Contrary to the popular way of thinking, we suggest that there is nothing wrong with declining prices. What signifies industrial market economy under a commodity money such as gold is that prices of goods follow a declining trend.
According to Joseph Salerno,
In fact, 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 occurred under the classical gold standard. For example, in the US from 1880 to 1896, the wholesale price level fell by about 30 percent, or by 1.75% per year, while real income rose by about 85 percent, or around 5 percent per year.[1]
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. Obviously, in a free market economy it does not make much sense to be concerned about falling prices.
On this Murray 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.[2]
For most economic commentators a general fall in prices is always “bad news” for it generates expectations for further declines in prices and slows down people’s propensity to spend, which in turn undermines investment in plant and machinery.
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