exact quotation.)



36 Responses to “Was Von Mises a post-modernist?”

  1. Gravatar of D. F. Linton D. F. Linton
    26. November 2011 at 08:16

    You really can’t quote Mises declaring that the very concepts of inflation and deflation are scientifically meaningless and then say you agree except than you can scientifically distinguish the difference between real and nominal GDP.

    Come on. Nominal GDP estimates are at best bureaucratically true; just deeply nested piles of ad hoc adjustments to combinations of sets of small sample statistics. Real GDP is a ratio between two fundamentally unobservable quantities.

    If you want the FED to target 5% NGDP growth, surely that can’t be worse than the technocratic ad hoc’ery they use today. But once they fix on this standard won’t that just drive the gamesmanship into adjusting NGDP estimation technqiues to meet the political ends of whatever group of cronies is then in power?

  2. Gravatar of Bill Woolsey Bill Woolsey
    26. November 2011 at 08:26

    Why 5 percent growth in nominal GDP?

    Why not 8% or 2% or -6%?

    I think Mises was against the concept of the price level because he say targeting a price index as a threat to the gold standard.

    You think the gold standard is a bad idea? Well, any argument that says that it causes fluctuations in the price level is unscientific because no price index is perfect.

    I suppose that your response would have to be that it causes flucations in the flow of money expenditures on output.

  3. Gravatar of Martin Martin
    26. November 2011 at 08:47


    I find your argument about NGDP vs inflation convincing. Could you however elaborate about consumption vs income and asset prices vs interest rates?

    I know you elaborated about income as a meaningless concept in the past and that you consider interest rates an epiphenomenon, but I am not entirely sure why you are arguing those points.

    What I’ve understood so far, is that:

    1. what all the concepts you reject have in common is that they’re indirect measurements and that all the concepts you want to replace them with are and can be directly observed.

    2. The indirect measurements add no additional insights in the area they’re supposed to help explain, beyond what they’re calculated from.

    #2 mostly because the calculation is sensitive to additional (arbitrary) assumptions made by the observer.

    Is this what you’re arguing or is there something more?

  4. Gravatar of Becky Hargrove Becky Hargrove
    26. November 2011 at 09:50

    It sounds as though you would simplify the (measuring) process by replacing external valuations with internal ones, observable by how they relate in real time. Such a proces could help in that it would be capable of estimating economic activity that could be replicated at any level. That would also make it possible to see how ‘sustainability circles’ could relate to one another.

  5. Gravatar of Bogdan Bogdan
    26. November 2011 at 09:55

    The “Austrian” critique to inflation indexes was the object of a 1927 book by Gottfried Haberler, called “The Meaning of Index Numbers”.

    The idea is that there is no strict method of capturing the value of money through an index simply because the value of money is given by all the exchange ratios between money and goods in the economy and an index that tries to track a certain price level is more or less arbitrary, in the sense that it depens upon the basket of goods selected, their assign weight, the average used to calculate the mean and how constant they remain during the measurement period. In other words, one can get va variety of index values and price levels simply by changing a bit one of these factors.

    The second point of the critique is that too much focus on one price index obscures a lot of important microeconomic relationship that might be more consequential, simply because movements in some categories of goods is obscured or cancelled out by movements in other categories of goods. Like capital goods prices rising faster than consumer goods and so on in the upswing phase of the “Austrian” business cycle, i.e. the bubble period and so on.

    P.S. Strictly speaking, the whole musing on subjectivity makes Mises – from the standpoint of cultural philosophy – a modernist, much like Keynes, although they have different policy conclusions. Post-modernism lack the “constructive drive” of modernism, which it has even when it reaches the opposite edge, as in the case of – I don’t know? – absurd drama, let’s say. Post-modernism it’s all deconstruction, even when we’re not talking about deconstructivism, because it starts there so it can only end there. One might say they fake the whole process 🙂

  6. Gravatar of CA CA
    26. November 2011 at 10:01

    Brad Delong has had a number of great posts on Mises in the last few weeks. Here’s his latest.

