Monday, March 30, 2009

Nothing to fear about falling prices

Imagine a place where producers are surging ahead and everyone’s benefitting – a place where technology is making more and more and better products; where food is coming out of the ground in increasing amounts thanks to improved agricultural techniques; where access to housing is getting easier and easier thanks to radically improved construction techniques; where new inventions and new technologies are making travel easier and cheaper.

This would be a great place to be, wouldn’t you think?

Well, not if you’re an economist it wouldn’t.  At least, if you’re an economist like Neville Bennett, writing today at Bernard Hickey’s place, you’d be wringing your hands and talking about “deflation.”  To an economist like Mr Bennett, the world of the late nineteenth century, in which we experienced gently falling prices for most of the four decades to 1914 – which means gently rising real wages -- is not something to embrace, but something to fear.

Sad but all too true.  This is what real prosperity actually looks like: goods becoming more abundant, while the price of goods becomes ever cheaper:
Gold-Century-web
6a00d83451eb0069e200e55074d96c8833-800wi You’d think this would be something to celebrate, wouldn’t you [click on the pic above to enlarge].  And most of us would be.  While we were enjoying the increasing prosperity and rising real wages, however, Mr Bennett and his anti-deflationist confreres would be huddling in the shadows talking about “a technology, called a printing press” that would enable them to banish the spectre of “deflation,” and the rising prosperity with it.  (Sadly, it was those confreres who took over from 1914 on, kicking off the inflationary century that followed (right).)

Paul Walker at Anti Dismal rightly banishes the anti-‘deflationary’ foolishness, explaining the difference between “good” deflation and “bad” deflation.

And George Reisman explains why even in bad times falling prices is not a bad thing – that falling prices are not in fact deflation but the antidote to deflation.

Please recommend the reading to someone you know, before they’re put wrong by the likes of Mr Bennett.  And when someone tells you that falling prices are always bad, just think back to that graph above, and remember what was happening to real wages over that period.

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