Economist's Message 5
It is entirely possible I am failing to make myself clear— rather than your failing to comprehend a clear message. It is exactly because your claims appear to be so outrageous, I thought it better to seek clarification privately rather than call you out publicly. However, your responses have so far largely reinforced my initial impression.
How can I be so immovable after so much feedback? Because nothing of substance that you have added has come as news to me. I keep nodding my head and thinking either “yes, I agree, and if you think this is a point of dispute I must again try to clarify” or “yes, I already understood that to be your position"
To reply to your latest comments, I'd like to summarize your arguments. Correct me if I'm wrong, but I think these are your main points:
1. Economists are aware that prices change over time.
2. Price change can be objectively measured.
3. Economists have developed price indexes that are designed to deal with changing prices (Fisher indexes, etc). These indexes deal with the base-year problem, and so get rid of uncertainty in the calculation of real GDP.
I think this is an unhelpful summary. However, in the interest of helping sort out your thoughts, I will proceed.
"I agree with point 1. Yes, economists are aware that prices change over time. This is why they try to adjust for inflation."
Good. If we could not agree on that, then this would be a truly useless discussion. Can we also agree then, that the economists at BEA, say, are deeply aware of the base-year problem?
Whether point 2 is valid depends on how we define price change. If we simply mean the nominal change in the price of a commodity, then yes, price change can be measured. But this is not how economists measure price change. Economists want to differentiate between a "pure" change in price, and a change in price that reflects a change in "productive value" (i.e. quality). So take computers. When economists construct price indexes for computers, most of the change in indexed price is due to their measurement for quality change. Since this measurement is inherently subjective, it negates the objective measurement of price change. So no, price change (in the sense meant by economists) cannot be objectively measured. See Jonathan Nitzan's article for an illuminating discussion of this problem.
Yes and no.
The reason for quality adjustment is that not everything is a commodity in the strict sense. A personal computer of 1986 and a personal computer of 2016 are *not* the same. Because Apple IIe’s with 256K RAM are not currently in production, we cannot observe a price for currently-produced Apple IIe’s with 256K RAM. Clearly, a similar computer today selling for the same nominal price is a *very* different thing. So YES there is uncertainty in our estimate of prices because we *absolultely* need *some* way to account for the fact that the items are not identical! I meant for this to fall under the umbrella of "the uncertainty in the surveys which provide the prices and quantities” (email, 3/27 @ 6:15pm)
But, as I stated in that same email "taking each year’s prices and quantities as given, any ‘uncertainty’ [meaning, relating to the base-year problem which we were discussing].., is almost certainly small” in comparison.
In short, while I understand your concern regarding this point, I don’t understand why you think it is relevant to the base-year problem, specifically.
"On point 3, I agree that economists have indexes that "deal" with the base-year problem. These indexes take as inputs changing prices over time, and they return a unique value for the price index. So in a mathematical sense, there is no uncertainty in these functions. As such, they return an unambiguous value for the growth of real GDP.
The problem is that there are an infinite number of functions that could do the same thing. They each take changing prices as inputs and return an unique price index. But each assigns different weights to the price change of different commodities. The challenge is to show that your chosen method is the CORRECT one. This means showing that ALL other methods return the WRONG price index, and thus the wrong measurement for real GDP."
No! Absolutely not!
1. Recognizing that there are an infinite number of ways to aggregate does NOT mean that the measurement for real GDP is *uncertain*. GDP is an index of the value of output measured at market prices (or, to head you off on this point… as near to market prices as possible— e.g., owner’s equivalent rent)
2. The challenge— for construction of GDP measures— is to reflect that as accurately as possible. To that end, chaining pretty unambiguously improves upon simple base-year indices. As I wrote previously "The point is to chain together short enough periods that the weights don’t much change, and therefore the choice of mean also doesn’t much matter.” (email, 3/27 @ 5:24pm)
3. This does *not* mean, however, that GDP is the “CORRECT” measure of *output.” The choice of GDP as a measure of output is normative— "Orthodox economists *choose* relative prices as a proxy for relative productive value.” (email, 3/27 @ 5:24)
4. Given the normative choices in GDP as a measure of output, chained Fisher is clearly superior to base-year Laspeyres indexing. I’m not saying it corrects completely for the problem and therefore the measure is perfect. I’m saying the point of chaining is to address a particular problem.