  7. Gravatar of K K
    26. November 2011 at 10:32

    The fatal flaw in the inflation logic is that on the whole we aren’t actually getting any happier. Therefore *all* of NGDP growth is inflation. The underlying problem, as you’ve pointed out before, is that our utility is not a function of consumption (once we are beyond basic needs). It’s a function of consumption relative to everyone else (including our recent selves). Over decades, comparing utility is utterly meaningless.

    But I don’t agree about rates. The risk free nominal short rate is the universal price of borrowing against a greater value of liquid good collateral. It’s very real and well defined.

  8. Gravatar of Bogdan Bogdan
    26. November 2011 at 10:45

    I read the Delong post and I sort of agree with him there, in the sense that Mises, although was theoretically aware, clearly underestimated the adverse effects the combination of sudden deflation (P.S. he distinguished between secular and sudden deflation) and huge nominal rigidities that were coming to the front then (collective bargaining, passport travel in Europe, working papers etc) can have in the downswing of the cycle. But he woud insist that the cause of the cycle was an expansionary monetary policy that caused capital misallocations and a liquidity shortage, not a failure in demand. And that idea is clearly worth exploring.

    Regarding Mises’ case for the gold standard despite the caps on money expansion it puts and how this can aggravate the depression, well, you can see the issue in three ways : 1) it’s the fault of the gold standard per se, 2) it’s the fault of of the interventions in the market that created all the nominal rigidities or 3) it’s the fault of those who manage the gold standard, i.e a failure of government, since the gold reserves exists somewhere and either the central bank, or the government or the central bank and government of the outflow country should monetize and put back into circulation those reserves (Machlup even wrote that in order to offset the increased demand the government should leveraged the central bank’s fractional gold reserves or sell guaranteed bonds and start public works! even through there is some inneficiency in this because this pattern of demand with what the private demand would have been). In sum, the rational for the gold standard has nothing intrinsically to do with the issue of promoting or preventing deflation and business cycle, although it can be involved in that. The case for the gold standard is that it provides an anchor for the money supply and serves as an international reserve asset, preventing any serious nominal supply shocks.

  9. Gravatar of Don Geddis Don Geddis
    26. November 2011 at 10:50

    Final quote is from: Haldane, J.B.S., Journal of Genetics Vol. 58, page 464 (1963)

    Theories have four stages of acceptance:
    i. this is worthless nonsense,
    ii. this is interesting, but perverse,
    iii. this is true, but quite unimportant,
    iv. I always said so.

  10. Gravatar of dwb dwb
    26. November 2011 at 11:34

    just thinking out loud, I am having a hard time reconciling 1) the belief that a small positive rate of inflation is optimal with 2) the belief that inflation targeting is superior to nominal income targeting. Seems to me, if one accepts 1) then one accepts the caustic effects of deflation (the usual channel is the nominal balance sheet and/or sticky wages) thus a small positive rate of inflation is warranted. But why not then simply target nominal income directly? Seems to me if you’ve conceded positive inflation is optimal then you’ve conceded all the conditions under which nominal income targeting is optimal. All of the FOMC accepts (1). Which begs the question… Under what conditions is a small positive rate of inflation optimal but inflation targeting superior? I can’t think of any….In pool, I’d rather the direct shot to the hole than a bank shot anyday. Seems to me inflation targeting with is the bak shot.

  11. Gravatar of Morgan Warstler Morgan Warstler
    26. November 2011 at 11:38

    The only real value of NDGP targeting is that is presents small c conservatives with a tool to reduce money printing in the future.

    It makes constantly obvious, every single day, the choice Greenspan presented Clinton with in 1993: more fiscal spending OR lower interest rates.

    And by making that choice clear as day, we are far more likely to scream bloody murder when our govt. runs a deficit.

    At 4% level, we’d likely never need a Balanced Budget Amendment.

