<blockquote>
<p>Is it possible for a society to live with deflationary prices and suffer no ill effects?</p>
</blockquote>
<p>No, if you count above average unemployment, deeper recession and potentially more sluggish growth as “ill effects”. It is well established that deflation can make recessions much worse they need to be. In fact deflation was one of the important reasons that put the ‘Great’ into the Great Depression (See Friedman &amp; Schwartz (1965) The Monetary History of United States. Ch 7). It is also well established that at least in short run deflation leads to unnecessarily high unemployment (e.g. see the discussion in Blanchard et al. macroeconomics: a European perspective). These negative effects may also result in damage to long term growth trajectory trough possible hysteresis effects, although evidence on this is less clear so you can treat it as a hypothesis for now.</p>
<p>However, deflation is not affecting economy in some binary way. The more the change in price level deviates from its optimum, the higher the negative effects will be. Although this relationship is not necessarily linear, it’s not on off relationship.</p>
<blockquote>
<p>Yet, the conventional wisdom is that in the face of deflation, people will hoard money, not spend it on consumer goods/services, and the economy will collapse.</p>
</blockquote>
<p>This is not at all what conventional wisdom says, if by conventional wisdom you mean the consensus in economics.</p>
<p>As already mentioned above deflation is not on/off switch for negative effects. With -0.05% change in price level you won’t get the same negative effects as with -10%. People won’t start hoarding money and reduce their spending to bare minimum because of small level of deflation. They will have larger incentive to postpone consumption, compared to counterfactual world with no inflation, and people might respond to that by adjusting their spending slightly at margin but small deflation will have only small effects.</p>
<blockquote>
<p>This is clearly not the case in tech - just because you can get a better GPU next year for the same amount of money, doesn't change the fact that you really want to play the video game today and need spend money today to enjoy the experience.</p>
</blockquote>
<p>You are being confused about deflation here. Deflation is economy wide phenomenon. If price of PC drops that is not deflation, as understood by macroeconomists. That is simply a relative price change compared to other products.</p>
<p>Hence you would not even expect that the “tech deflation”, will have the same effects as actual deflation. For example, even if prices in tech sector drop by 10%, if there is general deflation in economy that makes average consumer basket prices increase by 50% consumers will still have strong incentive to spend more today than tomorrow despite of the price drop in tech sector. Yes the price drop in tech sector might also have its own effect of intertemporal consumption patterns of tech itself but this effect will be actually offset by general inflation.</p>
<p>Moreover, moving from consumer decisions, even if tech prices drop, technology company still benefits from inflation eroding real value of nominal wages.</p>
<p>Hence, your observation about the price drop in tech sector does not really tell us much if anything about effects of actual deflation.</p>
<p>In principle, we can make the negative effects of inflation less severe by eliminating nominal frictions. However, while some sources of nominal frictions are just set by legislation (e.g. minimum wages, fixed pensions) and hence they could be eliminated (although I don’t think people would vote for that),  others such as rigidity in above minimum wage wages can’t be easily solved.</p>

