Interestingly, although inflation has existed for a couple of thousand years, theories about its benefits appeared quite recently. These theories are false not only logically, but also empirically. For example, the “industrial revolution” occurred during the era of “deflationary” money, not mass inflation.
However, the most dangerous delusion is the idea that “deflation is harmful.” As we have already said, the word “deflation” refers to different phenomena; in this case, it concerns the claim that gold or other “honest money” allegedly “appreciates by itself,” and therefore “everyone will simply keep money in the bank and no one will invest.” This is a classic example of what we discussed at the very beginning of this article—failing to understand that money is a product of human activity and does not exist on its own, separate from the patterns of that activity.
Indeed, in an economy with “honest” money, one can observe the phenomenon of falling average price levels. However, this phenomenon is not monetary in nature. Interestingly, “falling average price levels” stump not only people unfamiliar with economics, but also some economists. For example, I have encountered people who seriously asked: “Where will the profit come from then?” One must always remember that prices are relative. “Falling average price levels” do not affect this fact in any way. Profit, even if understood as the accounting difference between the selling price and costs, will not disappear and cannot disappear. Profit is the difference between 5, 10, and 50. And the “price level” is 5, 10, and 50 instead of 50, 100, and 1000. “Average prices” decline due to the properties of the economy itself, because goods and services become more accessible. The economy is “deflationary” by its very nature; money has nothing to do with it. Demand, supply, competition—these are the mechanisms that cause goods to become cheaper. Consider that the Motorola DynaTAC cost $4,000 in 1983. Now phones with such capabilities are simply not produced, and a phone with much greater capabilities costs at least a hundred times less, even without adjusting for (quite significant) inflation. The classic example is computers. “A good computer always costs $1,000”—only in 1994 it was a machine with a 486 processor and 8 megabytes of RAM, and today it would be a machine with somewhat different capabilities. “New” goods are (relatively) expensive, then they improve and become cheaper—this is a normal process in the economy. Inflation makes it less noticeable; only rapidly developing industries clearly demonstrate it, but in principle, it is characteristic of “the economy as a whole.”
It is not difficult to understand that money would never have emerged if it could not reflect fundamental economic patterns such as supply and demand through the price mechanism. The stock of goods increases—the price falls. The stock of goods decreases—the price rises. These are not monetary, but economic patterns. Opponents of “deflationary” money are, in essence, arguing against the economy itself. To finish with this topic, to no longer get tangled up and not fall victim to pseudo-economic nonsense, one should always remember that the amount of money in circulation by itself has no significance whatsoever. The economy is negatively affected by rapid changes in the money supply. When the money supply grows, this is called inflation; when it contracts, it is called deflation. At the same time, prices do not necessarily unambiguously reflect these changes, but the negative impact on the economy in these cases is always present. Price increases or decreases by themselves are neither inflation nor deflation, although they may be signs of them.