    That’s about all an Austrian can find in the thinking. And Friedman would see and say the same thing.

  12. Gravatar of Becky Hargrove Becky Hargrove
    26. November 2011 at 12:22

    You just reminded us what all the dark matter in the universe actually consists of.

  13. Gravatar of happyjuggler0 happyjuggler0
    26. November 2011 at 13:26

    From http://en.wikiquote.org/wiki/Mohandas_Karamchand_Gandhi :

    First they ignore you, then they laugh at you, then they fight you, then you win.
    Describing the stages of a winning strategy of nonviolent activism. There is no record of Gandhi saying this. A close variant of the quotation first appears in a 1918 US trade union address by Nicholas Klein:

    And, my friends, in this story you have a history of this entire movement. First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to you. And that, is what is going to happen to the Amalgamated Clothing Workers of America.

    Proceedings of the Third Biennial Convention of the Amalgamated Clothing Workers of America (1918), p. 53

  14. Gravatar of EZB: Mehr Inflation oder weniger Unabhängigkeit? « Aus dem Hollerbusch EZB: Mehr Inflation oder weniger Unabhängigkeit? « Aus dem Hollerbusch
    26. November 2011 at 13:31

    […] (Der Tip, Mises zu lesen, stammt von Scott Sumner) Teilen Sie dies mit:TwitterFacebookE-MailDruckenGefällt mir:LikeSei der Erste, dem dieser post gefällt. von → Wirtschaft, Wissenschaft ← Freitags Fisch – vor 42.000 Jahren Noch keine Kommentare […]

  15. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. November 2011 at 14:29

    Scott: if you are going to get rid of inflation, then you have to get rid of real wages as well.

  16. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    26. November 2011 at 15:57

    Maybe I didn’t strike out after all (the catcher dropped my foul tip?):


    ‘Congdon repeatedly refers to the interest rate as “the price of money.” This is a very common error, and one that is not only wrong but dangerously wrong.’

  17. Gravatar of Claudia Sahm Claudia Sahm
    26. November 2011 at 16:13

    Can you be more specific about the concepts of income and consumption you would want to swap? In reality, the NIPAs provide expenditures not flow consumption (pesky durables)…flow income in the NIPAs might be a better approximation for flow consumption. Plus real GDI appears to have some info on the underlying state of economic activity above and beyond real GDP (research by Jeremy Nalewaik). Not sure I would ban income just yet.

  18. Gravatar of Dustin Dustin
    26. November 2011 at 16:28

    (I should have kept this secret, and sprung it on Bob.)

    Yes, you should have. You do not want to take this guy lightly. He is extremely dangerous.
    You will want every weapon in your arsenal, including the secret ones.

  19. Gravatar of Peter N Peter N
    26. November 2011 at 17:09

    It’s getting worse:

    “Banks need to reduce their balance sheets as much as €5trn in assets over the next three years or so,” he added. “The problem is that there just aren’t enough buyers. Most banks will be forced to hold on to much of this stuff to maturity, which will affect their ability to lend and impact on the real economy.”


    Sounds Europe is in for some seriously tight money.

  20. Gravatar of Bob Murphy Bob Murphy
    26. November 2011 at 17:13

    You’re improving, Scott. Now your blog is only 26 days behind mine.

  21. Gravatar of Claudia Sahm Claudia Sahm
    26. November 2011 at 19:24

    Is the income to consumption swap simply about replacing income taxes with consumption taxes? That’s what I got out of your earlier post: http://www.themoneyillusion.com/?p=7091 If that’s all you meant, then ignore my question above about the consumption concept.

    HT: Robert Bell who commented over at MR about this post.

  22. Gravatar of Dan Kervick Dan Kervick
    27. November 2011 at 06:32

    Everybody can intuitively distinguish between changes in a country’s spending that are due to the country’s inhabitants growing richer or poorer and changes in a country’s spending that are due to changes in prices. And in the latter category, everyone can intuitively distinguish between changes in prices that are due to changes in the real costs of production and changes in prices that occur for other reasons.

