Wednesday, May 23, 2007

The last word on hedonics: "unfungible"

Hedonics fails because it wants to factor unfungible (non-transferable) added value into inflation indexing. Are retired people living on Social Security supposed to eat fewer potatoes as TV performance improves for the same price? Let them eat high definition?

If the Timex I wear today cost half what it would because it is made overseas, that frees up money for potatoes. That it keeps immeasurably better time (almost immeasurable error) cannot be traded off for more of anything else.

Add value that cannot transfer should be counted as unfungible added income. Lucky American consumers; we get to keep up with some part of average income increase -- that the market could not squeeze out of us.

Only God could figure the right inflation number for by a more powerful computer at the same price (and I am sure He would have a very interesting explanation). Meantime, for we human beings, it is enough to know that the price of the computer went up or down so much and the power went up or down so much. Any attempt to melt the two together would leave us with something akin to Heisenberg's uncertainty: unable to delineate cost and value (as in, position and momentum) -- in other words, a not very helpful measurement.

Ironically (hypocritically?), Hedonics believers advocated an inflation measure (C-CPI-U) that would have skipped over changes in value if they pushed inflation numbers in the wrong direction. If the price of pork went up -- forcing consumers to eat more rice (because cheaper; not because they are going macrobiotic) -- C-CPI-U would have allotted less weight to pork in the basket of goods used to track inflation and allotted more weight to rice -- as if the substitutes were voluntary instead of led by price changes. Republican logic.

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