In Defense of Deflation
mises.org
mises.org
> PB: Of course. During the nineteenth century in many countries we observed falling prices caused by strong economic growth. In the book, I analyze in detail the United States from 1865 to 1896. During this period the US experienced thirty years of falling prices and a strong increase in the standard of living at the same time. In fact, the natural result of economic growth is that prices tend to fall and the population enjoys the increase in production in form of lower prices. Something we observe today in the technology sector.
I have trouble viewing this as traditional “deflation” but don’t have the expertise to really understand it. If there is a technological revolution like in the period quoted above, then prices may fall due to things like efficient production. But is that really deflationary? I think the question is whether deflation is a good or bad thing when everything else is not changing. Like if the standard of living is not changing due to technology but prices are falling, what does that mean?
I did find other parts of this short interview convincing though, in particular the argument that every exchange has a buyer and seller and even in a deflationary period, there are people benefiting from the exchange - like due to falling prices. So it’s not inherently bad but just a redistribution. And the opposite condition of inflation is also the same - it’s not inherently bad but just a redistribution. As for who benefits from pushing a default inflationary posture:
> Who benefits from continued inflation? Well, the political and business elites. The biggest debtor in our economies is the state. Also many business elites are highly indebted. They would lose out in a scenario with price deflation.
It seems like the simplest explanation - this view point in favor of inflation is pushed because there are people who stand to benefit greatly from those conditions. Or is that too cynical?
I think the standard argument for the importance of inflation is focused at least somewhat on the supply side (governments add to the supply to stimulate the economy by devaluing money which people hold). The theory is that the increasing supply disincentives people from just letting their money sit stagnant.
Falling prices due to technical innovations may have a somewhat similar effect (people may hold off on buying a computer if they think the same computer will be 30% cheaper next year) but I think when the cost of things is "too damn high", that deflation can also stimulate purchases.
> > Who benefits from continued inflation? Well, the political and business elites. The biggest debtor in our economies is the state. Also many business elites are highly indebted. They would lose out in a scenario with price deflation.
> It seems like the simplest explanation - this view point in favor of inflation is pushed because there are people who stand to benefit greatly from those conditions. Or is that too cynical?
I'm not entirely sure I agree with this though, at least on the pricing side. When supplies and labor costs more, business operating expenses go up a lot, and the working class demands higher wages (at least in theory). So I think it really depends what is costing less vs costing more. The best case scenario for reducing wealth inequality I think would be labor costs going up while rents, real estate, and consumer goods get cheaper. I'm not sure how this would fare when measured against economic goalposts like GDP though.
I've always found this hypocritical in some way, since Keynesians and other Great Society/New Deal types are now generally very pro-environment and supposedly anti-consumerism.
So we're now in a situation where funny enough standard economics (which we're told is brain dead to oppose) would be exactly pro-consumerism and anti-environment just based on the idea of it incentivizing people to "not let money sit idle". It's clear to me that they're now faced with a problem being so pro-consumerism - they have to control the consumer through ever increasing regulation and surveillance.
Cantillon effect means everyone's who's closest to the government is all in favor of the flood of money never being reduced. Meanwhile normal people are debased into serfdom.
No. Mises.org is Austrian economics, so I don't expect them to agree with anything Milton Friedman ever said, but his "Inflation is always and everywhere a monetary phenomenon" necessarily also applies to deflation. Prices decreasing due to technology is great. Prices decreasing due to a shrinking money supply is bad for lots of reasons, and when the U.S. went back to the gold standard after the Civil War and cut the money supply in half, the result was the Panic of 1873, when the word "bum" was invented to describe Civil War veterans begging in the streets.
I'm not saying the Austrians don't have any good ideas, but they are considered fringe for a reason.