It may be that under historic conditions, deflation does tend to be bad. Though, I wonder conditions have changed sufficiently to mitigate its historical "badness". Specifically, I wonder if being able to price goods in real-time helps mitigate deflation's badness. Is it possible to assess the extent to which the inability to price in real-time affected historical cases of depression from deflation? Just thinking out loud here.
Thanks for the question, Proudhon.
For a myth to be adopted by a society, it must have at one point in time been
useful. Between 1700 - 1900, England was on a hard-money standard and price levels over these two centuries were fairly stable (although sometimes volatile). The "deflation is bad" myth had not yet been adopted
1.
Around the turn of the last century is when the "deflation is bad" myth truly took hold. Our productive abilities were increasing extremely fast--so much could be produced with so little human input. We had the factories in place to increase real output Q (from M V = P Q) and the will of the capitalists to push technology forward, but with a fixed-supply currency the only way Q could increase was if P decreased.
Like you said, we didn't have the internet back then and efficiently communicating real-time prices was difficult. Q increased only modestly, but since productivity had improved to such an extent,
there was less work available an unemployment increased during the Great Depression. And thus was born the myth that "inflation is good." The Fed increased the money supply M (by devaluing the dollar vs gold), which allowed Q to reach its potential without the fast drop in P that would have been required due to mankind's rapid advances in productivity.
The first thing the increased Q went to was WWII. We could produce so much stuff that we had to destroy it in order to keep the people employed!
But this got the people working, validated the "inflation is good" myth, and gave birth to our modern consumer economy. Our consumer economy is a relic from the Great Depression that says that if we don't consume our resources fast enough then people will lose jobs and will be back in a depression.
Our "deflation is bad" myth stems from our grandparents' inability to communicate real-time prices in 1933 efficiently enough to just let P fall to where it needed to be.
1But already early pioneers in anarchism like your namesake were working towards ways to provided fair access to capital for the people. Pierre-Joseph Proudhon "unsuccessfully tried to create a national bank, to be funded by what became an abortive attempt at an income tax on capitalists and shareholders...it would have given interest-free loans." I think Proudhon saw the unrealized potential in the people to increase real output Q if they only had equitable access to money. [Wikipedia]Thanks for this Peter - a very insightful post!
I keep wondering about one thing which is being left out of this discussion: divisibility.
Would the scenario of the Great Depression have played out differently, if the money supply possessed infinite divisibility, like Bitcoin? As opposed to the actual gold-backed fiat system that was in place, where you couldn't practically increase M to account for the increase in productivity. I feel like the possibility of infinite divisibility of money really pokes holes into the "deflation is bad" argument.
The modern finance is built in a way that money changes by following the economy, so the money in circulation is in balance with the economic development. If you keep the money supply static, while the economic growth is dynamic as usual, then the outcome is an unstable currency with constantly changing prices.
Since the external factors affecting economic growth are constantly changing (as you say) I think it becomes a choice between:
dynamic growth vs. fixed money supply vs. dynamic prices
and
dynamic growth vs. dynamic money supply vs. fixed prices
Personally I would feel happier with the fixed money supply. It is much easier to fix, for starters. It doesn't even require a human central planner, which can be badly informed and/or corrupted. Also I view prices as signals about how much people value certain things and I like my signals as pure and without distortion as possible. When we are trying to fix prices by managing the money supply (by using unelected central planners!) we don't change the underlying reality the price signals are expressing. But we do distort these signals, which causes all sorts of havoc, colloquially known as "malinvestment".
But if we can assume that most posters here are not part of the establishment, why then are so many people opposed to it? Simple brainwashing? That answer seems a little too easy somehow.
It is an easy answer, but a very potent one. I wouldn't call it brainwashing, though. I call it programming your mental operating system and you can get different versions of it. You may passively accept the programming of your community, of MSM, seek out alternative operating systems or try to learn how to program yourself. Because I assume that most people don't have a high skill level of "self-programming" they are left to choose between the memes that are floating around. And most of these support the currently dominant view that deflation is bad for the economy and what is needed is centrally managed inflation. Many people will have this sort of idea as a starting point and may be reluctant to change it, because they don't find the arguments to do so persuasive. It is a difficult debate, because it involves deeper questions such as "do we want to have perpetual economic growth?".