Davos 2010 - IdeasLab with Yale - Robert J. Shiller
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00:00:07 00:00:13 Okay. I have a new working paper with the policy exchange in London.
00:00:13 00:00:17 But this is a new presentation of an idea I’ve been working on for 20 years.
00:00:18 00:00:22 We need a system of economic units of measurement
00:00:22 00:00:26 that make it possible for people to take account of real quantities,
00:00:26 00:00:28 in particular, inflation.
00:00:29 00:00:33 First, inflation has been a terrible problem.
00:00:33 00:00:38 This is a one thousand deutsche mark, right...
00:00:38 00:00:43 issued in 1923 but on top of it, you know, it says one billion marks.
00:00:43 00:00:46 This is during the German hyper inflation.
00:00:46 00:00:49 We have seen major instabilities in the past.
00:00:50 00:00:53 This is a Zimbabwean currency,
00:00:53 00:00:59 recently. his kind of instability is associated with political instability
00:00:59 00:01:00 and instability in our life.
00:01:01 00:01:04 I think the German hyper inflation led to World War II
00:01:04 00:01:07 and so these are serious problems.
00:01:08 00:01:13 Mismeasurement... we tend to write contracts in terms of currency,
00:01:14 00:01:18 but the currency loses and changes in value so it throws a huge randomness.
00:01:18 00:01:20 This shows the change in value
00:01:20 00:01:23 between a one percent and a three percent inflation.
00:01:23 00:01:26 These are considered moderate. All right, this is not hyper inflation.
00:01:27 00:01:31 But for someone who has 30 years in retirement it’s a major change.
00:01:32 00:01:37 My hero, Eduardo... Montalvo, who is president of Chile,
00:01:37 00:01:41 when they issued their index unit of account
00:01:41 00:01:44 called the unadadi fermento in 1967.
00:01:45 00:01:47 They thought it was an emergency measure
00:01:47 00:01:49 to deal with out of control inflation.
00:01:49 00:01:51 But I think it’s a model for the world.
00:01:51 00:01:56 This is 20,000 Chile -- yeah a peso note.
00:01:56 00:02:00 It’s approximately one unadadi fermento or UF.
00:02:01 00:02:03 The exchange rate is... this is an idea.
00:02:03 00:02:08 There are no UF notes but people use UFs in Chile like money.
00:02:09 00:02:12 I can offer the venue... I can list my house for sale in terms of UFs
00:02:13 00:02:15 and then when payment is made, you pay in peso.
00:02:15 00:02:16 And you can go to...
00:02:17 00:02:21 Courier, the newspaper and you can find out the exchange rate.
00:02:21 00:02:26 Today it’s 20,919 Pesos or it works out to about 42 dollars.
00:02:27 00:02:33 If you define your house for sale in terms of UFs, it’s fixed in real terms.
00:02:33 00:02:35 None of this inflation thing come...
00:02:35 00:02:39 so this is some candles being offered for sale right now in Santiago
00:02:40 00:02:45 for prices of 990 to 227 UFs. They don’t even mention peso.
00:02:45 00:02:49 This is what they’ve got. They have adopted a separate unit of account.
00:02:50 00:02:52 Now, I’d like to call them something different.
00:02:52 00:02:54 In English I call them baskets
00:02:55 00:02:59 because the consumer price index is a measure of inflation
00:02:59 00:03:01 of the price of a basket of commodities.
00:03:01 00:03:03 So that’s what we’re really wanting to...
00:03:03 00:03:05 instead of defining contracts in terms of dollars,
00:03:06 00:03:09 let’s say I’ll pay you so many baskets
00:03:09 00:03:13 and when it comes time, you would then pay in the currency.
00:03:13 00:03:15 This is a picture of Simon Newcomb,
00:03:16 00:03:20 who’s really the progenitor of this idea in 1879.
00:03:21 00:03:26 He was a scientist who worked on systems of measurement for a scientists.
00:03:26 00:03:29 We now have good scientific measurement
00:03:29 00:03:32 but we don’t yet have good economic measurement.
00:03:32 00:03:39 This is about behavioral economics. These are psychologists, Danny...
00:03:39 00:03:43 and Amos... my... others of my heroes,
00:03:43 00:03:46 who showed the importance of human psychology.
00:03:47 00:03:49 When you take into account these things,
00:03:49 00:03:53 you realize that you can’t expect people to do complex mathematical calculations.
00:03:54 00:03:59 This is Irving Fisher, a Yale professor from first part of the 20th century,
00:04:00 00:04:03 who said similar idea we should have a compensated dollar.
00:04:04 00:04:06 The gold content of the dollar...
00:04:06 00:04:07 this is during the days of the gold standard...
00:04:08 00:04:10 should be changed to maintain its purchasing power.
00:04:10 00:04:13 But we no longer live in the gold standard days.
00:04:13 00:04:15 We have these devices here,
00:04:16 00:04:18 for example, that allow you to use your credit card.
00:04:19 00:04:22 These can be reprogrammed so that people can price
00:04:22 00:04:24 in terms of some new unit in baskets
00:04:24 00:04:27 and then you would just put it on your credit card
00:04:27 00:04:31 and then the currency value would be recalculated by a computer.
00:04:31 00:04:34 This is a symbol for a scientific... this is a lab scale.
00:04:35 00:04:38 What we need, I think, is a... not just baskets,
00:04:39 00:04:41 but we need a variety of units of measurement.
00:04:41 00:04:44 I think we should have a variety of consumer price indexes.
00:04:44 00:04:48 We should have wage indexes. We should have health care indexes,
00:04:48 00:04:52 education cost indexes that are all represented by units of measurement.
00:04:52 00:04:55 And this is to relate to the current crisis.
00:04:55 00:04:59 The current crisis is generating uncertainly
00:04:59 00:05:00 with regard to the price though
00:05:01 00:05:03 because you can see the... how uncertain...
00:05:03 00:05:05 this is the U.S. consumer price index.
00:05:05 00:05:07 You can see it’s been very unstable through time
00:05:08 00:05:11 and it’s jumped around a lot lately so we especially need...
00:05:11 00:05:15 this would be the opportunity, now, at a time of financial crisis,
00:05:15 00:05:18 to get on with perfecting our economic system
00:05:18 00:05:22 by adopting a system of economic units of measurement.
00:05:23 00:05:25 Thank you very much, Robert.
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