This article is adapted from a lecture presented at the 2025 Supporters Summit in Delray Beach, Florida.
I want to start with a confession: I love falling prices. I love deflation. I want all prices to go down to a nickel.
I stole that line from Murray Rothbard. It’s not inflation that we should fear, it’s the opposite— deflationphobia, which is the fear of falling prices. We should fear deflationphobia because it leads to a very dangerous institutional monetary policy: inflation targeting.
So, let me begin with some facts about deflation.
In today’s world, deflation is a word that means the general fall in prices, and I’ll use it in that sense even though that’s not really an expedient way of using the term deflation. It should really be used exclusively to mean a decrease in the money supply. Falling prices are a natural outcome of a capitalist economy using a market-based commodity for money, like gold.
Deflationphobia refers to a mental disorder in which many people, especially economists, fear deflation because they think it is harmful to the economy.
Natural deflation, or what I call growth deflation, is caused by improvements in technology and increased capital investment that introduce new products on the market and lower the cost of existing products. The result is an increase in supplies of both new and existing goods in the economy. Because the money supply under the gold standard grows very slowly, the rapidly increasing supply of goods drives prices progressively downward. Natural deflation (when prices are falling) spreads because of an increase in the supply of goods, and thereby spreads the benefits of economic growth throughout the economy. This is because falling prices increase the buying power of all wages, rents, interest returns, and retirement payments, even if their nominal amounts do not change.
Monetary inflation, on the other hand, prevents the natural fall in prices and diverts most of the additional goods to those who receive the new money before most prices have risen. These include federal bureaucrats, government contractors, big financial institutions, and recipients of corporate and individual welfare. All of these groups receive most of the loot, most of the new goods that are being produced in a progressive capitalist economy. Meanwhile, little is left over for the productive workers and entrepreneurs who don’t receive the new money right away.
Deflation, therefore, goes hand in hand with economic growth and rising incomes and standards of living across the board. This is illustrated by the experience of the United States in the nineteenth century. From 1819 to 1860, general prices were cut in half. They fell by 53%.
And from 1870 through 1898, prices fell again, by almost another half. During this period, the US had its greatest decade of growth, of nearly 4%. That was the 1880s. And the US was transformed from an agricultural into an industrial economy.
During this period, wholesale prices also dropped by 34%. Every year, they were falling, on average, by nearly 2%. Consumer prices on average fell 47%, almost 2.5% annually. Real gross national product, the total output of the economy, rose 4.5% each year, and some additional goods were capital goods. The rest were consumer goods. So, consumption per capita rose 2.3% a year.
But it’s really not only during the nineteenth century that deflation was beneficial. The deflationary processes have also greatly benefited households and businesses under the current fiat dollar standard in recent decades, even though their natural operation has been partially and deliberately stifled by the Fed’s inflationary monetary policy.
Let me take three examples: computers, televisions, and mobile phones.
Consider an IBM mainframe computer. In 1961, the cost was $2.9 million. It weighed 10.4 tons. It took a whole room to hold it. Today, a laptop sells on average for $500 to $1,000 and is 30,000 to trillions of times faster, with more memory than the IBM mainframe. From 1980 to 1999, personal computer prices fell by 90%, and yet the industry exploded in growth. In 1980, there were only 750,000 PCs shipped. In 1999, there were 113 million shipped, and in 2024, 407 million were shipped.
So, prices fell, profits rose, new firms entered, and output expanded tremendously, increasing the buying power of our dollars in terms of computers. The price per megabyte of computer memory was $411 million in 1957. That quickly fell to $5.2 million by 1960. By 2014, it was one cent per megabyte, and today it’s two-tenths of a cent. This is great. This is wonderful. I wasn’t kidding when I said I want all prices to fall to a nickel, maybe even lower.
Let’s consider televisions. There has been a steady deflation, and in every year from 2000 to 2021, prices fell by more than 10% and up to 25%. According to the Bureau of Labor Statistics, prices for televisions are over 99% lower in 2025 than in 1950, with an average inflation rate of −6.56% per year. Televisions that cost $1,000 in the year 1950 would cost $6.19 in 2025, if you could find them.
Even as TV prices fell every single year, the television industry grew tremendously. In 2002, estimated global shipments totaled 150 million sets averaging 27 inches. This number grew tremendously despite the falling prices, or because of the falling prices and costs, as people purchased more and better-quality TVs. By 2021, estimated global shipments totaled 221 million sets averaging 50 inches. That’s twice as big. So there was a vast improvement in quality, as well as a vast decline in prices.
What about mobile phone prices? The Brick (a.k.a. DynaTAC), the first mobile phone, produced by Motorola, was $3,995. Prices quickly came down, too. In 1996 the new Motorola StarTAC was selling for $1,000. The iPhone was introduced in 2007 at $499, but with only four gigabytes of storage. Today, the newly introduced iPhone 17 starts at $799 and has 256 gigabytes.
Remember now, overall inflation between 2000 and 2021 was 65.5%, and many industries experienced this rise. Childcare costs rose by about 112%; medical care services, by 123%; hospital services, by 211%.
