Deflation: A Student’s Best Friend

Despite hysterical warnings about the grave evils of deflation from central bankers, mainstream economists, and financial pundits, we are reminded on a daily basis of the Austrian insight that falling prices are a boon to consumers and a manifestation of growing economic prosperity. Indeed, as I have argued elsewhere, a secular decline in overall prices is a benign and natural outcome of a dynamic and growing capitalist economy operating under a genuine gold standard.  Unlike central bank fiat money, a commodity-money regime governed by market forces encourages the capital accumulation necessary to finance entrepreneurial innovations that reduce production costs, expand supplies of products and lower prices. I have also discussed recent empirical research that has discovered almost no correlation between deflation and depression. The bottom line is, all other things equal, lower prices are better than higher prices for consumers, and the lower the better, because the goal of an economy is to serve consumers. As Murray Rothbard once expressed it in a lecture, “I want all prices to drop to a nickel.”

The latest example of the benign consequences of falling prices on consumer welfare can be seen in the textbook market, where Flat World Management has introduced a novel publishing and distribution model for college textbooks. The firm publishes textbooks in many different fields and has recently published a new strategic management textbook co-authored by business professors Dave Ketchen of Auburn University and Jeremy Short of University of Oklahoma. The textbook, Mastering Strategic Management, was released in late December 2011 and is available for free online. It can be downloaded onto the iPad for $35.00 while hard copies are available in black and white for the same price and in color for $60.00. Meanwhile, one of the leading strategic management textbooks, Crafting and Executing Strategy: The Quest for Competitive Advantage by two University of Alabama Professors retails for $175.00! Another competitive advantage enjoyed by the Ketchen/Short textbook is the visual learning techniques incorporated by the authors, who have collaborated before in publishing graphic novel-style textbooks.

True to his discipline, Ketchen extols the virtues of rivalrous competition and falling prices for consumers:

Textbooks are ridiculously overpriced in most cases. . . . [W]e wanted to create a good book students could read for free. To me this is the Iron Bowl [the fiercely rivalrous Auburn versus Alabama football game] enters the textbook arena and I am going to enjoy taking their lunch money.

Now, one should be careful not to infer from this example that every new technology is automatically commercially viable and that its exploitation always improves efficiency and yields a profit. In fact, selecting among the array of new and untried production techniques is a matter of shrewd entrepreneurial judgment about future market conditions and requires careful allocation of scarce financial capital and real resources. Employing digital media in an innovative production technique does not automatically guarantee success by suddenly rendering resources costless and infinitely reproducible. Investing in digital media willy-nilly will result in squandered resources and will  be punished severely by the market like any other rash decision. In the above example, Flat World Management is speculating that the free online textbook will be widely adopted and that student users will perceive the iPad download and/or the hard copy versions of the textbook as complements to the free version, stimulating high-volume demand for the revenue producing versions. If this model proves successful, I foresee the possibility of a joint venture with Apple because the iPad will also be an important complement whose demand will be enhanced.


  1. I am confused by yor article on deflation, unless perhaps it is not about deflation at all, but about innovative publishing ideas.

    If delation suffers from the same misuse as inflation, then one should distinguishi between price deflation and monetary deflation; one being the reduction in price, and the other being the reduction in money supply. In sort, deflation denotes a rise in the purchasing power of a unit of money, and inflation marks a fall.

    While deflation is a boon to those who pay cash for cheaper goods, it has the oppossite effect on borrowers, who have to pay back their loan with money that is more valuable than that which was borrowed.

    Consequenlty, deflation presents a hazard for loan performance, much like is happening in the housing market today.

    It seems you are simply observing that technology makes more value available for less money, in relative terms; a restatement of Moore’s Law.

    What does this really have to do with deflation? The argument should be for stable money, which encourages long-term savings and investment.

  2. Apologies for coming up with two agricultural subsidy analogies in under 24 hours…

    Like European and US agriculture, large parts of education are subsidized.

    Education and agriculture are injection points for money, at least part of which is going to be from monetary expansion.

    Farmers, academics and students, then bid up the prices of their respective inputs: Land, seed, fertilizer, breeding stock, pharmaceuticals, machines etc for farmers, Textbooks, Ipads, cheap rental property, fast food, leather elbow patches and so on, for academia.

    If we use Eastern European or Asian printers for putting the info onto the paper, that part is very roughly around one US dollar for a couple hundred pages of US Letter / A4 format and a paperback binding, for a print run of 1,000.

    The expensive part is the writing (not that the author usually gets much return!), editing, capital and a book shop.

    How much of the cost of those expensive parts is currently inflated by malinvestment?


    To what extent is the current diversity of titles the reflection of a bubble?

    I’ve got to admit to books being one of my main voluntary expenditures (extortionately taxed fuel is my biggest essential expenditure), and accumulate them to the extent that I have to be careful where I place my book cases, so that they don’t overload the structure of my house!

    I much prefer reading and scribbling margin notes on paper to doing it on the available screens,

    add to that, my remote location means that I have to run a generator or charge big lead acid batteries to be able to run a computer for any length of time…

    Those personal points aside, I also have a huge stock of out of copyright and Mises Institute scans and .PDFs (my ex has promised to send me free software which allows me to put margin notes in them…)

    The low cost really does make a difference, even with my unusual circumstances and preferences.

    I’m speculating now, but, will initiatives like this, burst the bubble and result in lower cost providers picking up the titles and boxed up stock of printed books in the resulting liquidation sales?


    Will the continuing subsidization of education result in the continuation of bidding up prices and the current paradigm surviving?

    As an agricultural foot note, a friend and neighbour who died a couple of years back, was reckoned to run his business with just land, sheep, a shed for storing hay, a dog, a stick, and some old baler twine to use for any repairs.

    Several other farmers whom I know, have plans to operate the same low cost way, if and when the subsidies stop.

  3. You may want to look at this from the opposite viewpoint first, In an environment of expanding stock of fiat money, do the rising prices really benefit debtors? Seems that it might at first glance, but debtors must use a greater proportion of their income to pay for non-debt rising expenses.

    Economic growth is increased production due to capital investment etc. When prices decline from this “secular deflation”, it means that real income is increasing. Labor’s nominal wage does not necessarily decrease in this scenario although their real income increases. The debtor doesn’t lose in this situation since they are able to buy more with each dollar thereby increasing their standard of living.

    Also, this is exchange demand for money and it actually increases, which results in an increase in the purchasing power of money in the money relation..

    Perhaps someone with a better understanding will help.

  4. What if prices were to decrease 10% per annum from economic growth? Wouldn’t that trigger a wave of defaults? I know that for those with no debt the only thing that matters is relative prices. However, if debt is involved, absolute prices become an issue.

    Perhaps demand for the dollar would weaken if it could could buy more from economic growth and those two forces would offset themselves.

    If, however, there were a significant amount of price decreases from economic growth wouldn’t that screw up the credit markets and the economy?

    • acceptancetake,

      Price decreases from economic growth never lead to economic problems. Why would it screw up credit markets? If though growth a producer can supply at a lower cost and still make a profit then those who use his product benefit and he could also as his volumn increased at the lower price. Don’t get sucked into the Keynesian-monetarist myth that money and credit are necessary for economic growth. Money and credit facilitate economic growth but they are the servant of growth not the master.

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