    Obviously these phenomena are difficult to measure, since there are so many different goods and services and since the price ratios among those goods and services are always shifting in a variety of directions according to popular tastes and wants, and since the assignment of degrees of value and well-being to the acquisition of goods and services is fraught with philosophical perplexity and ineradicable subjective differences among individuals. So any attempt at measuring these phenomena requires making contestable choices.

    But people will always need to attempt to measure them in some way, because these attempts are essential to attempts to answer the most fundamental questions policy-makers and thoughtful citizens can pose have about their society’s economic condition: Are we getting richer or poorer? Are we we working more efficiently or less efficiently? Are we living more wisely or less wisely?

    You are falling into the positivist trap of arguing that because there is no uncontroversial operational procedure for measuring some quantity, then the concept associated with that measure is meaningless. But many of the most intriguing and important questions resist fixed, operationalized modes of inquiry.

    If someone tells me that the total level of spending, measured in terms of the currency most commonly used to make purchases, has risen or fallen by a certain percentage, they really haven’t given me much useful information. Their statement is obviously an invitation to ask more questions. You can’t get people to stop asking and prioritizing these questions by declaring them meaningless.

  23. Gravatar of ssumner ssumner
    27. November 2011 at 06:44

    D. F. I agree about real GDP, it’s not a scientific concept–just an opinion.

    Bill, Yes, that would be my response.

    Martin, Income is used for things that fit consumption better–such as economic inequality and taxes.

    Interest rates are used as an indicator and transmission mechanism for monetary policy, whereas asset prices fit better.

    Becky, I don’t know what sustainability circles are.

    Bogdan, Thanks for that info. I was joking about post-modernism.

    CA, Yes, I saw those.

    K, Yes, I agree about interest rates. The problem is that we use interest rates in monetary economics, whereas we should be using asset prices.

    Bogdan, Of course we know that it does not prevent serious money supply shocks. So it’s a bad system.

    Thanks Don, That’s what I was trying to remember.

    dwb, Excellent point. Very well stated.

    Morgan, Yes, and it also makes clear that if we bail out GM we destroy an equal number of jobs elsewhere.

    Thanks for that happyjuggler0.

    Lorenzo, I agree, and we should replace it with W/NGDP per capita. Call them relative wages.

    Patrick, Yes, that’s a common mistake. I’m surprised to see it made by a monetarist.

    Claudia, I want to use consumption for discussions of economic inequality, not income. I also want to tax consumption, not income.

    Dustin, Yes, I’m not ruthless enough.

    Peter, Yes, and I’d say they’ve been in tight money for 3 years.

    Bob, Rothbard too!! Great news.

    Claudia, Why would he comment over there, and not here?

  24. Gravatar of Becky Hargrove Becky Hargrove
    27. November 2011 at 07:42

    “…many of the most intriguing and important questions resist fixed, operationalized modes of inquiry.”: that made me revisit recent thoughts as to how any accepted theories might vary in our own time, from those of recent history. Because knowledge and information are now spread (if not shared) throughout society in exponential terms, it may well be that the theories people come to utilize are considered more in conjunction with one another, used as growing sets of tools in society’s ‘toolbox’; in this case tools for economic measurement. But that does not mean it would be impossible to understand economic dialogue, we just need to include in any education where that dialogue is actually coming from instead of waiting for an educational timeframe many don’t even get to. While any effort to ‘control’ the dialogue may work in the short run, as in the present it does not work in the long run…one look at the presidential candidates shows that some of the most important education stopped too soon.

    Perhaps it is the explosion of one-to-the-many forms of knowledge – rather than knowledge integration, that caused so much of the present unrest. On the surface this manifests in skepticism, cynicism, anger and violence. When I consider what happened in this light, something unexpected has happened that I never expected. I feel compassion for all of that.