In your first email, you wrote that chained indexes get "closer to the truth of things". But how do we know this? You have not given any objective criteria by which we can judge if one index is better or worse than any other. Instead, you are arguing by decree.
This is pure insult. I’m talking about chaining GDP versus simple base-year. YOU said that GDP is uncertain because of the base-year problem. That problem is known. The POINT of chaining is to correct for this *exact* shortcoming in methodology. Do you understand this?
It’s like we have two “yardsticks”— one 36” and the other 37” and we have a philosophical reason for measuring things in 36” units. If something is just as long as one stick but not the other, it’s not uncertain how many yards long the something is. One of the “yardsticks" more accurately measures things in our desired 36” yard!
(Again, exhaustedly, that doesn’t mean we *should* be measuring things in units of 36” as opposed to, say, kilograms. But given that choice, it is *clearly* superior to use a 36” yardstick.)
Likewise, we *know* that base-year indices do not accurately reflect productive value— given the orthodox price-based normative choice for value. Given the normative choice, we *know* exactly why base-year indices are— over time— a bad method for aggregation. So we use a *better* method. Meaning one which is more consistent with the *normative choice*. I have no idea where I’m losing you, here.
As I wrote previously "Using a Fisher index (or, really, any chaining strategy) instead of Laspeyres simply aims to bring the realized values in line with the philosophical ideal by taking into account the changes in relative prices so fundamental to the philosophy.” (email, 3/26 @ 2:14pm)
You are simply stating that the Fisher index is the correct measure of inflation.
This is a terrible misrepresentation, and very much an erosion of trust.
First, I have stated repeatedly that the choice of aggregation is based on a normative judgement.
"Now maybe you don’t like the spending biased revealed preference implication of price weighting. (Averaging component growth rates by expenditure shares is not obviously appropriate from a welfare perspective, for example.)” (email, 3/25 @ 6:28pm)
"Again, this doesn’t make market prices the appropriate basis for value.” (email, 3/26 @ 2:14pm)
"Given* the particular (philosophical) values implicit in the entire exercise, chaining is necessary in order to produce an index which better *reflects* those assumed values.” (email, 3/26 @ 2:16pm)
"Orthodox economists *choose* relative prices as a proxy for relative productive value. That’s normative.” (email, 3/27 @ 5:24pm)
Second, I have stated that Fisher indices are not the only way to correct for the base-year problem, even given the normative choice. My argument is only that given the normative choice, chaining with a Fisher index is an improvement in that the method more accurately reflects that normative choice. I never said it was the only way to do so.
"Using a Fisher index (or, really, any chaining strategy) instead of Laspeyres simply aims to bring the realized values in line with the philosophical ideal by taking into account the changes in relative prices so fundamental to the philosophy.” (email, 3/26 @ 2:14pm)
"You can chain index using only Laspeyres growth. And yes, the choice of mean (or even if to average) matters… a little. The point is to chain together short enough periods that the weights don’t much change, and therefore the choice of mean also doesn’t much matter.” (email, 3/26 @ 5:24pm)
So I’d appreciate it, that if you think I’m saying something which contradicts what I’ve pretty explicitly stated, that you be kind enough ask for clarification rather than assuming you understand my argument fully and assign to me the *least* generous interpretation of my words. It’s exhausting to keep repeating myself and *still* have you misrepresent my position so obviously.
Anyone is allowed to decree that they want to measure growth a certain way. But it needs to be explicitly stated that this is a measurement based on a subjective decision. When you acknowledge this, you do not get to claim that your index gets "closer to the truth". It is a normative claim, and nothing more
In case it’s not yet clear, we agree regarding the normativity inherent in GDP as a measure of output. But your use of “closer to the truth” is stripped from the context I provided. I have striven mightily to explain that the “truth” I mean here is that the measure should be constructed as consistently as possible with the *normative* choice—NOT that the measurement yields the “truth” of output.
