In this blog post, we’ll explore the underlying principles behind why prices in a capitalist society rarely fall once they rise, as well as how the value of money changes.
Why do prices only go up?
In a capitalist society, we are constantly engaged in consumption. Unless we are self-sufficient or bartering, we buy the goods we need with money. Yesterday, today, and tomorrow—if we do not consume, our very lives cannot be sustained. However, there are times when this consumption is hit hard, and that is precisely when prices rise. This is because while our income remains constant, rising prices force us to endure corresponding hardships in our daily lives. In such moments, we often complain, “Why do prices only ever go up and never go down?” Others, on the other hand, harbor the expectation that “if prices went down, we could live a more comfortable life.”
Underlying this line of thinking is the premise that “prices are fluid.” In other words, people believe that prices can go up, but they can also go down. This is one of the major misconceptions we have about capitalism. In the reality of the capitalist world, prices can never go down. Let’s take the example of a hamburger. Fifty years ago, the price of a single hamburger was $0.50. But these days, you usually have to pay $5 to $7 for one. That means the price has risen by more than 100 times over the past 50 years. During that time, the price of a hamburger has never once gone down.
Occasionally, newspaper articles appear with headlines like “Consumer Price Stability” or “Consumer Price Decline.” Reading such articles gives us the impression that prices, which had been rising, are now falling and stabilizing. However, these are merely temporary and isolated phenomena that occur only when the flow of money is blocked. When consumption (demand) slows down, prices may temporarily stagnate or fall, but this creates side effects in other areas.
Most notably, employment becomes unstable, causing greater harm to ordinary people. Since consumption is not stimulated, companies no longer need to produce more products, and consequently, they no longer need to continue employing their current workforce. Ultimately, when consumption slows down, workers lose their jobs. Therefore, while price stability resulting from a slowdown in consumption may reduce the amount of money coming out of my pocket in the short term, 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 behind how prices are determined back in school. It is the “law of supply and demand.” When prices rise, consumers reduce their demand, but when prices fall, consumers increase their demand, so the demand curve slopes downward to the right. Producers increase output when prices rise and decrease 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 the price of hamburgers keeps going up, doesn’t that mean there has been a persistent shortage of supply for the past 50 years, or conversely, that demand (consumption) has been steadily increasing? But is there really a shortage of supply in our society? Aren’t there countless cases where unsold goods are piling up in warehouses? It’s hard to understand. So, conversely, has demand continued to grow relative to supply? Looking at our daily lives, this is also not easy to grasp. High demand implies that people have plenty of money and are constantly buying things—does that mean our economic circumstances have improved that much?
Even if salaries rise slightly, prices rise as well, so isn’t it difficult for our standard of living to improve significantly or for us to consume more?
Ultimately, we arrive at the conclusion that this phenomenon of rising prices cannot be explained solely by the “law of supply and demand.” Does that mean there is another law at play? The secret behind continuously rising prices lies in the fact that the “amount of money” has increased. When the amount of money increases, the value of money decreases, and as a result, prices rise.
When the money supply increases, prices rise
Whenever the quantity of something increases, its value inevitably decreases. If 10 people are given 10 loaves of bread, we can say that each loaf is very valuable. Since each person can eat only one loaf, that loaf is considered very precious, and thus we can say it has “high value.” But what if 1,000 loaves of bread were given to 10 people? Psychologically, people would likely think, “I have plenty of bread,” and consequently, they would not value a single loaf as highly as they did in the past. In other words, as the quantity of bread increases, its value decreases.
Similarly, as the amount of money increases, the value of money decreases. Since the value of money decreases, we arrive at the conclusion that the price of goods rises. Consequently, even if the supply of bread doesn’t decrease, a loaf of bread that used to cost $1 now costs $5.
The phrase “prices are rising” means that the quantity of goods you can buy with the same amount of money is decreasing. For example, if you could buy a whole mackerel for $3 in 2000, by 2010, $3 would only buy you the tail of a mackerel. This means 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 rather that “the value of money has declined.”
In 1970, $1,000 could buy approximately 28.57 ounces of gold. This was because the price of gold at the time was $35 per ounce. As of September 10, 2024, the price of gold reached a record high of $2,532.70 per ounce. Therefore, $1,000 today can buy only about 0.395 ounces of gold. This means that the price of gold has risen approximately 72-fold, which simultaneously indicates that the value of money has fallen by that same amount. This change is the result of a combination of factors, including an increase in the money supply and economic conditions.
One might then think: to control inflation, all we need to do is regulate the “money supply.” If the money supply doesn’t increase, the normal “laws of supply and demand” would take effect, and prices would naturally fluctuate—rising at times and falling at others. Unfortunately, however, capitalism lacks the power to regulate this “money supply.” Or, more accurately, the “money supply” must constantly increase. That is the very nature of a capitalist society. If the money supply does not increase, the capitalist society in which we live cannot function properly. This is as self-evident as saying, “If a salaried worker does not receive a paycheck, their livelihood is threatened.” Therefore, the statement “reduce the money supply to control inflation” is akin to telling salaried workers, “We won’t pay you, 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’ve said that prices rise continuously under capitalism. However, one point of curiosity is why the government consistently introduces so-called “price stabilization measures.”
Can these government measures truly stop the rise in prices under capitalism? To put it simply, while they can “curb” the pace of inflation, they cannot fundamentally lower or stabilize prices themselves.
We sometimes see articles like this in the newspaper.
“The government forecasts that the consumer price inflation rate will remain at 1.7% this year, showing signs of stabilization.”
When hearing this, most people might think, “Prices must be stabilizing,” but the fact remains that prices have still risen by about 1.7%. In other words, it does not mean that consumer prices have not risen at all; it merely means they have risen by “only 1.7%.” The pace of price increases is not extremely rapid; it is simply rising steadily. Ultimately, the fact that prices continue to rise remains unchanged.
In fact, the government is pursuing price stabilization measures through the suppression of public utility rates, tax incentives, and improvements to distribution structures. However, there is a limitation in that these measures cannot be applied on a large scale because they do not conform to the market principles of capitalism.
