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Source link: http://archive.mises.org/5802/12-hamburgers-and-600-cars/

12¢ Hamburgers and $600 Cars

October 25, 2006 by

What might prices be if the money supply had been fixed since 1959?

According to the CPI, the 2005 price level was 6.7 times higher than it was in 1959. However, in the absence of an expanding money supply, the price level would have been one–fifth as high as it was in 1959. Due to economic growth, the price level in this period would have fallen by 80 percent. Therefore, the expanding money supply over the last 46 years has resulted in a current price level over 34 times higher than it otherwise would have been.

Let’s put this in everyday terms. Suppose these estimates represent the changes in the prices of goods such as hamburgers, cars, and housing. According to these numbers, a hamburger that cost 60¢ in 1959 would have cost $4 in 2005. If the money supply had been fixed, however, that hamburger would only cost 12¢ today. Similarly, a $20,000 car in 2005 would have cost slightly less than $3,000 in 1959. Again, without the monetary effect on prices, that car would only cost $600 today. The price of a $45,000 house in 1959 would have increased to $300,000 in 2005. With a fixed money supply, that house would cost $9,000 today.

FULL ARTICLE

{ 29 comments }

jeffrey October 25, 2006 at 8:13 am
anon October 25, 2006 at 9:10 am

I thought austrians dont believe in the price level.

Also, wouldnt a similar argument apply to the income side.

Mark Brabson October 25, 2006 at 9:36 am

anon:

Yes, it would apply to the income side, but that would not be a bad thing. A steady or slightly declining price level would strengthen an individual’s savings.

As it is, the expanding fiat money supply destroys individual savings via inflation.

Reactionary October 25, 2006 at 9:36 am

I would think there would be downward pressure on wages as well. However, the most dramatic difference between inflation and deflation or a steady money stock is that the latter rewards savings. Most importantly in my opinion, you could simply keep your savings in a vault rather than risk it in speculative ventures.

Marco Saba October 25, 2006 at 9:57 am

If you go in Nepal, you can find very low prices. You can live there very well with only 600 USD per month. (avoiding those places for foreigners like 5 star hotels)

Don B October 25, 2006 at 10:30 am

A good piece. A nice companion would be looking at the real wage level in comparison to the price adjustments through that period as well. That’s the real magic of true capitalism with sound money. Productivity reduces the cost of living while raising real wages. The ultimate win-win for humanity versus the current status where political and financial elites siphon off through inflation huge chunks of the value created by productivity increases.

Dr. Mark Thornton October 25, 2006 at 11:03 am

Mark Brandly has done us all a great service. We may not be great explaining how the Fed picks all of our pockets on a daily basis, but now we can tell people that “if it wasn’t for the Fed you could buy a new Honda Accord for $600″!!! (or how about buying a resturant hamburger, french fries, and a coke and get change back??)

Three cheers for Mark!

Dr. Mark Thornton October 25, 2006 at 11:10 am

I think that Brandly made it perfectly clear about how Austrians feel about price levels. In fact, if anything, he might have overdone mentioning those concerns. It would also apply to the income side as well, but it is my understanding that with deflation, capital and labor capture most of the productivity gains rather than the Fed.

billwald October 25, 2006 at 11:56 am

Nepal? Who wants to live in Nepal! I wouldn’t live there if it was free. I’m retired in the Seattle area and by $40k or so income is twice my basic living expenses. If we moved to Mississippi we could be living on the rich side of the tracks but that would be like moving to Nepal.

Second, one couldn’t buy a new car for $600 in 1960. Since 1950 or so an entry level new sedan has cost about a half year’s pay for anyone with a decent union job – and the cars are MUCH better built now. Back then tires lasted 10,000 miles, a new battery needed every 2 years if you were lucky and a tune up every 1000 miles.

Third, prices are meaningless without knowing wages. Back when gas was two bits a person could buy maybe 3 gallons with an hour’s wages. Now one can buy 10 gallons for an hour’s work.

Fourth, “However, if the money supply was fixed, prices would tend to fall.” And so would wages.

If the money supply was fixed then each person would have half the money in his pocket compared to 1960 due to population increase. It is psychologically easier to spend $100 if one has $1000 in one’s pocket than to spend a dime if on is down to one’s last dollar. Business activity would fall.

Fifth, since credit cards people create their own money. Would you gold bugs ban credit cards and revert to the bad old days when the banks – and the Mob – controlled access to credit?