  25. Gravatar of Jon Jon
    27. November 2011 at 10:45

    Wooley writes:

    “I think Mises was against the concept of the price level because he say targeting a price index as a threat to the gold standard”

    That’s not quite right. He inferred that price index targeting would not make the boom/bust cycle any more stable given a gold standard regime. That happens to be right. Given any accumulation of errors in the price index targeting, the banks will eventually need to tighten in order to maintain their gold cover constraints.

    Economists/bankers spent a few hundred years searching for a set of rules such that the currency could be elastic without violating gold parity or leading to a crisis. Mises saw through many schemes but he never abandoned a preference for gold parity. The trouble with people like Bob Murphy is that they don’t understand that Mises’s critiques make sense only if you assume a gold peg. Once there is no gold peg, you need to adjust and in some cases abandon the Misesian view, and today there is no gold peg; we live in a different world.

    Still it is wrong to claim that abandoning the gold peg was a monotonically better regime. The gold peg had some benefits. The most powerful of which was that devaluing gold was always a very high-powered infusion. Its not clear that QE works quite the same when the interest-rate channel is blocked. I would claim actually that when the interest-rate channel is blocked, base money is no more high-powered than credit.

    This is why expectations matter so much, because even if the present is awful, believe in the future can unblock the interest-rate channel… We’d be a lot better off, if the CB had a gold peg to slip in order to hit an NGDP target.

  26. Gravatar of Ryan Ryan
    28. November 2011 at 06:15

    Sumner, I take this post as the relatively cheap shot that it is.

    Mises rejected the whole AD framework of discussion – it is completely disingenuous to use Mises’ beliefs about inflation to buttress your case for a perpetually increasing money-supply-as-measured-the-way-Austrians-measure-it. Mises would reject NGDP targeting as quickly and eloquently as he rejected modern use of the term “inflation.”

    What gets me, though, is how you are fully aware of this and decided to put it on your blog anyway. But anyhoo…

    A word to those who believe Mises was “in favor of the gold standard…” Mises wasn’t “in favor” of anything other than sound money backed by real value. He preferred gold money to imaginary fiat money, but he would have no problem with any currency standard that allowed for the most stable, value-based currency possible.

    So when you read people like DeLong criticizing “the gold standard,” you are witnessing a straw-man argument based on a primitive understanding of Mises’ ideas. If you want to learn about Keynesianism, read DeLong. If you want to learn about Austrian School economics, start reading the Coordination Problem blog or something. DeLong isn’t addressing Austrian School economists, he’s addressing DeLong fanboys who just want to hear that ABCT is wrong. You’ll never learn anything by reading only stuff you already agree with in an endless feedback loop…

  27. Gravatar of sabre51 sabre51
    28. November 2011 at 06:35

    This might not be the quote you were looking for; I can’t tell, but it fits:

    First they ignore you, then they laugh at you, then they fight you, then you win.

  28. Gravatar of ssumner ssumner
    28. November 2011 at 07:15

    Ryan, You said:

    “Sumner, I take this post as the relatively cheap shot that it is.
    Mises rejected the whole AD framework of discussion – it is completely disingenuous to use Mises’ beliefs about inflation to buttress your case for a perpetually increasing money-supply-as-measured-the-way-Austrians-measure-it. Mises would reject NGDP targeting as quickly and eloquently as he rejected modern use of the term “inflation.””

    I am afraid it is you that took the cheap shot. I never said or even implied what you claim I did. Your comment is a flat out lie. Not only did I not claim that Mises favored targeting AD, I made no claim at all about Mises’ views on monetary policy. None.

    By that way, I have never proposed a “perpetually increasing money supply.” So that’s another cheap shot.

    Thanks Sabre51

  29. Gravatar of Ryan Ryan
    28. November 2011 at 07:27

    Ehhh… Context-dropping now…

    For what it’s worth, my “cheap shot” comment was offered in better spirits than it appeared to you. You alluded to “springing this on” Robert Murphy, and I was simply acknowledging that which you already acknowledged. Okay, you don’t like the phrase “cheap shot,” but surely you can choose a term that you like better, which still conveys the same thing you and I are both talking about.

