The Bishop of Ely and an early estimate (1707) of the purchasing power of income
Update 4/6/2014. When I wrote this post I had not yet read the Hume treatise mentioned by Robert Lucas. Yesterday I did and after a night of sleep the only conclusion can be that Robert Lucas, in his ‘Nobel’ lecture, willfully and consciously misrepresents David Hume’s take on the quantity theory of money. After explaining the a-priori theory of the quantity theory Hume explicitly (very explicitly) states that, in the real world, things did, after the influx of silver from the New World, not work out as the quantity theory predicted, which he attributes to ‘Changes in custome and manners’. This is not mentioned by Lucas which, considering the way how he uses his misrepresentation of Hume’s ideas to give some historical respectability to his own ideas, amounts to scientific swindle. Hume, of course, stands tall by putting his ideas to the test – and changing his mind when the test yields unexpected results.
I’m tinkering a bit with ‘the concept of the price level’. One popular concept is not really about the price level but about the purchasing power of money – a power more elusive than it seems. To avoid all kind of measurement problems and problems with historical comparisons, many macro models even assume only ‘1 unchanging final good’. A predictable value of money, instead of the ability of households or companies to pay the debts, gets precedence in such theories. For this tradition one may consult the ‘Nobel’ prize lecture of Robert Lucas, ‘Monetary neutrality’, which harks back to the (according to Lucas) a-priori, anecdotical, rationalist comparative statics of Hume (1752):
In formulating the doctrine that we now call the quantity theory of money, Hume stressed the units-change aspect of changes in the money stock, and the irrelevance of such changes to the behavior of rational people …. His development of the quantity theory was based largely on purely theoretical reasoning, though tested informally against his vast historical knowledge, and his belief in short run correlations between changes in money and changes in production was apparently based mainly on his everyday knowledge
The names of people like Irving Fisher and John Maynard Keynes come to mind. In this tradition not just the price level of goods is important but also the (changes of) the relative price levels of for instance wages or houses compared with the price level of goods or debts. In 1707, William Fleetwood (Bishop of Ely) published a book in this spirit, inspired by the questions how high the present cost of living of a student at university (based upon a basket of goods) was, compared with centuries old unchanged stipends, and if historical ‘money’ is an absolute, time-invariant measure of value (no). The article is mentioned by Ferger in a 1946 article (I hate paywalls). Remarkable aspects of the book (I love the internet) are its historical scope and the fact that it distinguishes, in a modern and scientific way, different kinds of price levels: goods on one side and income (rents, stipends) on the other side. See by the way p. 12 for college fees inflation. The Bishop’s basket of goods does not yet include new goods, though he was clearly aware of their existence: “neither your Founder, or any other founder … would admit of any expensive articles, which the corrupt Customs of the times … have made young people think necessary“. Present day student loans can be spent any way the students like. An improvement? Or as a non-neutral way of debt creation a corrupt custom of our time? Anyway – especially the rather impressing and systematic collection of data in the book shows that ‘cost of living’ estimates have surprisingly old historical roots (see also Diewert).