Don Robertson October 25, 2006 at 1:09 pm

Mark Brandly’s analysis is empirical wizardry, leaving me the opportunity to expand by asking within his virtual framework…

Incomes? The data is there to make a comparison within this empirical framework, and even to show us how clever empirical economics is, so why is income left out of the picture?

Standards of living?

The data is not there, and really, that is what we’re all interested in, isn’t it? Economics means nothing, if we cannot measure how well we live on this particular spot on the planet, and indeed, how well those who will follow us in the future will live here as well.

If we, or they, all die due to the rapacious apetite of an economy out of control demanding ever more of the very essense of sustenance to feed economic growth , the cleverest empirical analysis of the “data” will not mean did-ily-squat.

That’s sure a fine Austin though. I bet is cost less than $2500 in 1959.

Come back Mark Brandly, and bring us more pictures of such fine automobiles.

Don Robertson, The American Philosopher

mikey October 25, 2006 at 1:31 pm

Actally it’s an Aston Martin.An Austin is a more downscale English car held together with wet string and wishfull thinking.
(Long-suffering Austin owner)

Scott D October 25, 2006 at 3:06 pm

Don R.,

First off, just about every post you leave here drips with condescension. You might want to tone that down a bit if your goal is to persuade. It gives you the air of a grouchy crank.

Secondly, your point is valid to some extent about the need to compare other data to get a more complete picture, but I think that you overstate the case. The effects of inflation upon real wages and living standards might not be apparent to the newbie economist, but there are plenty of articles here that cover that subject in some depth. What is not so obvious is the degree to which inflation has been occurring, since increases in productivity serve to hide its effects.

Thirdly, I’m curious to know what your stand is upon Austrian economics (just the economics, mind you, not sociology, ie. Rothbard), which does reject much of the empiricism of mainstream economics as fallacious and ultimately self-defeating. I’ve watched you take some pot shots from the sidelines and it makes me wonder why you’re really here.

George Gaskell October 25, 2006 at 4:09 pm

It appears to be an 1964 Aston Martin DB5, the car that appeared in Goldfinger. About 1000 were made, and only a handful original examples remain in existence.

Jordan October 25, 2006 at 4:12 pm

Just wondering:

The $600/$0.12 in terms of 1959 dollars, correct?

If we re-adjust for the 6.7x that the price level has increased since 1959, then that would be about $4000/car, $0.80/hamburger, using 2005 dollars, correct?

So, what I’m saying here, is although the car may cost $600 and the hamburger $0.12 with a steady money supply (since 1959), it would feel like paying $4000 for the car and $0.80 for the hamburger to put it in more-familiar 2005 terms. I know this assumes a lot, but just trying to make it more familiar (since I wasn’t alive in 1959).

George Thomas Kysor October 25, 2006 at 5:53 pm

Did you know that today you can legally see (in streaming video) a full-screen (you have to click on the full-screen icon) first-run , full-length (one hour, 49 minutes) Movie/Documentary entitled FREEDOM TO FASCISM by Aaron Russo absolutely free at Google Video? It’s about the Federal Reserve and the unconstitutional Federal Income Tax on one’s salary. Both parts make for a good background to this dscussion; going off the gold standard with the Fed in charge necessitated unconstitutionally collecting a tax from wage earners. About the only objection I have to the documentary is Russo’s emphasis that, in the absence of the Fed, the government itself should “regulate” the money supply, but he nevertheless does cite the argument for a gold standard. Hey, since the movie is free, why not pay a teenager $5 to watch it? http://video.google.com/videoplay?docid=-4312730277175242198&q=freedom+to+fascism&hl=en

greg October 25, 2006 at 8:34 pm

Don> My education in economics is meager,…

Gee, no kidding? You could make your posts shorter if you dispensed with the obvious.

George Thomas Kysor October 25, 2006 at 9:21 pm

Don’s geocity links should end in “html” instead of “com”.

Nick Bradley October 25, 2006 at 10:51 pm

I looked around online and I found out that a top-of-the-line car (cadillac, corvette, etc.) in the mid-1960s ran about $4,000. According to the CPI, that car would go for about $26,000 nowadays. However, a 2007 Corvette goes for $44,000 (entry level), with the covertable starting at the suped-up Z06 starts in the $70,000s. One guy wrote online that his 1970 Nova (with everything, V8, A/C, etc.) cost him $2,000 off the lot. That car should cost $10,500 today, but I doubt there is anything comparable.

