Index fetishism

The Royal Institute of Chartered Surveyors tells us that house prices have fallen at their fastest rate for two years, prompting the question: so what?
By rights, I should be more interested than most in this, as I'm hoping to move in the next few months. But I don't give a damn about house prices generally. What matters to me is the price of my flat in Belsize Park relative to prices of detached houses in Oakham. And  there's so much uncertainty about my particular flat's price that any signal about it sent by average prices is swamped by noise.
Nor is it the case that aggregate house prices matter much for the general economy. As Willem Buiter points out, they're not (in aggregate) net wealth, and so should have little impact on spending. And I've said that house prices have no correlation with share prices.
So, why the interest? It's not just the English obsession with property, fuelled by Sarah Beeny, that's to blame*. What's going on is a form of fetishism - we believe artificial constructs have powers they don't in fact possess. 
But macroeconomics was never intended to have this power. Even Keynes was very sceptical about the meaning of macroeconomic aggregates. In chapter 4 of the General Theory, he wrote:

The community’s output of goods and services is a non-homogeneous complex which cannot be measured, strictly speaking, except in certain special cases...
the well-known, but unavoidable, element of vagueness which admittedly attends the concept of the general price-level makes this term very unsatisfactory for the purposes of a causal analysis.

Later economists, though, lost this scepticism. And the costs of doing so were high, as Hayek pointed out, most strongly in A Tiger by the Tail. Macroeconomic aggregates, he said, "conceal the most fundamental mechanisms of change" - namely, relative prices, which tell people what to buy and sell. Keynesian policy-makers in the 60s and 70s, he said, had fuelled inflation and unemployment by believing they could tweak macroeconomic aggregates to maintain aggregate demand, when in fact they had lost sight of the most important way to maintain employment, which is to ensure the price system is sufficiently flexible.
Although Hayek won that argument, his lesson has not entered our culture - hence our continued obsession with aggregates.
Why is this? Partly, I suspect it's because macroeconomic numbers give journalists easy copy. But could it also be that they help give policy-makers the illusion that the world is controllable?
* Ms Beeny is probably responsible for some of the rise in house prices in recent years. Many of us, when we look at her, think about finishing off a semi.

Comments

[Aaron Heath]

* Ms Beeny is probably responsible for some of the rise in house prices in recent years. Many of us, when we look at her, think about finishing off a semi. ~ Mr. Dillow

Very good, Chris. Not a "leg man", then?

[Mr Eugenides]

"Many of us, when we look at her, think about finishing off a semi."

Heh.

[reason]

It seems to me that Buiter's cute arguement applies to owner occupied houses but not to rental houses. It amounts to saying if we all owned one house and rented another then changes in rent would not change our income because they would cancel out.

With respect to Hayek, he may have won the argument, but that doesn't make prices more flexible. Keynesianism still has some relevance.

That said, I agree a lot of the story about what is happening is not in the indexes. Relative prices have changed enormously. It is by the way where I find cost-benefit analyses of environmental issues annoying. They are full of money illusion. Lomborg and company should read about King Midas.

[jameshigham]

The price/earnings ratio was greatly overinflated, the CDOs are next to worthless, the housing market is free-falling, the decrease in interest rate will hardly stem the tide. And you're thnking of shifting house, Chris?

[rmongleur]

"Later economists, though, lost this scepticism. And the costs of doing so were high, as Hayek pointed out, most strongly in A Tiger by the Tail. Macroeconomic aggregates, he said, "conceal the most fundamental mechanisms of change" - namely, relative prices, which tell people what to buy and sell. Keynesian policy-makers in the 60s and 70s, he said, had fuelled inflation and unemployment by believing they could tweak macroeconomic aggregates to maintain aggregate demand, when in fact they had lost sight of the most important way to maintain employment, which is to ensure the price system is sufficiently flexible."

I think you need to elaborate more on this.

[reason]

Chris,
the problem with falling prices in the housing market is that it also becomes illiquid.