| Author | Message | ||
     Martin Taylor Eminence Grise Username: Mmt Post Number: 71 Registered: 02-2004 |
Bill W., responding to my message: This approach would seem to describe the faactors that determine how two persons might make a choice to trade. In orthodox theory they have what is called an edgeworth box in which two consumers-- using utility theory -- decide to trade or not based upon whether each would gain by making the trade. The problem has been how to go from this description of a trade between two persons to a system in which it is possible to construct a price index. Suppose a consumer purchases various amounts of 20 commodities and various prices. Now, suppose that the price of one of these commodities increases and the consumer after adjusting to the price change purchases different amounts of the 20 commodities. If you could construct a price index, then you could calculate how much more money the consumer would need to reach the same level of welfare that the consumer experienced before the price change. As far as I can tell the orthodox neo-classical theorists never solved this problem. I think it's an ill-defined problem, as it stands. If you define a price index by the way it is calculated, the problem doesn't exist. However, if you define it in the spirit of PCT, by specifying what the measure is trying to signify, then the problem is pushed back a level. Bill says it refers to "how much more money the consumer would need to reach the same level of welfare that the consumer experienced before the price change, which requires one to define "welfare." I suppose, in ECACS, we ought to define it with some relation to complex control systems. which, in turn, presumably means some function of the ability of people to control their perceptions, or in another domain of discourse, the relation of their pleasure to displeasure. However, we come to the all too true aphorism: "Money can't buy happiness." Following this track, we arrive at a conundrum. If a "price index" relates to the ability of people to maintain the same level of welfare, then there's an argument that maybe it doesn't have anything to do with money. So, knowing that the definition of "price index," by its nature, has to do with money, we must seek elsewhere than through "level of welfare" or we must define "welfare" so that it doesn't imply ability to control perceptions, or pleasure/displeasure ratios. And at the same time, we don't want to specify a method of computation in making the definition. What then is meant by "price index"? Let's consider characteristics that might be desirable for such an index. Firstly, it should fairly represent something that affects most of the people in the economy being measured, and that "something" should affect those people in some way. Secondly, it should fairly represent something about the equations of the values of money versus goods and services held by the people covered. Are those two characteristics are necessary for defining a "price index"? If so, do they serve to define a unique concept of "price index", leaving only the computational method to be determined? Or are other characteristics required before a computational method can be designed and accepted as fairly providing a "price index"? Before proceeding, I ask for comment on that much. | ||
| Bill Williams Advanced Member Username: Williams Post Number: 35 Registered: 02-2004 |
Martin, It seems to me that without having defined _all_ our terms and sorted things out with any comprehensiveness, that we may be, more or less, in agreement. The ways that price indexes are computed now depends upon a hedonistic conception of value using maximization of utility. There are reasons to think that this approach to the issue is faulty. A number of paradoxes have been identified but not solved-- not solved in terms of maximization and utility theory. Control theory, especially when control theory is combined with a hierarchical organization appears to me to provide a very much superior understanding of the economic aspects of behavior. So, if we approach the problem of constructing index numbers from the standpoint of control theory we should be a few steps ahead of how things are done using orthodox economics based upon a hedonistic conception of behavior and maximization. But, there are some complications involved. But, first why not consider as simple a case as we can identify. Suppose we have a hierarchical control theory consumer. And, suppose that we know the structure of the consumer’s control loop gains, and the vertical structure of these gains from the most urgent— fluids, calories, shelter on up to less urgent needs on a hierarchy. And, fatuously suppose that the consumer’s least urgent commodity consumed is a box of sandal wood scent. Suppose initially that the consumer has, after meeting more urgent needs, enough money left overt to burn half a box of sandal wood. Now change a price or some prices of commodities which the consumer ordinarily consumes, and observe what happens to the consumption of the Least urgent item of consumption—the sandalwood scent. The price index deflator or inflator Would be the sum necessary to return the consumer to the initial position divided by the total budget. This number, the sum neccesary to return the consumer to the original position divided by the budget would be a price index. But, the price index would not neccesarily be able to say anything about the ratio of welfare between two consumers with two different levels of income. Is one twice as well off? Or, three times as well off? I doubt that welfare can be measured this way-- that is some sort of linear scale. I will break off the description at this point to see if this approach, and the way I've described it makes sense. In some respects this isn't all that different than the way orthodox theorists have approached the question. But, the shift to a control theory based assumption may make some crucial differences in the usefulness of results that are obtained. Bill Williams | ||
| Martin Taylor Eminence Grise Username: Mmt Post Number: 83 Registered: 02-2004 |
Bill, I'm supposed to be working on a major report with a much-too-close deadline, and had intended to delay responding here. But anyway... suppose that the consumer’s least urgent commodity consumed is a box of sandal wood scent. Suppose initially that the consumer has, after meeting more urgent needs, enough money left overt to burn half a box of sandal wood. Now change a price or some prices of commodities which the consumer ordinarily consumes, and observe what happens to the consumption of the least urgent item of consumption—the sandalwood scent. The price index deflator or inflator Would be the sum necessary to return the consumer to the initial position divided by the total budget. This number, the sum neccesary to return the consumer to the original position divided by the budget would be a price index. I'm afraid this isn't intuitively clear. Let's see if I can symbolize it. Suppose the original money available was B (Budget), out of which S was available to buy W units of sandalwood. B-S would buy the rest of the items to be purchased. Now the average price of those other items has increased by a factor M, the multiplier we seek. So, the amount of money used on the other items is M*(B-S), leaving B-(M*(B-S)) to buy sandalwood (whose price has also risen by a factor M). To buy the W units of sandalwood now costs S*M, so the "sum" needed is now S*M - (B-M*(B-S)). Unravelling the algebra, the "sum" is S*M -B + M*B -M*S, or B*(1-M). This gives M-1 = "sum"/B. So by "price index deflator or inflator" I guess you mean M-1. 