The Problem Began When the Invention of the Spear Reduced the Price of Food

by Don Boudreaux on May 27, 2011

in Complexity & Emergence, Creative destruction, Growth, Myths and Fallacies

Here’s a letter to the programming director of Marketplace Morning Report:

Speaking on this morning’s program about prices in Japan, the BBC’s Roland Buerk opined that “it really becomes a habit for people. You know, companies start to pander to people’s needs to pay less.  McDonald’s for example introduced a 100 yen – just over $1 – menus a few years ago.  There’s a battle between companies to make jeans for the cheapest possible price.  You can buy a pair of jeans for about $5 now in Japan.  Once you’re in that downward spiral, it’s very hard to pull out of it.”

Huh??

Mr. Buerk’s knee-jerk hostility to deflation leads him to lament the fundamental source of economic growth and widespread prosperity: efficiencies and innovations driven by competition.

Deflation is harmful if caused by a contracting money supply.*  But when prices fall because competition drives firms to operate more efficiently and pass along these efficiencies to consumers in the form of lower prices, economies grow.  Resources once needed to feed and clothe people become available to produce other goods and services.  Consumers once unable to afford other goods and services can now do so.  And so it goes, and grows, as competition incessantly prods producers to “pander” (as Mr. Buerk sneeringly refers to this engine of economic growth) to consumers.

Does Mr. Buerk believe that Japan’s economy will recover faster and thrive better if producers stop such “pandering”?  Do competition-sparked efficiencies really cause a “downward spiral” from which the Japanese should seek to escape?

Sincerely,
Donald J. Boudreaux

* Yes, yes – I’m aware that demand to hold larger money balances is also harmful in a world with downwardly sticky prices – but there’s only so much space in a letter-to-the-editor (and the prices that this Mr Buerk points to clearly aren’t sticky downward!).

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