On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory

IV. “Measuring” Changes in the Purchasing Power of the Monetary Unit

IV “Measuring” Changes in the Purchasing Power of the Monetary Unit 1. Imaginary Constructions All proposals to replace the commodity money, gold, with a money thought to be better, because it is more “stable” in value, are based on the vague idea that changes in purchasing power can somehow be measured. Only by starting from such an assumption is it possible to conceive of a monetary unit with unchanging purchasing power as the ideal and to consider seeking ways to reach this goal. These proposals, vague and basically contradictory, are derived from the old, long since exploded, objective theory of value. yet they are not even completely consistent with that theory. They now appear very much out of place in the company of modern subjective economics. The prestige which they still enjoy can be explained only by the fact that, until very recently, studies in subjective economics have been restricted to the theory of direct exchange (barter). Only lately have such studies been expanded to include also the theory of intermediate (indirect) exchange, i.e., the theory of a generally accepted medium of exchange (Monetary Theory) and the theory of fiduciary media (Banking Theory) with all their relevant problems.1 It is certainly high time to expose conclusively the errors and defects of the basic concept that purchasing power can be measured. Exchange ratios on the market are constantly subject to change. If we imagine a market where no generally accepted medium of exchange, i.e., no money, is used, it is easy to recognize how nonsensical the idea is of trying to measure the changes taking place in exchange ratios. It is 1. The Theory of Money and Credit [(yale, 1953), pp. 97ff.; (Liberty Fund, 1981), pp. 117ff.—Ed.]. 74 • monetary stabilization and cyclical policy only if we resort to the fiction of completely stationary exchange ratios among all commodities, other than money, and then compare these other commodities with money, that we can envisage exchange relationships between money and each of the other individual exchange commodities changing uniformly. Only then can we speak of a uniform increase or decrease in the monetary price of all commodities and of a uniform rise or fall of the “price level.” Still, we must not forget that this concept is pure fiction, what Vaihinger termed an “as if.”2 It is a deliberate imaginary construction, indispensable for scientific thinking. Perhaps the necessity for this imaginary construction will become somewhat more clear if we express it, not in terms of the objective exchange value of the market, but in terms of the subjective exchange valuation of the acting individual. To do that, we must imagine an unchanging man with never-changing values. Such an individual could determine , from his never-changing scale of values, the purchasing power of money. He could say precisely how the quantity of money, which he must spend to attain a certain amount of satisfaction, had changed. Nevertheless , the idea of a definite structure of prices, a “price level,” which is raised or lowered uniformly, is just as fictitious as this. However, it enables us to recognize clearly that every change in the exchange ratio between a commodity, on the one side, and money, on the other, must necessarily lead to shifts in the disposition of wealth and income among acting individuals. Thus, each such change acts as a dynamic agent also. In view of this situation, therefore, it is not permissible to make such an assumption as a uniformly changing “level” of prices. This imaginary construction is necessary, however, to explain that the exchange ratios of the various economic goods may undergo a change from the side of one individual commodity. This fictional concept is the ceteris paribus of the theory of exchange relationships. It is just as fictitious and, at the same time, just as indispensable as any ceteris paribus. If extraordinary circumstances lead to exceptionally large and hence conspicuous changes in exchange ratios, data on market phenomena may help to facilitate sound thinking on these problems. However, then even more than ever, if we want to see the situation at all clearly, we must resort to the imaginary construction necessary for an understanding of our theory. The expressions “inflation” and “deflation,” scarcely known in Ger2 . [Hans Vaihinger (1852–1933), author of The Philosophy of As If (German, 1911; English translation , 1924).—Ed.] “measuring” changes in the purchasing power • 75 man economic literature several years...