Monday, October 13, 2014

Cost is NOT Price, and Neither Cost, nor Price, are Value

Prices Provide a Misleading Measure of Dollar DevaluationForbes Magazine Online - Keith Weiner 
There’s not a human being alive who doesn't know the dollar is falling. Everyone over 25 has stories of what prices were like, way back when (and younger people have heard them). I remember when gasoline was 60 cents a gallon, and my mom remembers when it was 20 cents. 
Federal Reserve Chair Janet Yellen acknowledges the official objective to push the dollar down by 2 percent per year. This intention is behind the Fed’s ill-conceived loose money policy. 
It’s important to measure each drop. This is not just to keep a scorecard on the Fed, but because a change in the dollar skews historical comparisons and distorts business decisions, like giving increases to workers and pensioners....

Read the whole piece, and then come back...

The thesis statement of the piece is correct, in that prices provide a misleading indicator of currency valuation (and that our weak dollar policy is fundamentally wrong and destructive for that matter).

Unfortunately the author suggests that simply using a different price denomination and comparison is a less misleading indicator... In this, he's absolutely incorrect.

What you really want to compare is purchasing power parity (PPP) as measured by equivalent standard of living, expressed as a dollar cost in constant dollars normalized to average labor hour wage or compensation.

i.e. this item costs 5 minutes of average labor, this costs 8 hours, this costs 20 years; the cost to maintain this equivalent normalized standard of living across an aggregate population is 1940 hours of median labor wage etc... etc...

Note, this is NOT an expression of the fallacious labor theory of value, it is an explicit measure of purchasing power parity as actual cost, not currency denomination.

The critical function isn't price, and it isn't wage... it's cost, in this case expressed as a cost to value ratio as a normalized dollar (to make it easy to relate to wages and prices).

Cost is not price; it's a totalized measure of inputs including resources, time, and opportunity.