Date: 14 May 13
To: Editors, The Economist
From: Frank Gue, B.Sc., MBA, P.Eng.
Re: “Defeat deflation”, p. 73, April 13 edition
In the endless references to deflation as an enemy to be defeated, productivity is seldom if ever drawn into the argument.
Let the ancient, much-criticized but never-discredited pq=mv formula be solved for “p”, the price level. All else constant (which it never is, but that is another debate), if the quantity “q” of goods produced increases, the price level must fall. This we seem to fear and detest as “deflation”. Perhaps we should cheer and clap instead.
A current example of the operation of this law is computers. For less than $1,000, a laptop computer can do infinitely more than could a massive, million-dollar, room-sized machine In the ‘50s. pq=mv acted in spades owing almost entirely to better productivity. E.g., memory was lodged in trays of wire-wound ferrite cores; 64K of “core” memory was considered a lot and cost kilobucks. Today, a silicon chip with less mass than a single ferrite core houses gigs of memory and costs $4.95 (ref. Moore’s Law).
It is not reckless to extrapolate this experience to the whole economy. This begs the question: Why is a fall in price levels in an active, innovating economy automatically a bad thing, and a rise in inflation a good and necessary thing? Furthermore, who or what is skimming off the difference between the yearly 2% or 5% fall in costs (i.e. typical productivity improvement levels) and a 2% to 5% inflation in prices? Is it mainly, perchance, your beneficent government inflating away its obligations, as governments characteristically do?