This blog post explores the hidden principles behind why prices in capitalist societies don’t easily fall once they rise, along with changes in the value of money.
Why do prices only go up?
In capitalist societies, we constantly engage in consumption. Unless we live in self-sufficient communities or barter, we buy necessary goods with money. Yesterday, today, and tomorrow—without consumption, our very lives cannot be sustained. However, this consumption activity takes a hit when prices rise. This is because while income remains constant, rising prices mean we must endure greater hardship in daily life. In frustration, we might grumble, “Why do prices only go up and never come down?” Conversely, others harbor the expectation that “if prices fell, we could live a more comfortable life.”
Underlying this thinking is the assumption that “prices are fluid.” That is, they believe prices can rise, but they can also fall. This is one of the major misconceptions we have about capitalism. In the reality of the capitalist world, prices absolutely cannot go down. Take the example of a hamburger. Fifty years ago, one hamburger cost $0.50. Nowadays, you typically have to pay $5 to $7 for one. That means the price has risen over 100 times in 50 years. During that entire period, the price of a hamburger never once went down.
Occasionally, newspaper articles appear about ‘consumer price stability’ or ‘consumer price declines’. Reading such articles gives us the impression that prices, which had been rising, are now falling and stabilizing. However, these are merely temporary and peripheral occurrences that happen only when the flow of money is blocked. When consumption (demand) slows, prices may temporarily stagnate or fall, but this creates side effects in other areas.
Most notably, employment becomes unstable, causing greater harm to ordinary citizens. When consumption isn’t stimulated, companies see no need to produce more goods, and consequently, they no longer need to keep their current employees. Ultimately, when consumption slows, workers lose their jobs. So, while price stability due to reduced consumption might temporarily save money coming out of my pocket, it carries the greater risk of losing my job altogether.
The Law of Supply and Demand from Textbooks
Then why do prices constantly rise under capitalism?
We learned the principle determining prices in school: the ‘law of supply and demand’. When prices rise, consumers reduce demand, but when prices fall, consumers increase demand, so the demand curve slopes downward to the right. Producers increase output when prices rise and reduce output when prices fall, so the supply curve slopes upward to the right. The price is determined at the point where these two curves intersect. In other words, when demand is high and supply is low, prices rise; when demand is low and supply is high, prices fall.
But something doesn’t add up. If hamburger prices keep rising, doesn’t that mean supply has been consistently insufficient for the past 50 years, or conversely, that demand (consumption) has been continuously increasing? But is supply truly insufficient in our society? Aren’t there countless cases of unsold goods piling up in warehouses? It’s hard to grasp. So, has demand been steadily increasing relative to supply? Looking at our daily lives, this isn’t easy to understand either. High demand implies citizens have plenty of money to keep buying things, but does that mean our economic lives have improved that much? Even if salaries rise somewhat, prices also increase, so it’s unreasonable to expect a significant improvement in living standards or increased consumption.
Ultimately, we arrive at the conclusion that this phenomenon of rising prices cannot be explained solely by the ‘law of supply and demand’. So, does that mean there’s another law at play? The secret behind continuously rising prices is precisely because the ‘money supply’ has increased. When the money supply increases, the value of money decreases, and consequently, prices rise.
When the money supply increases, prices rise
Whatever increases in quantity inevitably decreases in value. If 10 people are given 10 loaves of bread, the bread can be said to be very valuable. Since each person can only eat one loaf, that bread is considered very precious, and thus we can say it has ‘high value’. But what if 1,000 loaves of bread are given to 10 people? Psychologically, people will likely think, ‘I have plenty of bread,’ and consequently, they won’t value a single loaf as highly as before. In other words, as the quantity of bread increases, its value decreases.
Similarly, when the quantity of money increases, its value decreases. As the value of money decreases, the conclusion is that the price of goods rises. Consequently, even if the supply of bread doesn’t decrease, what used to cost $1 now costs $5.
The phrase ‘prices rise’ means that the quantity of goods you can buy with the same amount of money decreases. For example, if you could buy a whole mackerel for $3 in 2000, by 2010, $3 would only buy you a mackerel tail. This signifies that the value of money has fallen. Ultimately, the true meaning of “prices are rising” is not that “the price of goods has become more expensive,” but that “the value of money has declined.”
In 1970, $1,000 could purchase approximately 28.57 ounces of gold. This was because the gold price at the time was $35 per ounce. As of September 10, 2024, the gold price reached a record high of $2,532.7 per ounce. Therefore, $1,000 today can purchase approximately 0.395 ounces of gold. This signifies that the price of gold has risen about 72-fold, while simultaneously indicating that the value of money has fallen by that same amount. This change is the result of a complex interplay between increased money supply and economic factors.
One might then think: to control inflation, we just need to regulate the ‘money supply’. If money doesn’t increase, the normal ‘law of supply and demand’ would operate, and prices would sometimes rise but also fall, right? Unfortunately, capitalism lacks the power to regulate this ‘money supply’. More accurately, the ‘money supply’ must constantly increase. That is the nature of capitalist society. If the money supply doesn’t increase, the capitalist society we live in cannot function properly. It’s as obvious as saying ‘if salaried workers don’t receive their wages, their livelihoods are threatened’. Therefore, saying ‘reduce the money supply to control prices’ is akin to telling salaried workers ‘we won’t pay your wages, so work hard for our company’. Unfortunately, expecting prices to fall in a capitalist society is nothing more than a naive notion.
Why the Government Introduces ‘Price Stabilization Measures’
We said that under capitalism, prices continuously rise. Yet one question arises: why does the government persistently introduce these ‘price stabilization measures’? Can these government measures truly halt the price increases inherent to capitalism? To cut to the chase: they can ‘curb’ the pace of inflation, but they cannot fundamentally lower or fix prices themselves.
We occasionally see statements like this in the news:
‘The government forecasts that this year’s consumer price inflation rate will stabilize at 1.7%.’
Hearing this, most people would think, ‘Prices must be stabilizing,’ but the fact remains that prices still rose by about 1.7%. In other words, it doesn’t mean consumer prices didn’t rise; it merely means they ‘only rose by 1.7%.’ The pace of price increases isn’t exceptionally fast; it’s just rising steadily. Ultimately, the fact that prices continue to rise remains unchanged.
In fact, the government is pursuing price stabilization measures through public utility rate controls, tax incentives, and improvements to distribution structures. However, these measures inherently conflict with the market principles of capitalism, limiting their broad applicability.
