Home > Uncategorized > The Bishop of Ely and an early estimate (1707) of the purchasing power of income

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

Another, more empirical, tradition emphasises the purchasing power of income.

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).


  1. F. Beard
    June 3, 2014 at 8:52 pm

    An increase in the supply of money may 1) increase demand relative to supply (price inflation) or 2) increase supply relative to demand (price deflation). Typically, 1) is followed by 2) as new production overshoots new demand. A decrease in the money supply is almost always bad since it is very likely to decrease both demand and supply with a paradoxical rise in prices due to loss of economies of scale from the decrease in demand.

    But in either case (increase or decrease in the money supply) it’s very possible (almost certain in the case of a decrease in the money supply) that people will suffer economic loss.

    THEREFORE money creation and destruction is a problem in ETHICS.

    • June 4, 2014 at 4:37 am

      Why do you repeat standard textbook memes which are either inaccurate or false? The trillions of US dollar fiat money created has not produced the expected demand, as the last quarter US GDP growth is negative one percent (annualized).

      In fact, historical data show that excessive money growth has caused the secular decline in US economic growth. Even though the data only show correlation, I hypothesize cause because there are identifiable economic processes.

      • F. Beard
        June 4, 2014 at 5:38 pm

        It’s an old story by now that increasing bank reserves (what the commercial banks use among themselves) does not necessarily increase commercial bank lending which is over 90% of the money supply the real economy uses.

        Do you also object to “THEREFORE money creation and destruction is a problem in ETHICS.”?

      • June 5, 2014 at 12:31 am

        It’s not an “old story” – it is an “unheard of story” among academics (Krugman, Summers and MMTers) and central bankers (QEternity pushers) who want to create more money and negative nominal interest rates (Rogoff suggests it’s possible if cash is banned) to “improve” the economy.

        Too many stupid and arrogant people are trying to manage my life and other people’s lives. They have no idea what they are doing except they feel important pushing people around. They create their own ethical problems which they are not even aware of. They are probably psychopaths.

      • June 5, 2014 at 1:47 pm

        There you have it: the ECB has just announced a historic minus 0.1 percent bank deposit rate. So it could cost depositors 0.1 percent to store their money in a bank rather than under their mattresses. When you factor in the possible risk of deposit confiscation in a “bail-in” of a failing bank, using your mattress to store cash and precious metal becomes more and more attractive.

        One wonders about the probability of a systemic bank run across much of Europe and a massive printing of bank notes needed to meet cash withdrawals. Will there be a resurgence of the cash economy and a boost to cyber exchanges with crypto-currencies?

        How does negative nominal interest rates meet the stated objective of “stimulating lending to the real economy”?


  2. June 4, 2014 at 1:55 am

    I was once madly in love with a beautiful archeologist, she told me the indigenous of coastal California only worked a few hours a day. Catholic missionaries from Spain had a hard time convincing them to work. On the other hand, they had eaten most of the seals, mini mammoths on the islands were long gone by this time. Acorn harvests, lobster and abalone would have sustained. Trade in art extended fairly distant. The hot glue of those times was superior to this era’s. Income could once again be a minor subject in the grandeur of life.

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