Declining Prices Do Not Destroy Wealth; They Enable Its Creation
Most economists believe that a general decline in the prices of goods and services is bad news because it is associated with major economic slumps such as the Great Depression. In July 1932, the yearly growth rate of US industrial production stood at –31 percent whilst in September 1932 the yearly growth rate of the US Consumer Price Index (CPI) stood at –10.7 percent.
Many economic commentators claim that a general fall in prices is always harmful, since it postpones people’s buying of goods and services, which in turn, they believe, undermines investment in plant and machinery, setting an economic slump into motion. Moreover, as the slump further depresses the prices of goods, the pace of economic decline intensifies.
In contrast, Austrian economists such as Murray Rothbard have believed that in a free market the rising purchasing power of money—i.e., declining prices—is the mechanism that makes the great variety of goods produced accessible to many people. Rothbard wrote:
Improved standards of living come to the public from the fruits of capital investment. Increased productivity tends to lower prices (and costs) and thereby distribute the fruits of free enterprise to all the public, raising the standard of living of all consumers. Forcible propping up of the price level prevents this spread of higher living standards.
Also, according to Joseph Salerno:
Historically, the natural tendency in the industrial market economy under a commodity money such as gold has been for general prices to persistently decline as ongoing capital accumulation and advances in industrial techniques led to a continual expansion in the supplies of goods. Thus, throughout the nineteenth century and up until the First World War, a mild deflationary trend prevailed in the industrialized nations as rapid growth in the supplies of goods outpaced the gradual growth in the money supply that
Article from Mises Wire