Yet the natural deflationary forces of a dynamic capitalist economy were still at work and still increasing our buying power in terms of certain goods. Cell phone services fell by 40%; computer software, by 72%; TVs, by 97%; toys, by 73%.
So you can see the deflation is still working. The capitalist economy is an engine that produces lower prices, and in doing so, increases real incomes, at least to the extent that it’s not overwhelmed by inflationary monetary policy.
Why, then, do economists fear falling prices? Their analysis of inflation and deflation is based on a false concept. That concept is the so-called price level. There is no such thing as a price level. There are only individual quantities of money and goods exchanged by two specific parties at specific moments in time.
As Mises wrote in Human Action, “A market price is a real historical phenomenon, the quantitative ratio at which at a definite place and at a definite date two individuals exchanged definite quantities of two definite goods.”
Each market exchange and price is a historical event, just like a war, a political election, or a football game. An economist cannot abstract from the unique features of millions of individual market exchanges and prices and then lump all prices together and average them into a single price level.
Imagine a historian who tried to talk about an average war or an average election. We’d think he was nuts. Well, the same thing’s true of an economist talking about a price level, which is an average of all of those different prices.
Mainstream economists base the idea of a price level on a false and misleading analogy. To them, inflation is like the level of water rising instantaneously and proportionally in a glass as more water, representing money, is poured in and eventually settling at a higher and even level.
Austrian economists—and one in particular who’s now sort of forgotten, Arthur Marget, a quasi-Austrian economist who wrote in the ’30s and ’40s—proposed a much richer and more accurate analogy. Inflation is like a swarm of bees that rises higher while the unique and individual bees are rising at different times and changing positions relative to one another.
So, when new money is injected into the economy, it affects individual prices step by step over time. Some prices rise more than others, and others may fall. Prices change relative to one another, like individual bees in a swarm moving up and down together.
Some people’s selling prices, including their wages and salaries, don’t rise as much or don’t rise immediately; they rise only later in the process because the new money isn’t spent on the goods and services that they help produce and sell. But in the meantime the prices of the goods they buy may be rising sharply, thereby shrinking the purchasing power of their incomes.
So, the false analogy between actual prices and an abstract price level leads to the dangers of deflationphobia.
It is the fallacy of the price level that leads economists to fear deflation and promote inflation targeting. For if all prices and wages rise evenly and proportionally to the increase in the money supply, then inflation is harmless.
If your wages and your incomes go up as fast as prices go up, you haven’t lost anything. The only people who may be hurt in this process are those who charged an interest rate on their loans and didn’t anticipate the increase in inflation. Deflation, in contrast, turns out to be harmful and possibly devastating to the economy. Because once prices and especially wage rates have reached a certain level, they become stuck or even frozen. So instead of prices and wages falling, employment and production decline, and a recession or depression occurs. It is as if the water in the glass freezes like ice at its current level. And any attempt to lower the level only cracks or shatters the glass, which is the analogy for depression or recession.
So, deflationphobia is really a mental derangement of economists who are misled by a false analogy and cannot comprehend the true nature and function of a natural deflation in a progressive capitalist economy.
The real and present danger to our economy today is the economists’ support of inflation targeting, which is a policy of deliberately expanding the money supply and reducing the value of the dollar to avoid deflation at all costs.
As Mises pointed out many years ago, “monetary policy” is simply code for inflation. Monetary policy is aimed at reducing the buying power of your dollar from what it would have been in a capitalist economy. And deflationphobia seems to be a progressive disease, as some prominent economists are now calling for an increase in the inflation rate from 2% to 4% per year.
If inflation were to be 4% per year over 10 years, prices would be 50% higher, and the dollar would only buy 67 cents’ worth of goods compared to what it buys today. In 20 years, prices would be 119% higher. They would more than double. And the dollar would only buy 45% of the goods it can buy today.
Let me just end with a Wall Street Journal article published last year titled “Americans Really, Really Hate Inflation—and That’s a Big Problem for the Fed.”
I think so. The article goes on to cite some prominent economists who support a higher inflation target but despair of the Fed ever implementing it because the American public would hate it.
It quotes some of the economists who wistfully talk about how great it would be if we could raise the inflation target to 4% or 5% because then the Fed would have more room to lower the interest rate when we have a recession or depression.
But one economist, Jón Steinsson—who used to support a higher inflation target and has grudgingly backed off—conceded, “I think we should be humble. It may well be that people really shouldn’t hate inflation as much as they do for some reason that is good and valid. It is very plausible that we as a field haven’t really had a lot of success in modeling and articulating these costs.”
You think? Mises modeled and articulated these costs many, many years ago in showing that inflation affects the economy step by step and that prices change relative to one another. Some people benefit, the people who receive the new money early, and other people are hurt.
To conclude, natural deflation is the hallmark of a dynamic capitalist economy producing an ever-increasing range of goods in ever-increasing quantities. It rewards those who participate in this production with greater real incomes and higher standards of living, as we saw with computers, TVs, and mobile phones. Fear of deflation leads to “monetary policy,” which is simply code for deliberately raising prices and lowering the purchasing power of our dollar.
