From geekosystem and elsewhere as popularized by Manuel Lora, this is not a disaster but a blessing courtesy of the free market:
YEAR — Price of a Gigabyte
1981 — $300,000
1987 — $50,000
1990 — $10,000
1994 — $1000
1997 — $100
2000 — $10
2004 — $1
2010 — $0.10
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The term “deflation” is generally understood to mean falling prices; and so it is used in the post’s header. It might be useful to remember, however:
There are a number of reasons why prices might fall, even persistently. Deflation – a decrease in the quantity of money and/or volume of spending in the economic system – is one of the reasons.
In the case at hand, falling prices are the result of gains in productivity.
If deflation actually occurs, falling prices are the result of deflation, not the phenomenon itself. And they are the antidote to deflation.
At least, that is how I read George Reisman: http://georgereisman.com/blog/2009/01/falling-prices-are-antidote-to.html
Using spending volume is a bad example. Saving is a legitimate economic activity that has its own set of value preferences that compete with spending. A reduction in the volume of spending would not be deflation, only a shift in the time-preference of resource use. Producers of goods and services will then have to adjust their practice – either increase perceived value or reduce the asking price – to compete with the preference for saving.
The first one, the decrease in the quantity of money, has pretty much never happened in the history of central banking (I’m just generalizing, there may be periods where it happened, but in total, the trend is always upward in quantity).
Based on this, it’s safe to say that deflation is little more than an academic discussion as it has never really happened in the real world.
You appear to be very knowledgeable in the matter. I am not. Should one be saddened by the historical absence of deflation? Is it something to be missed, even though, as you write,
… deflation is little more than an academic discussion as it has never really happened in the real world … ?
Neither deflation nor inflation are good things. Both are artificial artifacts of central planning and both create dangerous market distortions. The effects of inflation are well known. Deflation creates opposite problems. If inflation subsidies borrowers and drives excessive consumption, deflation subsidized savers and drives excessive saving. Inflation creates an illusion of the desire of future income use over immediate spending as money growth holds down interest rates. On the other hand, deflation artificially increases interest rates, driving the economy toward more immediate consumer goods while money holders save and offer for loans at the artificially high rates.
An ideal monetary system would be one where the raw quantity fluctuated as little as possible, tending toward 0. That way, the system has a stable base line to measure itself against. Money is only a ruler. Inflation or deflation is akin to continually redefining the length of an inch. If you order a door to be cut for 84 inches and the length of an inch is redefined as a shorter measurement (inflation), Home Depot will deliver a door too small for the opening. Deflation would be a door too large as the inch was redefined as larger. This is how our economy is attempting to operate today. The size of the door represents profit, salaries, etc, and because of inflation, earnings are in reality less than measured by the changing standard.
“The effects of inflation are well known. Deflation creates opposite problems…. Money is only a ruler. Inflation or deflation is akin to continually redefining the length of an inch.”
There are systematic asymmetries in the effects of inflation and deflation which your comments do not take into account. Hulsmann explains why here:
http://mises.org/daily/3231
The money paragraph:
“In short, the true crux of deflation is that it does not hide the redistribution going hand in hand with changes in the quantity of money. It entails visible misery for many people, to the benefit of equally visible winners. This starkly contrasts with inflation, which creates anonymous winners at the expense of anonymous losers. Both deflation and inflation are, from the point of view we have so far espoused, zero-sum games. But inflation is a secret rip-off and thus the perfect vehicle for the exploitation of a population through its (false) elites, whereas deflation means open redistribution through bankruptcy according to the law.”
The Kid Salami, thanks for your most interesting comment, too.
Ya, I didn’t do a good job of that in the reply (it’s hard to get EVERYTHING into a single blog post reply). The very basis is that any manipulation of the money supply, whether growing it or shrinking it, artificially benefits one party at the expense of another.
J. Murray, thank you for the very instructive and stimulating comment.
I have tried to avoid it for a long time, but I can’t afford to remain illiterate in monetary theory. Phew, I intend to start with Huerta de Soto’s weighty tome.
That’s an excellent starting point, for sure. Also go to the articles section of this website, there are plenty of articles, and entire books, provided for free to download and read.
I have to disagree somewhat with your statement. Let’s say we have a situation where a nation with a certain population produces a certain amount of food, along with a fixed money supply. The next year, technological and management techniques improve such that they double their yield of food. Each unit of money can now purchase twice the amount of food as it did previously – the price of a given quantity of food has halved.
Isn’t this deflation? Or is the definition of deflation strictly linked to the money supply? And taken in the context of the example I gave, why exactly is deflation a bad thing?
I was on Samizdata a while ago, and the value of gold versus the quantity/quality of clothing it can purchased was discussed. Needless to say, after 2000 years, the same quantity of gold (1 oz) can purchase much better clothing. I’d say that was deflation too.
IF Austrians Economists want to inflation is “the increase of the money supply, period” then deflation is “the decrease of the money supply, period”.
This was not a scholarly article… it was a one sentence blog post poking fun at popular notions of deflation and its dangers. I wouldn’t read that much into it.
Ahhh, quickly print money before we all vaporize!
Someone get to work on a time machine so I can offload my 2gb novelty flash drive!
You’ll also need to invent a USB connection if you want to get $600,000. Just be sure to buy gold in 1981 before coming back to 2011.
