Inflation: Science vs Ideology and the Crisis of Economics

Blair Fix is a political economist from Toronto, Canada. He spends his time thinking about the future of humanity and how we can create economics that’s relevant to the real world. He is a researcher who publishes peer reviewed journal articles and also writes for a popular audience on his blog, Economics from the Top Down.

Josh Levent is a designer, hacker, and thinker from Bern, Switzerland. Aside from teaching and research at the Bern University of Applied Science, he is trying to figure out how things “really” work.

Talk of inflation is everywhere at the moment. Most countries are reporting higher-than-usual levels of inflation.

But the headline numbers hide a dirty secret. The prices used to calculate inflation vary a lot between different commodities. In fact, this variance is often larger than the rate of “inflation” itself. Noting this feature, political economists Jonathan Nitzan and Shimshon Bichler observe:

Inflation certainly involves a rise in the average price of commodities; but that is like saying that the average outcome of a game between two basketball teams is always a draw: one team’s win is another’s loss. (Nitzan & Bichler)

In The Truth About Inflation, Blair reveals (with helpful graphics) the absurdity of relying on a single indicator of inflation. He points out that in about 100 years of data on US CPI inflation, the average rate is 2.8%, but the average standard deviation (between the price change of different commodities) is 5.2%.*

There are two things happening here. First, the COVID-19 pandemic has caused many supply-chain shortages, which have led to price increases. Second, (and perhaps more importantly), when inflation starts to rear its head, companies raise prices to bolster profits. In the United States, it appears that inflation has systematically benefited large corporations. 

In this SuperSalon, we will talk about inflation. We will talk about how to measure it, the differential price changes that make it up, where it comes from, and what its effects might be.

But we will also talk about economics as ideology. As Blair points out in ‘The Truth About Inflation’, there are signs that orthodox economics is not much of a science. If the credibility crisis in psychology is anything to go by, economics has a rude awakening ahead of it.

But aside from the issue of models failing to fit the real world, creeping instrumentalisation has hemmed in theory development. In economics, as in other sciences, the “shut up and calculate” crowd has gained strength. As mathematics and computing advance there is a growing variety of ways to apply mathematical methods. This has some benefits, but if theory development doesn’t keep apace, we risk pursuing irrelevant details and missing important ones.

• But what could a good science of economics actually look like?
• Who is developing new theories that can explain economic phenomena?
• And, to close the circle, should you  believe official inflation numbers?

Join us, to discuss these questions and more, in this exciting SuperSalon on inflation, economics, and how we explain the world around us.

* This is actually quite a generous comparison, since a standard deviation on either side of the data contains 68% of the samples. So the mean and standard deviation here tell us that 68% of the component price changes were between -2.4% and 8%. That is to say, that even while the average prices have increased, a substantial number of things have decreased in price.

Reading List

The Truth About Inflation – Economics from the Top Down

Opinion | What scaremongering about inflation gets wrong – The Washington Post (washingtonpost.com)

Opinion | The Year of Inflation Infamy – The New York Times (nytimes.com) (block the nytimes.com cookies if you see a paywall)

16 Depth > Neutrality | CAPITAL AS POWER (blairfix.github.io)

Inflation rates are rising around the world — Quartz (qz.com)

How Economics Found Science …and Lost its Subject Matter | Institute for New Economic Thinking (ineteconomics.org)

Photo by Sean Robertson on Unsplash

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