hb -
[...the fallacy of hedonic pricing is of course easily exposed by common sense: let us assume you are now using a processor that is twice as fast as its predecessor and are typing a letter in MS word. has your productivity doubled? according to the government it has.
imo, if productivity and GDP growth are really influenced in a major way by an increase in computing power, it should be possible to measure this in REAL dollars...after all, if the increase in computing power enhances performance to the extent the government assumes with its hedonic pricing calculations, shouldn't this show up in real economic output? if it doesn't, the improvement can not possibly have occurred.
the problem this creates is that both the Fed and businessmen are effectively basing their decisions on fantasy data. this has led to a far too lax monetary policy over recent years, and enormous malinvestments in its wake...]
Great post, but you don't go far enough. All economic data is 'fantasy data'.
Every free economy is merely an agglomeration of all the individual choices made by individuals, in their role as both consumers and producers. Statistical measurements of this are limited to the observations that can made of the money prices that mark the exchange of money for goods and services. But any results are inherently rendered largely meaningless by the fact that no such thing as objective valuation exists.
The fundamental basis of economics, and Austrian economics in particular, lies with the combination of the subjective theory of value and the law of diminishing marginal utility. Without trying to detail the theories, the results are both clear and understandable.
No two individuals would place the same money-equivalent valuation on a television set for a number of reasons.
First is just a matter of individual preference for televisions over all the other goods and services that would be have to be precluded from acquisition if the available funds are spent on televisions.
Secondly, the willingness of an individual to pay a given money price for a television depends in part on both the amount of money he has available and on how many televisions he already owns. The more he has of either money or televisions, the lower its subjective marginal utility, and the results not only vary from individual to individual, but also vary minute to minute for a given individual. The illusion that a given television will tend to a fairly narrow range of money prices is not an indication of an objective value, but rather a combination of cost competition among suppliers and the great difficulty in enforcing price discrimination among the wide variation of consumer subjective valuations.
Trying to derive meaning from even a perfect record of all the money exchanges made in an economy is no more inherently valid than associating patterns of animal shapes with distinctive clouds or the relative positions of stars as viewed from a given point in space.
Jumping to the overall economy and its measurement, imagine an economy where every product and service had the unit productivity growth characteristics of computers and semiconductors. Every year, every product and service could be purchased for the wages earned by 20% less hours of work than the year before. There is no doubt that this would be an economy characterized by a rapidly increasing real standard of living.
However, I also would expect that any attempt to measure GDP growth would likely result in a negative number, and that the revenue and profit growth of individual companies also could well be negative.
Thus, we have an amazingly successful economy, but one which may not be able to generate financial profits and returns for its investors. Profits, inherently tied to economic measurements, are not only not necessarily tied to real economic progress, but may also disappear due to competition.
Summary -
There are strong reasons to believe that real economic progress does not necessarily lead to strong financial results for either companies or investors. In the end, investors may have to take their gains largely from the increased purchasing power of their (possibly diminishing) capital.
Regards, Don |