For a more complete breakdown of prices over time: http://ns1758.ca/winch/winchest.html
The computer industry had undoubtedly been impoverished by this horrible trend. I’d bet all of the current unemployment in the country is because of all these increasingly efficient computers stealing peoples jobs. Hopefully the government will confiscate all our computers and put us back to work.
Maybe the Fed can back our currency with storage megabytes, I’m sure that would make them happy (well for a little while), and they wouldn’t even need to make adjustments for technology improvement.
Thanks for mentioning me. I am glad that you find this interesting. If only things like health care would go down in price like that. Instead, the state makes it more difficult. Oh well, at least this kind of technology keeps getting better/cheaper all the time.
Jeffrey:
)they claim that the price of the computer has halved over the last 18 months – to buy a computer with the same CPU and the same amount of memory would have cost you $1000 18 months ago. Exclude gas, food and electricity from the basket used for the CPI and voila – no inflation!
This is another way they rig the CPI. Suppose you buy a new computer for $500. To compare “apples to apples” (or PC’s to PC’s
Price decline in spite of an expanding monetary base. Just imagine how cheap it would be without all that money being printed. Of course, producers would probably be out of business.
It would cost the same – the nomimal price may be lower but so would your income.
Ah, if only…but if inflation were neutral, the govt wouldn’t bother doing it.
Yeah but what would a list for the cost a basic stick of RAM look like (adjusted for inflation)? Yeah new RAM sticks have more capacity but depending the day can cost much the same as an older stick (e.g. a 512Mb DDR RAM then vs 2Gb DDR3 RAM now). Maybe I could get DDR400 RAM on the cheap but my motherboard only accepts DDR3 RAM. By the same token a new basic PC system is faster than one five years ago but the actual price may be more or less the same. Thus in terms opportunity cost PCs have come down slowly in price over the past decade.
On the other hand, how much would it cost to get a working ’80s computer? Chances are they’ll be collector items as anyone who still owns such a system would most likely be the one to know its worth.
Saw a 8088 system at a garage sale a few months ago with a $15 price tag on it. Thought it was too expensive.
No it wouldn’t. A standard 8088 system in 1981 cost $3,000. This included 64k RAM and 5.25 floppy drive. The monitor was $300 extra. The average salary in 1981 was $15,000. So, a functional PC (the article mentions $1,500, but it lacks a floppy drive, so it would be mostly useless to the average consumer) would cost a consumer nearly 22% of his annual salary. For comparison, that $3,300 PC with monitor with inflation factored in would equate to a $7,688. I purchased a top of the line 6 core processor system with two top of the line video cards, 12 gigs of ram, and a 512 gigabyte SSD for 40% of that. 22% of today’s $46,000 average salary would be a computer that’s $10,120.
Today, a typical PC runs $800. The average salary is $46,000. So a PC today costs 1.7% of the average annual salary. If PC prices were comprable today as in 1981, this PC would run $343.35 using reverse inflation. If using the 1.7% salary method, it would cost $255.
PC components haven’t come down slowly, they’ve come down rapidly when adjusted for inflation. From a constant 1981 Dollar of $3,300 to $343.35. PCs cost roughly 10% of what they did 30 years ago and are immensely more powerful.
I still say slowly because it takes 20 years to appreciate the price drop. Besides I’m talking within the last ten to fifteen or so years where your PC is no longer outdated because is more than 6 months old. Depending on what you’re doing a 10 year old PC will easily do word processing and spreadsheeting. However PC hardware standards constantly change. Barely anyone wants a 3.5″ floppy disk drive for their computers so comparing a 3.5 floppy disk to a USB stick is invalid.
(Maybe the 8088 was a bargain like someone who sells a Rembrandt cheaply without knowing it.
)
Imagine 30 years in the future !!!
Without The State The Economy Would Be God’s Gift To Humankind!
Despite the destruction of the purchasing power of the currency! – that is why it is unfathomable to imagine how great the difference will be between these Dark Ages of economics and the future when all ego-driven intervention will be properly viewed as completely immoral and unthinkable!
Nevertheless it is exciting to live in this formative age!
THIS deflation of memory prices is the reason I’ve been holding off on upgrading my magnetic core memory. Why should I buy memory now when I know it’ll be much cheaper in the future? I’d be throwing my money away!
Shay, think like an entrepreneur. Buy now. Your new computer’s expanded capabilities may enable you to make or save ten times what you may realize in savings while waiting for the price drop.
Bruce Koerber’s remark, as usual, is spot on. The extent of computing’s contribution to human productivity in the past thirty years has been largely offset and negated by the growth of the State, without which true Nirvana would be near realization now. I do not mean Keynes’ dismal Nirvana of “full employment,” but my Nirvana of near-full unemployment where everyone is so productive they need only spend a couple of hours a week grubbing for subsistence and the balance of the time doing whatever they prefer over work.
Jeffrey Tucker, thanks for bringing your frequent insightful observations like this to the attention of Mises.org visitors and habitues. I’m still getting mileage–and wasting water on multiple flushes–out of your government-mandated-toilet observation.
Shay was being sarcastic. Magnetic core memory has been obsolete since the 1970s.
In this case there was an enormous increase in supply, no deflation.
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