inflation, growthIs it possible, not just theoretically, for a country to achieve steady economic growth and higher living standard without high rates of inflation?
EDIT
I have not done much research on this. My main reasoning was that if greater profits results in higher salaries, inflation is inescapable. But I thought there might be many more variables to it than that.
As Milton Friedman said “inflation is always and everywhere a monetary phenomenon” - it’s about money, not about what’s going on in real economy. If there’s less money in circulation, or lower monetary velocity, prices and wages will fall.
There’s plenty of historical examples of societies which had positive economic growth and deflation or pretty much zero inflation. So it’s perfectly possible.
Imagine that in one year workers produced 100 widgets each, got 100 galactic credits in wages (1 per widget produced), and widgets cost 1.5 galactic credit each to buy. Then 10 years later, everyone worker made 200 widgets, earned the same 100 galactic credit (at much lower wage 0.5 credit per widget!), and widget pries fell proportionally to 0.75 credits per widget. Even though unit wages are now much lower, and total wages stayed stagnant, workers can now afford twice as many widgets as before.
If workers now things are getting cheaper fast, they’ll accept stagnant or even decreasing nominal wages - in theory they should care about their real purchasing power in terms of what they can buy with their wages, not with some numbers on bank statement. In practice it’s somewhere in between - people mostly care about real purchasing power of their wages, but they care quite a bit more about numbers than rational expectations claim they should. (that’s called “money illusion”).
Due to variety of problems like money illusion, zero bound, downward wage and price stickiness, debt deflation etc. deflation tends to quite harmful to economic activity, and even very low inflation (0%-4%) may not always be optimal. Empirically countries with modest but not negligible inflation (5%-20%) seem to do the best, but the difference between modest inflation countries and very low inflation countries is not that huge.
In theory…
To do this the government would have to have absolute control of commerce, and money supply. The former is easily achievable through an electronic currency that requires 100% of transactions to be processed through a government transaction processor.
The latter would be much tougher. Physical property is harder to control. But the government could define prices for all goods. It could lease non consumable items at a fixed rate that it never changes. It could require that all consumable items be consumed in a facility where people were monitored and checked coming in and out for contraband consumables. Because if the consumables get out of government control then they could become a pseudo currency and create a black market in which the government would lose control.
Wouldn’t that be a fun place to live?
That said a government could take on a policy that would promote a consistent monetary value. However such a policy would probably require a relatively low debt burden to avoid instability in confidence. A consistent definition for terminology and formulas used to calculate key economic figures. And a truly independent body that is properly rewarded for true effectiveness.
Such a system would likely not be in the political interest of those charged with running the government though.
Lets take a simple situation. You and your friend start working at a firm and both of you earn 10 units a month. You put in extra effort this year while your friend lazes around. Now that you have worked hard, you would expect to have a better status than your friend. The company decides to increase your salary by 3 units and your friend’s by 1 unit.
The company now has to shell 4 units more every month. In order to maintain balance, it has to increase its revenue. So it decides to increase the price of its product by 10%. I, as a customer who bought the product at 100 units last year, would have to shell out 110 this year. Hence I too need a pay hike. Effectively, everyone gets a hike and buying power of 1 unit of money has come down which is nothing but inflation. If this hadn’t happened, you would end up without progress in your life. Hope that answers your question!
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