What effect, if any, do technological improvements have on the general price level? I believe that technology causes prices to go down. Here’s why.
Back in College Economics 101, a professor explained how prices are set by companies. He said they subtract their cost estimates from various projected selling prices to find the various possible profit margins. Then they chart that against the expected units sold at the various prices.
Where the two graphs cross gives the maximum profit (but companies would trim the volume, and raise the “best” price, to achieve a desired ROI (Return on Investment)). In the real business world, its nowhere near that exact, but the general outline of the process makes some sense.
To be sure, there are a ton of estimates that need to be made. Businesses which do a poor job of the estimation process, risk going out of business (prices set too high -> not enough customers, prices too low -> not enough profit) . Over time, this leaves only better estimators as suppliers of goods and services.
Now, the number that a business can improve is the cost to produce the product. If technology improves, it can reduce the costs to produce. For example, if human technology improves, through employee training for example, quality goes up and reject rate goes down, so the cost for the value offered goes down, leaving room for more profit and a lower selling price.
If process technology improves, as when Henry Ford introduced the production line, costs fall allowing selling prices also to fall. And, if machinery technology improves, as when CNC controls allowed for greater use of robotics in manufacturing, costs and prices will tend to go down.
The point is that, any time that any form of technology improves, the price of the item sold will go down – or more correctly the value to the customer will go up. Over time, better value will replace lesser value, and the general price level for all items offered onto the market will go down.
Yes, the basket of goods and services offered will change over time. Yes, the concept of combining the prices of apples and oranges into a general price level is sketchy at best. But, if all else were held equal for 100 years (yes, an impossibility), you would expect the prices to be lower, and value to be higher, for eggs & milk, dresses & suits, pots & pans, cars, homes, computers & pianos, and everything else offered for sale.
In fact, during the 1800s, while the US was on a Gold or Gold/Silver Monetary Standard, prices did indeed decline.
Since the FED (US Federal Reserve) was created in 1913, the supply of paper money – M2 – has increased by about 400 times (that’s NOT 400%!). Over the long term, such debasing of the currency will result in prices which are higher than without the money printing.
The BLS (biased) CPI has gone up about 24 times since then, while others (eg. http://www.ShadowStats.com) show about a 60 times increase in prices. Using a low side guess at technological improvement of 2% a year (3% might be more like it), we might expect a 7 fold improvement in prices/value over that 100+ years since the FED started printing. This gives about a 400 times increase in prices since 1913 (60*7)!
Instead of the price of a $1.00 item in 1913 going down to about $0.14 today, all of the FED’s debasement of the money supply has caused that $1.00 item from 1913 to go up to $24.00 (BLS numbers) or to $60.00 (ShadowStats.com numbers).
Now truly, other factors come into the equation. New items & categories of items are invented, and consumer preferences change.
With Gold and Silver, there can be times of large new supplies of these monies in the short run. But paper Dollars were needed to have the 400 times M2 increase we’ve seen with the FED. The FED has robbed all Americans with that 400 times printing of Dollars. All Americans are paying 400 times more than they would have paid. Americans’ life savings are losing value because of the FED’s unending printing.
We need to ratchet down the FED’s ability to create more paper Dollars, so that eventually, we can end the FED.