Are Falling Prices Undesirable?

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Mises: Are Falling Prices Undesirable?

JANUARY 22, 2015 Randall G. Holcombe

 

Popular opinion seems to be that falling prices–or even stable prices–are bad for the economy, but I’ve never seen any good arguments about why. I probably don't need to convince followers of the Austrian school that prices work best when they reflect the underlying values of the things that are priced, but I’ve just read another article about the problems that come with deflation that gives six clearly numbered reasons. Let’s look at what the article says to see if its arguments hold up.

 

First, the article says, “When shoppers see persistent price declines, they hold out on buying things. ... As a result, consumer spending flails.” People tend to buy things because they want to own them or consume them, so this argument seems weak. One area in which prices have persistently declined for 35 years is electronics, yet that industry is thriving as prices plummet. If this argument was true, how did Apple Computer become the most valuable company in the world by selling products whose prices have persistently declined since the company was founded?