Economic Error #12: Falling Prices and Increased Productivity Produce Depression and Poverty.

Gary North

Ellen Brown makes the standard error of all Keynesian economists, all Greenbackers, and all monetary cranks. She equates falling prices with economic depression. She spells this out in two paragraphs. They are among the most silly paragraphs in her book, which is really saying something.

You and nine of your mates wash ashore with a treasure chest containing 100 gold coins. You decide to divide the coins and the essential tasks equally among you. Your task is making the baskets used for collecting fruit. You are new to the task and manage to turn out only ten baskets the first month. You keep one and sell the others to your friends for one coin each, using your own coins to purchase the wares of the others.

So far so good. By the second month, your baskets have worn out but you have gotten much more proficient at making them. You manage to make twenty. Your mates admire your baskets and say they would like to have two each; but alas, they have only one coin to allot to basket purchase. You must either cut your sales price in half or cut back on production. The other islanders face the same problem with their production potential. The net result is price deflation and depression. You have no incentive to increase your production, and you have no way to earn extra coins so that you can better your standard of living. [Web of Debt, pp. 360-61]

Here we have a situation in which somebody has found a way to become highly productive. He makes twice as many baskets in the second month as he made in the first month. But he finds that he cannot sell all of his baskets at the price he charged in the first month. So, he has to cut his sales price in half or else cut back on production. In Ellen Brown's universe, this makes the basket-maker a poor man.

Here is a great conundrum. The more productive people become, the poorer they get. What is the cause? Gold currency, she says.

If you were a basket-maker who has doubled his production, your goal would be to increase your income by 100%. You can increase this income through barter, or you can increase it through an increased income of gold coins as a result of selling more baskets.

Everybody else on the island is striving to increase his production, too. Let us assume that everybody doubles his output the second month, the same way that the basket-maker doubled his output. So, there are twice as many goods available for purchase. If prices fall 50%, everyone can buy twice as many goods as before, for half the money.

If the price of each good falls by 50%, everyone can buy twice as many goods. Why are they all poorer? Their goal is not to collect gold coins and pile them up. The goal is to generate more income in gold coins, so that they can spend those coins of the things that they want to buy. They don't work for the coins for the sake of piling up the coins; they work for the coins to spend on goods and services.

Ellen Brown is trapped in the same illogical thinking that confuses Keynesians and other monetary cranks. She does not understand that falling prices are a benefit. Falling prices that are falling because of increased productivity do not make people poorer.

Let me give you an example. In 1983, I purchased an external hard disk drive for my computer. It was 10 MB. I paid the equivalent of $5,900 in the purchasing power of 2010. Today, I can buy a hard disk drive with 2 TB of capacity for under $100. One terabyte is a million megabytes. Am I poorer because I pay so little money for so much storage capacity?

If other prices had fallen by comparable amount, we would live in a world in which there is virtually no scarcity. It would be a world comparable to the Garden of Eden. It would be a world without the curse of God on mankind. It would be heaven on earth. Of course, sinful men being what they are, it is best that they are not all fabulously wealthy. The devil loves idle hands. There would be a whole lot of idle hands.

My point is that falling prices do not make me poor. Henry Ford became one of the richest men in the world because he kept cutting the price of cars. He kept increasing the output of his workers. He was able to pay them high wages, despite the fact that the products they were selling were selling at an ever-lower price. He made it up by volume.

In a society in which people are doubling their output in a month, within a very short period of time, they will all be fabulously rich. They will not be fabulously rich in terms of gold coins; they will be fabulously rich in terms of the goods and services they can purchase. They are buying the goods and services by means of their own productivity. Production is the key to wealth, not the amassing of gold coins.

Because Ellen Brown neither understands this nor believes this, she has adopted a crude form of Keynesianism, in which the government has to issue pieces of paper marked "legal tender" in order for society not to fall into depression and mass poverty. Without pieces of government-printed paper, rising production somehow makes everyone poorer. Assumption: falling prices impoverish a society. This assumption is false.

Ellen Brown does not understand basic economics. Anyone who believes Ellen Brown also does not understand economics. I suggest that you not believe Ellen Brown.

For a detailed critique of Ellen Brown's economics, go here:

http://www.garynorth.com/public/department141.cfm