Ina an "Austrian economy" i.e. one with a gold standard and gradually declining prices, wouldn't share prices also fall as well? What would be the incentive to buy shares?
First of all, what is an Austrian economy?
Secondly, why the assumption that a free market would only use gold? Free markets have traditionally mixed gold, silver, copper, and other metals for use.
Thirdly, why the assumption that shares would gradually decline? Prices of consumer goods would fall because there would be more good creation than money creation and because capital accumulation would lower the price of producing goods. Shares, however, would not fall in price because lower consumer good prices means a greater incentive to save, which means a greater incentive to buy shares (thus raising share prices). There's a reason why stock markets existed before purely fiat currency.
Mises Community Natural Rights Discussion Group
In a free economy, with commodity based money, prices tend to go down over time as technology improves. It is true that the average ECONOMIC profits OF ALL FIRMS in such an environment will go to zero. BUT these are averages. Some firms will continue to make profits by satisfying consumers.
I have several good examples of firms that manage to make profits while others have failed:
1. Proctor and Gamble: The firm has been in business making some of the highest priced consumer goods on the market. The prices have declined but they remain the best by continually creating new products and producing old ones at lower costs.
2. Ford from 1905 to 1925: The firm had 1 model of a car. Yet made tons of money by making it cheaper and cheaper. After the 1930s and the pro-labor stance of the Rosevelt Adminstration Ford became just like any other company.
3. South West Airlines: The firm has bargin basement prices yet continues to make money of their competitors through smart purchases of fuel futures, contracted out labor, leaning on airports for runway fees and what not.
4. Berkshire Hathaway: $10K invested here 30 years ago would have grown to over 1 mil? Not a bad return.
Will all of these firms eventually go bankrupt? Ford is closing in now. The answer is Yes. These firms will eventually be replaced by other competitors who satisfy consumers even more.
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