The original Ford Model T cost around $850, but within a few years the price had dropped all the way to $250. Was it deflation? Not at all. The dollar had a stable definition then. What brought down the price of the first mass-produced automobile was the rising number of specialized hands involved in producing it.
The Model T is hardly unique. The original wireless Motorola Star-Tac phone that merely made calls set buyers back $3,995 in 1983. Fast forward to the present, and buyers can purchase veritable supercomputers that fit in their pockets, and that make phone calls, for a fraction of what the Star-Tac once set buyers back. Again, it’s the norm. If readers doubt this, look up the prices of the original flat screen televisions, or for that matter the original, UHD flat screens.
These truths came to mind while reading a recent piece by Washington Post columnist Catherine Rampell. Rampell asserts that we’ll “probably never” see prices ‘”come back down,”’ and she adds that “In the modern era, we’ve almost never seen price growth turn negative in the United States.” Rampell could perhaps be persuaded to take back what she wrote.
In a growing economy, prices of all manner of formerly dear goods are naturally always in decline. That’s the aim of profit-motivated capitalists (Ford said “I will build a great car for the multitude”), to turn luxuries into common goods. No doubt pundits and economists imagine that businesses seek “pricing power” that makes it possible for them to keep prices up forever, but the persistent reality is that investors reward the entrepreneurs most skillful at pushing prices down.
Despite this truth, the economists Rampell caucuses with sing a different tune. Rampell writes that “Economists generally consider an upward trend in prices a good thing,” which reveals the downside to the columnist’s reverence for experts. What appears true in theory has little to do with reality. Worse, is the why behind the theorizing of the experts.
Rampell explains their thinking this way: “when prices are falling people hold off on making purchases because they keep expecting prices to drop even further.” It’s all well and good in theory…Except that rich, “venture buyers” don’t hold off on purchasing what will enhance living conditions as cars, wireless phones and flat screens remind us. Formerly the baubles of the deep-pocketed, consumptive few, the intrepid buying of the few signaled the commonality of those goods in the future.
Rampell imagines falling prices to be a problem based on expert theory that says “if everyone stops buying things simultaneously, the economy falls into recession.” Quite the opposite, actually. Never forget that investment returns (what we call wealth) are the remuneration of abstinence. It was John Stuart Mill who observed the latter, as was it Mill who understood that no act of saving ever subtracts from demand.
What people don’t spend doesn’t sit idle simply because banks and other financial intermediaries don’t “rent” savings in order to stare at them. Instead, unspent wealth is either shifted to those with near-term consumptive desires, or to businesses seeking to expand production of consumer goods through the expansion of hands involved in their production. The assembly line again. In modern times, there’s realistically no consumer good that isn’t the result of cooperation among endless producers the world over. In other words, the investment that powers actual economic growth is all about falling, not rising prices. Savings don’t cause “recessions,” rather they expand the capital bases that author the very growth that signals falling prices.
Contra Rampell, don’t fear falling prices or savings. They’re actually a bullish, growth-signaling mirror of one another.