Saturday, November 25, 2006

Its All in How You Measure It

The best things in life are free

The NY Times today had an eye-catching (well at least to those interested in monetary economics) article on inflation, couching it in terms of what should you serve to a central banker who comes over for breakfast. The point was that if you measure coffee, orange juice, wheat and bacon then inflation has been going at the rate of 13% over the past four years. This is of course pretty high, salaries in mega-institutions generally go up around 5% per year, slightly above what everyone thinks inflation is or should be (around 3%).

The founder of The Mises Institute did a very interesting study showing that those things most free from government regulation have gone DOWN in price, whereas those things with the most intervention have gone UP in price. So it is all how you measure it. And really most people probably dont notice or care about inflation as it is so incremental that you dont notice. Except for oil and heating prices when it blows a hole in your cash-flow. International trade and competition have allowed the prices of the most basic things to go down at the retail level eg Walmart, Target, IKEA.

This is the raising tide of Adam Smith. Albiet alot of this benefit of lower prices comes at the cost of the average Chinese person. Because the Chinese government doesnt allow the yuan to float it keeps the value of their money artificially low. This means that exports are cheaper, but it also means that imports are more expensive which means the Chinese people have to pay more for things than they should. This is what Smith calls a "system of preference and constraint" and of course what he was worried about eg special interest groups getting special favors from government.

It is not accumulation or lifestyles of the rich and famous which count, but free from worry in day-to-day living for all of us. We are achieving this. Incomes have gone up 10 times on average worldwide since 1900. Now, today, there are more overweight (one billion) than malnurished people (800 million). Pretty soon they'll be giving the stuff away. (And here of course I dont mean housing or health :-) ).