Why do Prices Rise in Capitalism?

Why, if there’s constant economies of scale, if producing over time and for bigger and bigger demand allows you to get lower costs per unit  because you can build or construct or produce at scale at a large scale, why, then are prices of consumer goods forever rising? Perfectly good question and in fact exposes something. Here’s basically what it exposes. Typically, in new industries, you will find, not always, but often, a proliferation of small companies, medium-sized companies, companies where at least you can say that they are competing. That they all produce something more or less the same. Shirts, chairs, haircuts, whatever. And that they have to compete for customers so what that means is the minute any of them can achieve an economy of any kind, cheaper inputs, better technology, whatever, it might be they pass it on to the consumers by lowering their price since they have achieved some sort of economy.

And they do that because then customers will come to them. They’ve produced the commodity but at a lower cost and one of the ways you do that is by increasing your scale, so that if some companies out-compete others those who win, the competition, not only get the bulk of the consumers to come to them, that’s why they after all lowered the price, but also by driving their less efficient competitors out of business. Guess what! The winners in the competition buy the used equipment and machinery of the losers and typically hire at least some of the workers laid off by the losing competitors. Make a long story short, competition reduces the number of firms from many to few and sometimes just to one. Wow! How interesting. Why?

Because once there’s only a few, three or four, what we technically call oligopoly in economics or if you only have one, a monopoly in economics, well then here’s the good news for them. Not for us! Now that there’s only a few or even only one, they can jack up the prices because we the consumers have nowhere else to go. That’s why you hear the stories of the executives of the few remaining companies golfing together going on a vacation together, happening to bump into each other at a local restaurant because they’re working out the jacking up of prices. We call them monopoly prices. Prices that are no longer competed over, they get rid of the competition mostly by getting rid of the competitors until there’s only a few and they can get together and raise the price so what you have at any moment is in a sense two processes going on.

Fall in prices coming from the sectors that remain competitive or are just starting out as competitive versus those that have become oligopolized or monopolized where the prices are going up and what you see is the net effect on the price level of those two. The more developed the economy, the more mature the economy, the bigger the role of the monopolist. The ones who are left when lots of competitors are gone since that’s the dominant part of many modern economies, not so much the new ones in India or China or Brazil, but more the older ones like the United States, Western Europe and Japan you see the rising prices because the monopoly-oligopoly is the dominant phenomena in the economy. Last point.

You asked about deflation. Why is that such a problem? Why is that such a worry? Well, here’s the interesting thing. You’re quite right that if prices go down, that’s what deflation means, it’s the opposite of inflation, then we’re all better off because we can get the goods and services we need paying a lower price for them than what happened before a deflation takes place. So, it isn’t bad for the public. Except it’s bad for the producer! Think about it. You’re buying your inputs now; it takes you time to produce. If prices are going down by the time your output is ready to sell, you’ll have to settle for a lower price. If there’s a deflation, so it’s the business community that is most upset about! It much prefers inflation when it can buy at today’s prices and sell in the future at higher prices and pick up the difference for itself.

Nothing is neutral in economics and when you hear someone say, oh this is good for everybody, all of your antenna of suspicion should go up! Capitalism is a system that divides us. First and foremost, the tiny group of people, the minority, that our employers versus the majority that are employees. Most of the time, like 99%, what’s good for one of them isn’t good for the other one and you may get a lot of emphasis on the tiny number of win-wins but that’s in order to distract your attention from the normal major situation in which they view the world and they experience capitalism in very different ways.