Some comments:
(1) The idea of steep price falls and perhaps general deflation this century owing to strong productivity growth is not unrealistic.
Now Selgin makes the case for “good” and “bad” deflation. But is the so-called “good” deflation really good? Specific price falls in individual goods (but not general deflation) that occur from productivity growth are no doubt a good thing. But even here it does not follow that general price deflation, even when solely from productivity growth, is a good thing.
The idea that, since the price fall of an individual good from productivity growth is positive, then general price deflation from the same cause will be positive as well is a fallacy of composition, despite Selgin’s protestations that it is not (from 13.20). It fails to consider the macroeconomic effects of general price deflation, and, above all, debt deflation. This issue is very briefly touched on at 13.05–13.20 and 38.23–40.20. However, I do not see any strong counterargument against the debt deflation objection. What is being assumed is that deflation from productivity growth will not result in involuntary unemployment and downward pressure on wages (see (4) below).
Strangely, Selgin defends by his position by accusing his opponents of being guilty of a “vast reverse fallacy of composition,” whatever this means.
(2) On the so-called Great Depression of 1873 to 1896, I agree it was not a depression in the conventional sense (see Capie and Wood 1997; Saul 1985). It was a period of several businesses cycles, and certainly real GDP in all nations was higher in 1896 than in 1873. Selgin argues that these 19th century periods of deflation from productivity growth were not “harmful,” and that “nobody back” in that century was aware of a depression from 1873 to 1896. While one can recognise that there is a kind of myth about 1873 to 1896, nevertheless I think that these claims are doubtful. I dispute that nobody then thought there was any kind of economic crisis in these years. There was concern from various groups in the years from 1873 to 1896: business people who saw their profits fall, European farmers who saw a real depression (Capie and Wood 1997: 188), and debtors hit by debt deflation.
On the specific economics problems of the 1870s and 1890s, see here:“US Unemployment in the 1890s,” January 24, 2012.(3) But if the price reductions from productivity growth are not of the type that cause significant falls in the need for labour (unlikely, in my view), then that can only put strong downward pressure on wages as profit margins are squeezed. Selgin denies this (from 15.15) and protests that he is not advocating wage deflation.
“US Unemployment, 1869–1899,” January 26, 2012.
“Per Capita GDP Growth Rates During the Gold Standard Era,” September 11, 2012.
“Rothbard on the US Economy in the 1870s: A Critique,” September 24, 2012.
But, if wages are cut, then that would induce debt deflation pressures, as the real burden of nominally fixed debts soars.
Even if one wants to assume that there are no really no wage falls, then we still have (4) below.
(4) Alternatively, and more likely, if the productivity growth causes sharp falls in the need for labour and serious unemployment, then, despite the prices falls, involuntary unemployment will result in an aggregate demand problem. Moreover, debt deflation is still a problem for the unemployed, even assuming the employed face no wage reductions. A market economy does not automatically adjust to full employment, and there is no reason to think that large-scale structural unemployment would not cause macroeconomic problems.
BIBLIOGRAPHY
Capie F. H. and G. H. Wood, 1997, “Great Depression of 1873-1896,” in D. Glasner et al. (eds), Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York, 287–289.
Saul, S. B. 1985. The Myth of the Great Depression, 1873–1896 (2nd edn.). Macmillan, London.
