Re: RE: Re: Re: RE: Re: new cpi
How our consumer tastes change over time is explained by Robin Marris as an electro-chemical change in the brain. We learn to consume and form habits. There is a section or chapter on "Demand" in Marris' book Managerial Capitalism that lays this out in a persuasive way. There is also quite a bit of statistical work on habits of consumption -- i. e. once we learn to consume something it is hard to do without. See Houthakker and Taylor, for one example. Can't remember the name of the book. Gene Coyle "Devine, James" wrote: > Eric writes >... Strong evidence exists, I think, that ... "utility" becomes > more demanding over time. This is something that the CPI assumes away but is > something very important for determining subjective experiences of the > standard of living in differ times. > > >For instance, if you had the EXACT same set of goods consumed by someone > who lived in, say, 1950 your "real material standard of living" would be > exactly the same as this person in 1950. That is, according to the > assumptions behind the CPI. > > >But, in fact, you would likely be very unhappy if you had to consume the > exact same goods someone from 1950 consumed. Imagine that you had to drive > the incredibly unsafe cars driven in 1950? Imagine if you had to use the > same phone as they did. Imagine if you had the sort of TV they had. > > >This points out the real flaw of neoclassical price indices. It assumes > people's preferences do not change over time. But over time we become > more demanding (endogenous impact of capitalist expansion of quality of > goods). THe CPI does not take account of this, however.< > > Dean Baker has written about this too. In the Marxian tradition (e.g., Mike > Lebowitz) this is referred to as an increase in needs. > JD
RE: Re: Re: RE: Re: new cpi
Eric writes >... Strong evidence exists, I think, that ... "utility" becomes more demanding over time. This is something that the CPI assumes away but is something very important for determining subjective experiences of the standard of living in differ times. >For instance, if you had the EXACT same set of goods consumed by someone who lived in, say, 1950 your "real material standard of living" would be exactly the same as this person in 1950. That is, according to the assumptions behind the CPI. >But, in fact, you would likely be very unhappy if you had to consume the exact same goods someone from 1950 consumed. Imagine that you had to drive the incredibly unsafe cars driven in 1950? Imagine if you had to use the same phone as they did. Imagine if you had the sort of TV they had. >This points out the real flaw of neoclassical price indices. It assumes people's preferences do not change over time. But over time we become more demanding (endogenous impact of capitalist expansion of quality of goods). THe CPI does not take account of this, however.< Dean Baker has written about this too. In the Marxian tradition (e.g., Mike Lebowitz) this is referred to as an increase in needs. JD
RE: Re: Re: new cpi
one problem is that as you drink more booze, your tastes change (as your judgement falters). As a result, it sure seems that some of my students get _increasing returns_ to drinking, until they reach the tipping point (tippling point?) and bow down before the porcelain god. JD Michael wrote, > Let me see if I have this right: if the price of champagne > increases and I switch to beer, then substitution dampens > the effect of inflation. Eric writes:> I believe what is involved is the BLS distinguishing between the income and substitution effects of price changes. As the price of champagne increases you are hurt as you must now guzzle beer instead of champagne. This saddens you; you are on a lower indifference curve. Yet to get you back to the original indifference curve you were on (before the increase in the price of champagne) you don't have to give given enough income to return you to the exact same consumption bundle you had before. Because of the relatively higher price of champagne you now _prefer_ to consume more beer than before. Due to the curvature of the indifference curve the income you need to get to the same indifference curve as before is less than needed to get you to the exact same consumption bundle. This latter factor is how the new approach would lead to a lower rate of inflation (measured by how much income you need to get to the same indiffence curve as before). This is what the BLS would say, I believe.< Eric neoclassical hat in hand.
