Ask the astute business owner the same question, and I would bet the same salary that ninety percent would answer to lower prices. Why? Because the business owner knows, if not explicitly than instinctively, that demand curves slope downward. The lower the price, the more volume he will sell. The higher the price, the less he will sell. Our sagacious business owner prefers to continually lower the price, and he prefers to do so while continually lowering the costs, thus enabling him to maintain his gross, operating, and net margins at the lower price. Sell more while maintaining the margins, the profits will move inversely to the price. But even if margins should contract on the road to lower prices and higher volumes, our business owner might proceed and lower them anyway. What's lost in profits from contracting margins could be reclaimed in greater inventory turnover and additional market share.
Unbeknownst to the ninety percentage of our men wondering the streets, the greatest fortunes have arisen through forced, relentless deflation: Rockefeller at Standard Oil, Ford at the Ford Motor Company, Walton at Walmart, the Albrecht brothers at Aldi. These great men of business learned the benefits of forcing prices lower by forcing costs lower, thus forcing revenue and volumes higher, and, most important, forcing profits higher. Consumer-price Inflation wasn't what they wanted, consumer-price deflation was.
The evidence that deflation creates wealth and drives economic growth appears to baffle the economists of today at the Federal Reserve. They maintain this odd fetish with inflation, preferring it maintain an even 2% year-over-year trajectory into perpetuity. Their logic for maintaining the fetish is foolishly flawed: They reason that if deflation persists, consumers and businesses will continually delay purchases and investment because a lower price will always be on offer tomorrow. Wages, in turn, will deflate, leaving workers with less pay, and thus, poorer. Everything grinds to a halt because everyone is sitting on his hands today because everyone is anticipating the lower prices of tomorrow.
Knowing a better price could materialize tomorrow won't necessarily crimp a purchase or an investment today, Most times it won't. We all have no choice but to address our needs of the moment today.. We have to eat today, wear clothes today, live in a house today, and work today. We have to consume today. We have to produce today. None of these needs are mitigated by the prospect of lower prices tomorrow.
Economic historian Robert Higgs highlighted the deflation counterintuitive in his book The Transformation of the American Economy 1865--1947. Higgs reveals that the United States experienced an impressive spurt of economic growth that occurred over the thirty years from 1866 to 1897 -- a period marked by continual secular deflation with real GDP growing 4% annually. Prices trended lower, but productivity trended higher. This was the greatest economic growth spurt during any period of comparable length.There's more to the story. Because productivity trended higher, wages trended higher. The workers' lot improved -- greatly. More dollars bought more goods at lower prices.
But let's say it never happened for the worker; let's say that wages stagnated, or even deflated, over the period. Wage-earners would still have seen their living standards rise. Their appreciating dollars, even if they were paid fewer of them, would have bought more goods and services.
Of course, deflation isn't intrinsically good all the time. Nothing is. Most things good can degenerate into something quite bad if taken in inappropriate amounts, mostly in excess. Food and water in the right proportions and of the right variety will sustain life and promote longevity. The same food consumed in glutenous excess will kill you. The thing salubrious degenerates into the thing toxic at the extreme.
Salubrious low, chronic deflation degenerates into toxic deflation should it mutate into the acute and unfettered. The Great Depression is an extreme example. Between 1929 and 1933, real gross domestic product per capita plummeted by nearly 30%; the unemployment rate soared to 25% from 3%. The consumer price index plunged by nearly 25%, with the deflation rate exceeding 10% in 1932. (The Federal Reserve, in its infinite wisdom, contributed to the acute deflation spasm by maintaining a rigid, restrictive monetary policy.)
Chronic deflation is the product of a vibrant, growing, technology-advancing, efficiency-gaining economy. The money manipulators at the Federal Reserve today disagree. They prefer a little chronic inflation over a little chronic deflation, and they have managed the money supply to enflame more inflation from intransigently low inflation that's persisted over the past fourteen years.
We all know that the Fed finally got what it wanted in 2022. Well, it got more than what they wanted. The continual match-striking on inflation has finally ignited the kindling, which has fueled a campfire of inflation that has uncontrollably exceeded its boundaries to set the neighborhood ablaze with all its destructive consequences.
What do the armchair philosophers tell us? Be careful what you wish for, because you might get a helluva lot more of it than you ever wanted? Yeah, no kidding.