"This is how real science is done."
This is social science, and the normative choices are fundamental.
But this astronomical example is— even apart from that-- a terrible metaphor for our point of departure. A better metaphor ishttps://www.sciencemag.org/news/2012/02 ... no-results
Scientists were trying to measure neutrino speeds, but it turned out the equipment was bad. They didn’t say, well, there is uncertainty in the measurement. We don’t say that neutrinos can be observed to move faster than light if we use this machine that doesn’t really do what we want— in theory— for it to do. We simply accept the measurements made with better equipment.
I think we need to reflect on our debate so far. You initially wrote me to question my claim that chain-weighting hides uncertainty in the measurement of real GDP. Your exact query was:"why would choosing an index which attempts to get closer to the truth of things be “hiding” the problem rather than attempting to deal with it?"
My interpretation of your query depends crucially on your wording. You used the words "closer to the truth of things". I interpret "truth" as a scientific assertion. "Truth" means a a statement about the real world that is objectively verifiable. Thus, I read your query as saying this: chain-weighted GDP gets closer to objectively measuring the growth of the real economy.
Clearly I disagree with this assertion, as our exchange has shown. I think chain-weighting is an arbitrary decision, informed by economists subjective ideals. As such, official metrics of real GDP growth say nothing about the "real" (objectively verifiable) growth of economic output. When we take objective measurement seriously, we find enormous uncertainty in the growth of real GDP. Official metrics hide this problem.
Based on my interpretation of you query, I have repeatedly asked you to provide objective criteria that justify your claim that chain-weighted GDP gets "closer to the truth of things". Your response has been to express exasperation that I would even ask for such objective criteria. Instead, you redefine the word "truth". By "truth" you mean "the measure should be constructed as consistently as possible with the *normative* choice".
This is an odd definition of "truth". It means that any measurement that is consistent with our philosophical ideals is "true". That's a pretty low bar. For instance, suppose we are medieval members of the clergy. Our "philosophical ideal" is that the earth is the center of the universe. Because it is consistent with our philosophical ideals, the Ptolemaic (geocentric) model of the universe "gets closer to the truth". Copernicus and Galileo deserve their place in hell.
As far as I can tell, your arguments mirror this logic. You argue that economists believe that prices reflect productive potential. Given this normative (i.e. subjective) ideal, economists choose chain-weighted GDP as the most appropriate measure of economic growth. Because this measure most closely matches economists' normative ideals, it "gets closer to the truth".
This position is a devastating critique of real GDP. It means real GDP makes no objective claims about the real world. Instead, its purpose is to merely to reflect the subjective ideals held by economists. This is exactly what I argued in "The Aggregation Problem".
It means that most of the field of macroeconomics is a waste of time. There is no need for production functions or elaborate regressions to explain the growth of real GDP. Why? Because there is nothing to explain. Real GDP makes no objective claims about the growth of the economy. Instead, it is a subjective metric that is meant only to reflect economists' philosophical ideals.
The problem is that I see immense cognitive dissonance in your arguments. You acknowledge the subjective element of real GDP measurement. But then you use the language of science to talk about it. You use words like "truth", "unambiguously improves", "exactly", "clearly superior", "do not accurately reflect", "mis-measurement", and "correct for". This is the language of objectivity. We have no business using it when we are talking about a normative measure informed by subjective ideals. The best we can say is that this measure is consistent with our ideals. If economists talked about real GDP using this soft language, no one would take the measure seriously. And rightly so. The allure of real GDP is maintained only by constantly giving it the cloak of objectivity.
To conclude, we could have saved ourselves a lot of writing if you had expressed your position accurately in the first email. You should have written:
Chain-weighting does not "hide" the base-year problem, since there is nothing to hide. Real GDP is a normative metric. As such, its purpose is only to reflect the philosophical ideals of economists. It is not meant to measure any objective facts about the real world. Since chain-weighting better reflects economists' ideals, I consider it an improvement. It gets closer to what economists intended when they defined real GDP.