Re: Re: new cpi
Michael wrote, > Let me see if I have this right: if the price of champagne > increases and I switch to beer, then substitution dampens > the effect of inflation. I believe what is involved is the BLS distinguishing between the income and substitution effects of price changes. As the price of champagne increases you are hurt as you must now guzzle beer instead of champagne. This saddens you; you are on a lower indifference curve. Yet to get you back to the original indifference curve you were on (before the increase in the price of champagne) you don't have to give given enough income to return you to the exact same consumption bundle you had before. Because of the relatively higher price of champagne you now _prefer_ to consume more beer than before. Due to the curvature of the indifference curve the income you need to get to the same indifference curve as before is less than needed to get you to the exact same consumption bundle. This latter factor is how the new approach would lead to a lower rate of inflation (measured by how much income you need to get to the same indiffence curve as before). This is what the BLS would say, I believe. Eric neoclassical hat in hand.
Re: Re: RE: Re: new cpi
Doug wrote >All these "technical revisions" have been happening over > the last few years, and I'll bet this one's been in place for a while. Undoubtedly given how long the BLS tests things before they introduce it. But although this revision will reduce the measured inflation rate, it has very good foundation within the neoclassical theory of price indicies. It attempts to generate a "constant" utility basket of goods as opposed to a fixed basket of goods. The former is actually was is required by the neoclassical theory of price indicies. Although it can be important to point out the political factors behind any change in the CPI (among the goals of this political agenda is to reduce the rate at which social security payments grow over time), it is also important to point how that any neoclassical price index inherently violates certain key claims of the theory, one of which is not not make interpersonal utility comparisons. Not only does a intertemporal price index compare utilities of different people it does so across time. Strong evidence exists, I think, that over time "utility" becomes more demanding over time. This is something that the CPI assumes away but is something very important for determining subjective experiences of the standard of living in differ times. For instance, if you had the EXACT same set of goods consumed by someone who lived in, say, 1950 your "real material standard of living" would be exactly the same as this person in 1950. That is, according to the assumptions behind the CPI. But, in fact, you would likely be very unhappy if you had to consume the exact same goods someone from 1950 consumed. Imagine that you had to drive the incredibly unsafe cars driven in 1950? Imagine if you had to use the same phone as they did. Imagine if you had the sort of TV they had. This points out the real flaw of neoclassical price indices. It assumes people's preferences do not change over time. But over time we become more demanding (endogenous impact of capitalist expansion of quality of goods). THe CPI does not take account of this, however. Eric
Re: RE: Re: new cpi
Eric Nilsson wrote: >RE >> It's been clear for a long time that the BLS has largely gone along >> with the Boskin stuff . . . > >I imagine that the behavior of the BLS towards "revising" (sic) the CPI >changed once Katherine Abraham left as head of the BLS. > >Her term expired in about September 2001. I bet no one in the administration >wanted to offer her a new term. She was a strong advocate against mindlessly >changing the CPI methdology. Doubt it. All these "technical revisions" have been happening over the last few years, and I'll bet this one's been in place for a while. Doug
RE: Re: new cpi
RE > It's been clear for a long time that the BLS has largely gone along > with the Boskin stuff . . . I imagine that the behavior of the BLS towards "revising" (sic) the CPI changed once Katherine Abraham left as head of the BLS. Her term expired in about September 2001. I bet no one in the administration wanted to offer her a new term. She was a strong advocate against mindlessly changing the CPI methdology. Eric .
RE: Re: new cpi
Michael Perelman writes: >I had not heard about the new cpi method that is about to be used. I just saw the notice in yesterday's WSJ. Has this been totally off the radar screen?< Doug writes: It's been clear for a long time that the BLS has largely gone along with the Boskin stuff, despite protestations of independence. Incrementally, in technical changes. They're getting there, just a few adjustments more. They probably have to, because Congress wants it, and Congress sets their budget. Conceptually the new technique is supposed to compensate for substitution. But if you love Washington merlot but its price goes up by 25% so you switch to Budweiser, aren't you suffering a loss of welfare? Why should a price index write that out? -- there's a lot of potential here: the price of Prozac goes up so you substitute booze for it. Obviously, there's no loss of welfare, so the CPI should write that out, too. JD
