In this blog post, we’ll explore the underlying principles behind why prices in a capitalist society don’t easily come down once they’ve risen, 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’re self-sufficient or engaging in barter, we buy the goods we need with money. Whether yesterday, today, or tomorrow, our very lives cannot be sustained without consumption. However, there are times when this consumption is disrupted—namely, 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 grumble, “Why do prices only ever go up and never go down?” Conversely, some people harbor the hope that “if prices went down, we could live a little more comfortably.”
Underlying this line of thinking is the assumption 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 actually fall. Let’s take the example of a hamburger. Fifty years ago, a single hamburger cost $0.50. These days, however, you typically have to pay between $5 and $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.” When we read such articles, we get 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 causes side effects in other areas.
Most notably, employment becomes unstable, causing greater harm to ordinary people. Since consumption isn’t picking up, companies no longer need to produce as many products, and consequently, they no longer need to keep the people currently working on the payroll. Ultimately, when consumption slows, 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
So 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; therefore, the demand curve slopes downward to the right. Producers increase output when prices rise and decrease output when prices fall; therefore, 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. Doesn’t the fact that the price of hamburgers keeps going up mean that, ultimately, there has been a continuous 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 outpace 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—but does that mean our economic circumstances have improved that much?
Even if salaries rise somewhat, prices also go up, so isn’t it unrealistic to expect our standard of living to improve significantly or to consume much 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 work? The secret behind continuously rising prices lies in the fact that the “money supply” 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 anything increases, its value inevitably decreases. If 10 people are given 10 loaves of bread, we can say that each loaf of bread is very valuable. Since each person can eat only one loaf, that loaf is considered very precious, and we can therefore 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 wouldn’t value a single loaf as highly as they did before. 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 prices of goods consequently rise. As a result, 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 a mackerel tail. 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 approximately 0.395 ounces of gold. This means that the price of gold has risen about 72-fold, which simultaneously indicates that the value of money has fallen by the 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, to be more precise, 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 a statement 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 a salary, 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 that raises questions is why the government consistently introduces so-called “price stabilization measures.”
Can these government measures truly halt inflation under capitalism? To put it simply, while they can “curb” the rate 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 stable this year at 1.7%.”
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, this does not mean that consumer prices have not risen at all; it simply means they have “risen by only 1.7%.” The rate of price increases is not particularly rapid; prices are merely rising at a steady pace. Ultimately, the fact that prices continue to rise remains unchanged.
In fact, the government is pursuing measures to stabilize prices through the suppression of public utility rates, tax incentives, and improvements to distribution structures. However, these measures cannot be applied on a broad scale because they do not conform to the market principles of capitalism.
