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Deflation: A Student's Best Friend

March 12, 2012
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.

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