CC BY-SA 4.0
2023-10-24T17:56:56.300Z
Thanks for the detailed answer. I'll make a few clarifications based on what you said. A rephrasing is that the tech _sector_ is clearly deflationary; can people's behavior in the sector be extrapolated to the whole economy?
Nayuki
CC BY-SA 4.0
2023-10-24T17:58:20.960Z
As a comment, you said that tech prices can drop while the prices of other consumer goods rise, producing an overall inflation of prices in the economy. Naively, it sounds like people want to spend less on tech and more on sectors that are becoming less affordable by the day. Yet, people still spend a considerable amount on tech. What explains this, despite the sector being deeply deflationary?
Nayuki
CC BY-SA 4.0
2023-10-24T18:00:25.023Z
I'd like to note that wages are sticky upward for several reason. One is perception and psychology - it's simply shitty to get a demotion or pay cut, and people will push back. The other is that there are many laws in place where lowering the wage of an existing worker can trigger steep legal requirements to prove the need, and can also be a risk of being considered a constructive dismissal.
Nayuki
CC BY-SA 4.0
2023-10-24T18:42:17.500Z
@Nayuki 1. Again deflation, as defined by macroeconomists, is property of **whole economy, not a sector.** A clock measures time, a cog in a clock itself does not have a property of measuring time. Economy can experience deflation a sector can just experience drop in prices (macroeconomically speaking). There is no prima facie reason why drop in prices in one sector should have the same effect than drop in prices across whole economy. If one person stands up in a theater they see better if everyone stands up nobody sees better, you are sentient, clumps of cells that make up you arent
1muflon1
CC BY-SA 4.0
2023-10-24T18:45:16.090Z
you should not expect macro properties of a system to carry to constituent part of said system. 2. **In microeconomic perspective when price of good decreases spending on good increases.** Again your cells are not conscious and you are. In **a single market drop in prices boosts demand**, drop in all prices at the same time reduces aggregate demand. 3. I dont know where you read that but wages are sticky downwards not upwards, but maybe its a typo given the next sentence
1muflon1
CC BY-SA 4.0
2023-10-23T08:31:20.083Z
2023-10-23T08:44:15.563Z
2023-10-23T08:44:15.563Z
1muflon1
<p>Technology has been incredibly deflationary in the past century. A thousand dollars buys you a better iPhone this year than what was available last year. If you want a 60-inch TV, you could get it for a lower price if you wait out a year or two. Cars get safer and more featureful as the decades progress.</p>
<p>(Even if there are irregularities like each year's phone being released at a higher starting price, you could still use the secondhand market to buy previous models at a price lower than the release price, with little or no loss of functionality.)</p>
<p>Yet, the conventional wisdom is that in the face of deflation, people will hoard money, not spend it on consumer goods/services, and the economy will collapse. This is clearly not the case in tech - just because you can get a better GPU next year for the same amount of money, doesn't change the fact that you really want to play the video game today and need spend money today to enjoy the experience.</p>
<p>Likewise, even if a country's currency is deflationary, you still need some minimum amount of food and housing to survive. Just because your money is hypothetically worth more tomorrow, it can't stop you from spending money on the essentials right now.</p>
<p>Is it possible for a society to live with deflationary prices and suffer no ill effects?</p>
<p>(I am aware of related questions about the concept of deflation broadly: <a href="https://economics.stackexchange.com/questions/42646/why-is-deflation-bad-for-economy">0</a>, <a href="https://economics.stackexchange.com/questions/5861/is-zero-inflation-desirable">1</a>, <a href="https://economics.stackexchange.com/questions/5220/easy-to-understand-explanation-of-deflation-and-what-causes-it/53954#53954">2</a>. I know about the stickiness of wages by law.)</p>

<price-level><deflation><technological-progress>
Does the tech sector show that we can live with deflation?
Nayuki
# Does the tech sector show that we can live with deflation?

(Asked by: username_0 on 2023-10-23)

Technology has been incredibly deflationary in the past century. A thousand dollars buys you a better iPhone this year than what was available last year. If you want a 60-inch TV, you could get it for a lower price if you wait out a year or two. Cars get safer and more featureful as the decades progress.

(Even if there are irregularities like each year's phone being released at a higher starting price, you could still use the secondhand market to buy previous models at a price lower than the release price, with little or no loss of functionality.)

Yet, the conventional wisdom is that in the face of deflation, people will hoard money, not spend it on consumer goods/services, and the economy will collapse. This is clearly not the case in tech - just because you can get a better GPU next year for the same amount of money, doesn't change the fact that you really want to play the video game today and need spend money today to enjoy the experience.

Likewise, even if a country's currency is deflationary, you still need some minimum amount of food and housing to survive. Just because your money is hypothetically worth more tomorrow, it can't stop you from spending money on the essentials right now.

Is it possible for a society to live with deflationary prices and suffer no ill effects?

(I am aware of related questions about the concept of deflation broadly: [0](https://economics.stackexchange.com/questions/42646/why-is-deflation-bad-for-economy), [1](https://economics.stackexchange.com/questions/5861/is-zero-inflation-desirable), [2](https://economics.stackexchange.com/questions/5220/easy-to-understand-explanation-of-deflation-and-what-causes-it/53954#53954). I know about the stickiness of wages by law.)

**Tags:** price-level, deflation, technological-progress

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## 1 answers

### Answer by username_1 on 2023-10-23. Score: 1

> Is it possible for a society to live with deflationary prices and suffer no ill effects?

