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Increasing capital formation and increasing productivity => naturally falling prices. Such naturally falling prices don't impede economic growth
Even more emphatically, attempts to stabilize such prices by monetary supply inflation are highly damaging, even if it were possible and even if the attempts succeeded.
When one product or group of products is produced more productively, either by the application of capital production equipment or by a more efficient use of specialization and the division of labor, competition has a strong tendency to both increase the real wages of the workers involved, and to reduce the prices of the products produced.
It is this reduction in product prices that tends to spread the benefits of the productivity enhancements over the entire economy, including to workers whose productivity has not been enhanced at all. This is the result of either these workers buying products at the new, lower prices themselves, or by seeing an increased demand for the products that they DO produce as others paying the lower prices have more left over to buy their non-productivity enhanced products.
This benefit spread is stopped in its tracks when the government increases the supply of money to try to stabilize the money prices of the productivity enhanced products. The other workers have not seen their productivity enhanced, they cannot buy products at lower prices, they do not see an increased demand for their products, and the wages that they receive are worth less.
Regards, Don |
