Price of Ignorance

With a little perserverence you can get things done
Without the blind adherence that has conquered some
--Corey Hart

We've been conditioned to 'expect' rising prices over time. But are price increases a natural consequence of economic activity?

Suppose that, prior to lighting off economic activity, a finite supply of monetary currency is created to facilitate exchange. Further, suppose that the physical nature of the money makes it infinitely durable and that it never needs replacement. In fact, suppose that we lose our wherewithal to create additional money and we must eternally live with the initial supply. What will happen to prices 'naturally' over time?

They should fall.

As society advances and productivity improves, more output is created per unit of input. A dollar that bought one loaf of bread in the beginning should buy two or more over time.

During the late 1800's, the US saw precisely this phenomenon. During one of the most productive periods in US industrial history (which also corresponded to a period when the US Dollar was backed by gold thereby limiting its supply), broad price declines were evident. Purchasing power increased as money bought more goods and services. There was little concern about the dangers of falling prices. People were better off and standard of living increased (Rothbard, 2002).

Today, drums beat a tune against declining prices and for inflation. There is chatter that the Fed might adopt a policy of targeting a certain annual increase in prices. Critics suggest that they've been engaged in this activity for years with predictably detrimental results.

Don't be fooled. Price declines should be a welcome consequence of economic activity.

Reference

Rothbard, M.N. (2002). A history of money and banking in the United States. Auburn, AL: Ludwig von Mises Institute.