No, if you count above average unemployment, deeper recession and potentially more sluggish growth as “ill effects”. It is well established that deflation can make recessions much worse they need to be. In fact deflation was one of the important reasons that put the ‘Great’ into the Great Depression (See Friedman & Schwartz (1965) The Monetary History of United States. Ch 7). It is also well established that at least in short run deflation leads to unnecessarily high unemployment (e.g. see the discussion in Blanchard et al. macroeconomics: a European perspective). These negative effects may also result in damage to long term growth trajectory trough possible hysteresis effects, although evidence on this is less clear so you can treat it as a hypothesis for now.

However, deflation is not affecting economy in some binary way. The more the change in price level deviates from its optimum, the higher the negative effects will be. Although this relationship is not necessarily linear, it’s not on off relationship.

> Yet, the conventional wisdom is that in the face of deflation, people will hoard money, not spend it on consumer goods/services, and the economy will collapse.

This is not at all what conventional wisdom says, if by conventional wisdom you mean the consensus in economics.

As already mentioned above deflation is not on/off switch for negative effects. With -0.05% change in price level you won’t get the same negative effects as with -10%. People won’t start hoarding money and reduce their spending to bare minimum because of small level of deflation. They will have larger incentive to postpone consumption, compared to counterfactual world with no inflation, and people might respond to that by adjusting their spending slightly at margin but small deflation will have only small effects.

> This is clearly not the case in tech - just because you can get a better GPU next year for the same amount of money, doesn't change the fact that you really want to play the video game today and need spend money today to enjoy the experience.

You are being confused about deflation here. Deflation is economy wide phenomenon. If price of PC drops that is not deflation, as understood by macroeconomists. That is simply a relative price change compared to other products.

Hence you would not even expect that the “tech deflation”, will have the same effects as actual deflation. For example, even if prices in tech sector drop by 10%, if there is general deflation in economy that makes average consumer basket prices increase by 50% consumers will still have strong incentive to spend more today than tomorrow despite of the price drop in tech sector. Yes the price drop in tech sector might also have its own effect of intertemporal consumption patterns of tech itself but this effect will be actually offset by general inflation.

Moreover, moving from consumer decisions, even if tech prices drop, technology company still benefits from inflation eroding real value of nominal wages.

Hence, your observation about the price drop in tech sector does not really tell us much if anything about effects of actual deflation.

In principle, we can make the negative effects of inflation less severe by eliminating nominal frictions. However, while some sources of nominal frictions are just set by legislation (e.g. minimum wages, fixed pensions) and hence they could be eliminated (although I don’t think people would vote for that), others such as rigidity in above minimum wage wages can’t be easily solved.

> **Comments:**
> **username_0**: Thanks for the detailed answer. I'll make a few clarifications based on what you said. A rephrasing is that the tech _sector_ is clearly deflationary; can people's behavior in the sector be extrapolated to the whole economy?  
> **username_0**: As a comment, you said that tech prices can drop while the prices of other consumer goods rise, producing an overall inflation of prices in the economy. Naively, it sounds like people want to spend less on tech and more on sectors that are becoming less affordable by the day. Yet, people still spend a considerable amount on tech. What explains this, despite the sector being deeply deflationary?  
> **username_0**: I'd like to note that wages are sticky upward for several reason. One is perception and psychology - it's simply shitty to get a demotion or pay cut, and people will push back. The other is that there are many laws in place where lowering the wage of an existing worker can trigger steep legal requirements to prove the need, and can also be a risk of being considered a constructive dismissal.  
> **username_1**: @Nayuki 1. Again deflation, as defined by macroeconomists, is property of **whole economy, not a sector.** A clock measures time, a cog in a clock itself does not have a property of measuring time. Economy can experience deflation a sector can just experience drop in prices (macroeconomically speaking). There is no prima facie reason why drop in prices in one sector should have the same effect than drop in prices across whole economy. If one person stands up in a theater they see better if everyone stands up nobody sees better, you are sentient, clumps of cells that make up you arent  
> **username_1**: you should not expect macro properties of a system to carry to constituent part of said system. 2. **In microeconomic perspective when price of good decreases spending on good increases.** Again your cells are not conscious and you are. In **a single market drop in prices boosts demand**, drop in all prices at the same time reduces aggregate demand. 3. I dont know where you read that but wages are sticky downwards not upwards, but maybe its a typo given the next sentence  

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