Ludwig von Mises was an exceptional economist; one of the best in all of history. But, like all humans, he still made little mistakes occasionally. One of his mistakes is his dismissal of price levels or in other words statistics that show the general trend in prices. He clearly states his opinion in his book Economic Policy: Thoughts for Today and Tomorrow. On the topic of inflation, he states:
“But with prices, there is no such thing as a “level.” Prices do not change to the same extent at the same time. There are always prices that are changing more rapidly, rising or falling more rapidly than other prices.”
The second two sentences of that statement are correct, but they do not prove the first. Certain prices will always change more rapidly than others with inflation, however why can’t we say that prices, in general, will rise? This is where Mises was wrong; price levels are valid and in fact crucial to proving many of Mises’ own points.
The point that inflation raises prices is one of them. All Austrian economists stress this point and I completely agree with it, but without price levels you can’t prove it. If there is no way to show that in general prices are rising, how can he support his claim that inflation, in general, raises prices? The opposition could easily claim that the rising price of one thing is offset by the lowering of another. But, Austrian economists can prove this isn’t true because of price levels, not just with theory.
Why should we say that price levels don’t exist? What is the problem with looking at a bunch of different commodities and determining a long-term trend for prices? I don’t see one. Price levels allow Austrian economists to look back and see that their claims about inflation are true. For example, it is easy to see that the value of the U.S. dollar has drastically declined over the years as the U.S. government has inflated. Because of price levels we know prices, in general, have gone up. Therefore, price levels do have a part to play in proving Austrian economic theory. For this reason, I believe it was a mistake for Mises to dismiss them.
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