So, I see a big discrepancy between the CPI and what prices actually are nowadays. Comparing the official government CPI calculator and the official housing price calculator, housing prices are 78% higher than they should be (comparing 1975 to 2006).

What gives? My hunch is that inflation has been grossly underreported for decades.

Publius October 26, 2006 at 12:20 am

Whoa! Way cool!

Only I went back a bit further.

Assuming consistent money supply…

A spiffy 1925 Hudson Sedan would cost only $217 today.

Don’t know about a burger, but a “Sunday Chicken Dinner” in a nice family restaurant would be about 11 cents today (13 cents with tip!)

And today you could nail a roomy 3 bedroom house in New Jersey for under $1000!

Peter October 26, 2006 at 1:48 am

So be it. I know I the pain I can cause some. Thinking is hard.

Nevertheless, if you’re going to keep posting here, you might at least make an attempt!

Samuel Odell Campbell October 26, 2006 at 2:16 am

How much would a typical house of 1,000 sq. ft. cost in 1959? In the West Coast? East Coast? Mideast? South? Etc. In terms of typical worker’s hourly wages?

I don’t think houses have changed that much as far as utility and comfort to the user is concerned.

Sure, things like furnaces and ovens are more energy efficient nowadays, but I’d guess they don’t affect the wallet too much.

H. Galley October 26, 2006 at 7:40 am

OFF TOPIC
Don, do you happen to suffer from temporal lobe epilepsy? If you are not sure, I would kindly suggest you visit a physician who can diagnose such things.

David White October 26, 2006 at 7:43 am

billwald:

You’re welcome to insult the state of Mississippi (where my wife was born and raised and one brother now lives), but all it does is expose your ignorance about the South. The Mises Institute, after all, is headquartered in Alabama.

On second thought, this makes perfect sense, as your ignorance about both goes hand in hand.

Gary Johnson October 26, 2006 at 8:30 am

“Constant money supply?” I thought that under a gold standard, the money supply would increase at a rate consistent with gold production, which is roughly equivalent to the rate of population growth.
Also, I don’t see the point in mentioning that automobiles are better made today than in 1959, unless there is some link between technological innovation and monetary growth. You’d have a harder time arguing that houses are built better today than before.

Mark Brabson October 26, 2006 at 9:45 am

As an aside:

The money supply in a free economy doesn’t have to be gold, silver, platinum, copper or anything else. You can trade in tobacco, grain or anything else. The market will choose its own best medium of exchange. If a bank or other institution chooses to coin “money” than the market would be free to accept or reject such coins. The tendency over time would be for any medium of exchange to appreciate in value, creating the effect of a steady or slightly declining price level.

For international trade, necessity would dictate use of gold or silver for such trade, with a fixed exchange rate, based on weight of coinage.

What is needed is for government to take their central banks and butt out.

billwald October 26, 2006 at 11:07 am

I apologize to citizens of Mississippi. I meant (another state).

Under our current medium of exchange – the electronic banking system – “money” functions as an IOU and not as a storage of a hard asset.

George Gaskell October 26, 2006 at 12:47 pm

I don’t think houses have changed that much [since 1959] as far as utility and comfort to the user is concerned.

The square footage of the average house has increased over 100% since 1950, and more than 50% since 1975.

At the same time, the number of persons per household has declined from nearly 3.5 in 1950 to less than 2.5 today.

Under our current medium of exchange – the electronic banking system – “money” functions as an IOU and not as a storage of a hard asset.

And what, under this IOU, does one owe?

Brian Gladish October 26, 2006 at 3:10 pm

Nick,

The many improvements/changes mandated by the state have increased the price of automobiles beyond the level of inflation (and made them a maintenance nightmare). Of course this is one of the big problems with inflation calculation as it is no small problem to factor in the impact of product revisions.

Kevin Breen October 28, 2006 at 11:51 pm

According to the Associated Press Article on foxnews.com that professor Brandley linked to in “Don’t Believe Those Inflation Numbers,” the bureau of labor statistics reported that the price index was an inaccurate measure 24 percent of the time between 1986 and 2005. The BLS may have made an effort keep that statistic low, and I don’t know the figures used to calculate this one, but it seems high given the constant reporting methodology.

In any circumstances, prices on cars are difficult to compare because “top of the line” cars from different time periods are different products with different features. This is, of course, directly related to the statement Mr. Gladish made above.

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