Deflation: What Happens When Prices Fall - Chris Farrell (Collins, 2004)

Inflation has been the global experience since the end of WWII, but this may have been the anomalous period in modern economic history in that deflation or stable prices are more likely over the long run.  Since the mid-1990s, deflationary pressures brought about by advances in productivity and technology have moderated the increase in prices and wages. This book looks at causes and consequences and tries to argue that, in the main, this is a good thing. [332.43]

This book was written as an analysis of current economic trends.  With the perspective of the past dozen years, a book such as this becomes interesting for what it appears to have gotten right and for what we now know to have been quite wrong. 

The author's premise is that deflation brought about by a drop in demand, as happened in Japan after its real estate bubble collapsed can be very damaging to an economy.  The Great Depression is another example of such a deflation; it was a rapid drop in prices and, by setting up expectations of further falls in price, encouraged consumers to put off buying goods that would only be cheaper later still.  The fall in demand and economic activity becomes self-perpetuating.   

There is another type of deflation, one that is gradual and results from outward shifts of the aggregate supply curve.  (NB. This is NOT an argument of "supply side" economics nor should it be confused with that specious doctrine.)  Such a shift results from new technology, increased competition, or changes which reduce the costs of production generally.  In this world, wage increases may be severely dampened, but they are more than compensated for by increased purchasing power. 

Farrell argues that our current bout of low inflation, bordering on deflation, is similar to the same phenomenon at the end of the 19th century in that both grew from new technology: railroads, telegraph, electricity or the internet and supply chain management.  In fact, he suggests that most of modern history saw fairly stable prices with the post-WWII period being the true exception.  Such periods of economic transition can be very difficult for many workers and business owners as industries undergo Schumpeterian creative destruction. 

Correctly, then, Farrell expected some social stress as workers are displaced and industries undergo new competition.  He could see free trade as a likely scapegoat for the social cost of a changing global economy.  This clearly is continuing today and it has affected our political process.  The book is colored by the dot.com collapse and its destruction, but that is already fading.  The author cannot anticipate the far more serious collapse of 2008.  This will exacerbate some of the negative trends and will reverse the steps toward income equality that the late-90s boom engendered as employment grew.   And, the consequent deleveraging as credit collapsed would hold back recovery much longer than might have been expected.  Overall, the author has presented a clear argument that better explains what our economy is going through and offers comfort in that we have been here before. 

This book is recommended for its fresh perspective on deflation.