In a recent post, Tyler Cowen offered the following criticism of my views on inflation:
More seriously, Scott seems to dismiss the price level concept altogether. For instance he once wrote: “In the past, I’ve frequently argued that inflation is an almost meaningless and useless concept. I’m not even aware of any coherent definitions of the concept.” I don’t think this is a defensible point of view, and you have to compare Scott’s criticisms of the o1 model to his own approach, which is fairly nihilistic. And I think wrong. If inflation were higher and someone offered Scott an inflation-indexed contract to sign, would he be unable to evaluate such a transaction? Obviously not.
In a previous post, I provided a fairly detailed response to this criticism. More recently, Bryan Caplan directed me to a 2004 post by Tyler that seemed almost as nihilistic:
Peter Gordon looks at a 1902 Sears Roebuck catalog and asks whether money was worth more back then.
Of course it depends how much you are given. $5.00 back then goes a longer way, but I would rather earn $100,000 a year today, and yes that is not adjusting for inflation. For Peter modern pharmaceuticals are the clincher:
Would you want their best 1902 camera for $7.90? Probably not. High-end cutlery for 6 for $1.79? Why not? A great western saddle for $8.95? Sure.
It’s the Sears “Drug Department” that is the real eye opener. “Fat Folks, Take Rose’s Obesity Powders and Watch the Result … $4.20 per dozen boxes.” Herb laxative teas for 16 cents a box may be OK. Dr. Rose’s Arsenic Complexion Wafers 35 cents a box may have few takers today. Vin Vitae for 69 cents (“Not a Medicine … Not Merely a Tonic”). The “White Ribbon Secret Liquor Cure” went for $2.50 a box. The list goes on and does focus the mind.
My question for today: Does this mean that we should adjust the gdp deflator series to show ongoing deflation for the 20th century?
At the time the post was written, official price level data showed the cost of living to be nearly 20-fold higher than in 1900, and yet Tyler expresses doubt as to whether there had actually been any inflation at all!
Perhaps I expressed my views with more over-the-top language than Tyler, but I believe he shares my skepticism as to whether adjusting wage income by government price indices allows us to ascertain how living standards have evolved over time.
