Consequences and Myths Concerning Deflation

In order to understand the consequences of price deflation, many economists have focused on a macroeconomic aggregate: price levels. They have considered its declines and its relation to other aggregates like the gross domestic product (GDP). This procedure, however, obstructs the view of consequences apart from those aggregates that are more or less meaningful. In other words, the aggregates obstruct the view on individual human action. It is individual human actions in the first place that lead to exchanges of things and thus to exchange relationships, i.e. prices. Looking at the movements of a statistical price level obstructs the analysis of consequences of individual price changes on human action. To understand the consequences of price deflation one has to analyze the consequences of a decline of individual price changes. This is what price deflation really means: the fall of a significant portion of individual prices. Of course, prices are always the result of a complex market process. It is within this dynamic of human interactions that one can determine which prices fall first, which fall later, which fall faster, which fall slower and to which extent. Which companies or individuals make higher or lower profits in a price deflation depends on this dynamic.