According to mainstream economics textbooks, one of the primary functions of money is to measure the value of goods and services exchanged on the market. A typical statement of this view is given by Frederic Mishkin in his textbook on money and banking. ‘[M]oney … is used to measure value in the economy,’ he claims. ‘We measure the value of goods and services in terms of money, just as we measure weight in terms of pounds and distance in terms of miles.’
When money is conceived as a measure of value, the policy implication is that one of the primary objectives of the central bank should be to maintain a stable price level. This supposedly will remove inflationary noise from the economy and ensure that any changes in money prices that do occur tend to reflect a change in the relative values of goods and services to consumers. Thus, for mainstream economists, stabilizing a price index based on a basket of arbitrarily selected and weighted consumer goods, e.g., the CPI, the core CPI, the Personal Consumption Expenditure (CPE), etc., is a prerequisite for rendering money a more or less fixed yardstick for measuring value.
This idea – that a series of acts involving interpersonal exchange of certain sums of money for quantities of various goods by diverse agents over a given period of time somehow yields a measure of value – is another ancient fallacy that can be traced back to John Law. Law repeatedly referred to money as ‘the measure by which goods are valued.’ This fallacy has been refuted elsewhere and rests on the assumption that the act of measurement involves the comparison of one thing to another thing that has an objective existence, and whose relevant physical dimensions and causal relationships with other physical phenomena are absolutely fixed and invariant to the passage of time, like a yardstick or a column of mercury.
This post was published at Ludwig von Mises Institute on Friday, August 29, 2014.