100*(M-1) is equivalent to the CPI percentage inflation over the time-period of concern. And in effect, it's the same as what is now done with a "shopping basket" of goods and services to compute the CPI. Am I right so far? ---------------------------------- But, the price index would not neccesarily be able to say anything about the ratio of welfare between two consumers with two different levels of income. Is one twice as well off? Or, three times as well off? I doubt that welfare can be measured this way-- that is some sort of linear scale. I think you are asking one index to do two jobs here. The first construct is computed with reference to marginal value, whereas now you are asking for some kind of overall satisfaction index. How well off someone is in that sense has not much to do with money. As they always say, "money can't buy happiness." There is, however, another dimension of enquiry here. There are some constraints on control that are correlated with money. Firstly, to survive in a complex society, one has to use money for minimal nutrition (unless one can use someone else's money, as children do). That reduces the amount of money one has available for discretionary spending. There are a few other things for which one must spend either one's own money or someone else's (or impose on someone's good nature by using non-monetary compensation)--shelter, medical expenses, transport to a place of work, for example, though not all may figure in any specific person's controlled perceptions at any specific moment. It seems to me that an index of welfare ought in some way to be concerned with the potential for directing perceptual control after the "required" perceptions are under control--in everyday words, the amount available for discretionary spending. This ties in with an observation that has puzzled me for many years. Since the 1960's I have spent a fair amount of time in Denmark visiting friends. My observation is that the normal Danish salary is less than here (Canada/USA), the taxes are higher, and the average person has more money available for discretionary spending. The only answer I have come up with is that the after-tax amount required for control of the "obligatory" controlled perceptions is much lower in Denmark than here, and that therefore the general "welfare" (in your second sense) is higher there. Not much of this speaks to the issue of how control theory could lead to useful general measures for economics, but perhaps it may help constrain the directions in which to look? | ||
| Bill Williams Advanced Member Username: Williams Post Number: 42 Registered: 02-2004 |
Martin, I think that we are in agreement regarding the issues discussed so far. I raised the question about how to measure income levels to point out the severe limitations in the price index method I was suggesting. Your example from Denmark is interesting. There has been some thinking going on concerning the contrast between a black inter-city population and an Indian city population. The Indian population has about 40 percent of the income of the American population, but the usual indicators of health, and welbeing are much better. Longer lives, more literature, less violence, and what have you.... I think what might make sense is a control theory informed social cultural analysis of what it takes to live in a society in a standardized lifestyle. This is in effect what I think is actually done anyway. If the numbers get too far out of whack using the economic calculations there is a Congressional hearing, and afterwards things get fudged a bit to get the numbers back to somewhere close to where a reasonable person, or people interested in the question think they ought to be. So, I think we ought to do openly what I think we actually do covertly. Bill Williams | ||
| Martin Taylor Eminence Grise Username: Mmt Post Number: 86 Registered: 02-2004 |
Bill, I think before we go much further, we should (in a PCT-thinking mode) clarify why a "price index" should be computed. Is it a number to aid economic policy decisions, something for the public to glom onto, or what? Once we are clear what the tool is supposed to represent, there might be a chance of developing a rational way of computing it. It's part of a more general issue raised by your last message, of what "ought" to be the measures on which policy is based. For myself, I can see a use for an index of inflation, but it's probably not a use you might accept. What I see is that if a measure of inflation is made public, and is reasonably stable at a level that is psychologically not too far from zero, then people planning their future uses for money can do so with less uncertainty than if no such measure was available to them. If Bagno was right, the mere availability of this number would reduce the inflation rate required for economic stability below what it would be in the absence of such a number. It would be even more useful, however, to have separate rates for different classes of goods and services. Unfortunately, so far as I can see, your algorithm would not allow those to be computed. | ||
| Bill Williams Advanced Member Username: Williams Post Number: 43 Registered: 02-2004 |
Martin, In your post you talk about a price index being "computed." I doubt that there is a theoretical basis for actually computing an index, but I think survey methods might be used to gather information as to how much currency it takes to purchase a standardized sort of life-style for a single person, a student a family of four, a retired person, or for that matter to run a retail shop of a certain size and so forth. And, in a community where there are cultural differences, and/or economic class differences I could see price indexes being gathered ( rather than computed ) for different class or cultural groups. If prices always changed in some fixed proportion I don't see that there would be any point to attempting to gather or compute price indexes. It seems to me that price indexes serve as meters that describe the rate and direction that typical bargins concerning wages and purchases, sales and expenses are moving. In a typical Western economy the bargins concerning incomes and expenses are set by a mixture of "free market" forces and public policy. And, whatever the nature of the decision that is being made, such decisions are made, at least in part, in terms of estimates of the cost, cost in currency, that is a composite price involved in carrying out some modification that involves economic considerations. And, there is also the question in macro-economics of how much currency to provide either through government printing of money and other money type financial assests, and bank loans. If too much money is provided it is expected that prices will rise excessively, if too little money is provided transactions, it is thought, will be restricted by a lack of currency to carry out transactions. So, an inclusive price level measure provides a guide for Macro-economic policy makers and critics. There may be other uses for price indexes. Once a tool is created for one purpose it is likely that other uses, unanticipated uses may be found. And, just like there are wrenches for differnt sized nuts, there ought to be price indexes of various kinds for various purposes. |