    Part of what makes this blog so frustrating is that you insist on defining all terms your way and then pretending every disagreement is definition-stasis. I read your blog and take what you mean at the concept level, rather than holding you to *MY* definition of every term you use. Example: I even spelled out my “increasing money supply” concept as the one Austrian Schoolers use, and you STILL won’t acknowledge the point.

    I mean, a lot of this stuff just goes in circles because you won’t acknowledge the points at which people talk past each other. It’s the concepts that are important, not the words! Someone who thinks “inflation” ought to be replaced with “NGDP” should know this better than I do.

    But anyway. Accept my sincerest apologies for any apparent “cheap shot” on my part. I really didn’t intend that comment to come off as aggressively as it did.

    Accept my further apologies for my mounting frustration with the way blog-debates (and this means all of us including myself) so often pan out into this kind of strange refusal to acknowledge the real meaning of the other side, and to harp on terminology instead.

    I guess that’s what it’s like in the world of theory…

    I need to take a break from this stuff.

  30. Gravatar of Becky Hargrove Becky Hargrove
    28. November 2011 at 08:14

    This is probably a good point to bring up the fact that I got really upset at you not so long ago. Sometimes words are just not enough to convey the common ground we often have. And even worse, I’m not sure we were talking about the same de Soto but I didn’t want to bring it up because I greatly embarrased myself on a Mises blog not long ago with that very topic (Two de Sotos on the roster and they pretended the one I mentioned was not there). I have barely visited Mises blogs since. So now I will say that my influence was Hernando de Soto. When I read the Mystery of Capital it was hard to get through more than a dozen pages at a time without my own mystery of capital generating a huge brainstorm. I wanted to be able to accomplish for human capital, what he had been able to accomplish for physical capital.

  31. Gravatar of Ryan Ryan
    28. November 2011 at 10:15


    Not to worry. When I refer to de Soto, I always mean Hernando unless I specify otherwise. 🙂 I consider him one of the most important economists of our time.

    There are a couple of Friedmans out there, but generally when people say “Friedman,” most assume it’s a reference to Milton. (Special populations notwithstanding, as your de Soto example illustrates.) These misunderstandings pop up from time to time. We can expect them, we can plan to bump up against each other from time to time, but it’s always in good faith from the angle of fellow truth-seekers.

    Anyway, I’m a little slow sometimes. It’s taken me some time to figure out that TMI blog isn’t a dialogue about macro-policy so much as it is a promotional vehicle for market monetarism. Now that I understand how it works, I will adjust my comments accordingly in the name of interpreting information on the level it is intended. I’m not a big fan of “gotchas,” anyway…

    Lesson learned!

  32. Gravatar of ssumner ssumner
    28. November 2011 at 16:00

    Ryan, I had no intention of arguing that von Mises agreed with me on monetary policy in my debate with Murphy. Sorry if I was too rude in my reply, but I get tired of constant attacks by people who claim I say things that I never even implied. I don’t think there is anything that could be construed in the way you suggested, even taking into account my quirky use of terms. If I am wrong, please tell me which sentence seems misleading, and why.

  33. Gravatar of Rien Huizer Rien Huizer
    29. November 2011 at 06:16


    Starting from the top after a few weeks’ absence, this is a little gem!

  34. Gravatar of Scott Sumner Scott Sumner
    29. November 2011 at 07:27

    Thanks Rien.

  35. Gravatar of Greg Ransom Greg Ransom
    29. November 2011 at 16:09

    Hayek makes the same point about the arbitrary nature of picking an particular index as “the” index of inflation in his Prices & Production.

    Hayek, of course, had read Haberler’s book on index numbers, and similar works by other “Austrian” classmates.

  36. Gravatar of Scott Sumner Scott Sumner
    1. December 2011 at 05:16

    Greg, That’s good to know.

Leave a Reply