A very shrewd and evidently humorous correspondent from Turkey — where, one presumes, they know all too well about such things! — sent me the following mail:
Dear Mr. Corrigan:
Something I feel a need to be enlightened on: falling prices.
I was watching a regular TV program that is run by three economists — with occasional guests — here (in Istanbul, on a national channel), and they answered the fax of a viewer on the problem of “falling prices."
Naturally, they being neo-Keynesians, quickly pointed out that it’s the worst of all economic evils.
Their reasoning went: if prices start to fall, consumers stop consuming as they give into an expectation to wait for lower and lower prices.
For example, even though I may be starving, I don’t buy bread at $1 today, which was $1.10 two days ago, since, if I fast for another week or so, I may purchase it for 90c. And who knows, if I break Bobby Sands’ record, in 54 days or so, I may even get the darned thing for free.
Seriously, though, this “psychology of expectations” — and the accompanying “conceit of low expectations from non-inflationary markets” — is a difficult trick to deal with.
In fact, I could bet my boots that three issues are what helps these guys pull fast ones at every opportunity: (i) liquidity — what will poor investors do if they can’t make a fast buck by selling their speculative holdings to some ever greater fool? (ii) consumption — what will poor investors do if other people don’t spend everything on their chosen company’s products, even if they are simultaneously consuming their seed-corn to do so? (iii) u2018deflation’ — what will poor investors do if their company cannot post ever higher monetary profits, thanks to the deceit of a debased currency?
I was wondering if you might say a few words about this “nightmare” scenario of falling prices?
Well, for the hunger-striker gag alone, I thought this merited a considered reply, and — for what it’s worth — I thought I’d share it with readers, here.
As you say, Sir, what nonsense!
Clearly, we all know that iPods will be cheaper next year and cheaper again the year after that; we all know that this season’s must-have shoes will be 50% off, come the Spring; we know that, when the barely-discernibly different new model arrives, the perfectly functional car sitting on the garage forecourt today will be 10, 20, 30% cheaper than its near exact replacement; we all know that the presents we buy for our kids at Christmas will be practically given away by the stores on Boxing Day and — to adapt your marvellous bread analogy (which I will certainly plagiarize!) — we know that if we buy a loaf on the way home from work, rather than on the way to work, it can be had for a song — yet, still, many of us are compelled to buy the dearer product, precisely because we want it NOW!!!!!!
All Keynesians and all under-consumptionists should be compelled to spend several weekends escorting their five-year-old nephews and nieces around the shops, in the run-up to the little treasures’ birthdays — let them see how much psychic pain is really attached to the matter of deferring the instant gratification of wants!
As you also say, we live in a world so engrained with the effects of inflation that it is hard to envisage how things could be other than they are — much as a fearfully scourged galley slave would find it impossible to comprehend the voluntarism inherent in an Oxbridge rowing eight.
Yes, in a world run on debt and dissaving, where instant credit means one never has to wait for anything and where assets are supposed magically to appreciate every year to offset the debt incurred by one’s unceasing improvidence, generally falling prices would prove a formidable — if a temporary and wholly beneficial —hardship, indeed. But, even Heracles must have gotten his sandals wet when he cleaned the Augean stables!
What everyone also forgets is that, in an unhampered market, as prices fall, costs are also likely to fall and that producers may therefore count on earning one of: (i) the same nominal profit per item; (ii) failing that, the same real profit per item; or (iii) a lower unit profit which is compensated for by the higher unit sales which a cheaper price usually occasions!
What everyone also forgets is that as the money we hold and the wages we earn go further and further in the shops, we are therefore becoming materially richer and, therefore, we are likely to become increasingly less, not more, reluctant to consume.
What they also forget is that because we can satisfy our existing consumption needs with less outlay today, we can provide for tomorrow’s consumption needs more richly — i.e. we can save and invest more in an even more materially favoured, lower cost, more prosperous future and so we can begin to reinforce this wholly virtuous circle!
Thank the Gods that Keynes only arrived to plague us at the very tail end of our antiquity! Can you imagine how it would be had he been borne a thousand years earlier? For surely, the authorities would have seen to it that, in their struggle to plaster over and otherwise deface the rich tapestry of technological progress and entrepreneurial innovation with the ragged scraps of their ever more debauched money, the real price of cakes would hardly have fallen from the one they commanded when King Alfred himself was burning them, even as their nominal price would have soared beyond all possibility of calculation!
Sean Corrigan [send him mail] writes from Switzerland.