To understand the causes and mechanisms of inflation, we need to look at economic principles, government policies, and the flow of money. In this blog post, we’ll look at why prices rise and the role of government in reining them in.
Why do prices keep rising?
In a capitalist society, we are constantly consuming. Unless we are self-sufficient or bartering, we pay for the things we need. Without spending yesterday, today, and tomorrow, we wouldn’t be able to live. But there comes a time when this spending behavior takes a hit, and that’s when prices rise. This is because we have a constant income, but when prices rise, we have to bear the pain of daily life. Some people say, “Why do prices keep going up and not going down?” and then they complain. Some people also have the opposite expectation: “If the cost of living went down, I would be able to live a more relaxed lifestyle.
The premise behind this thinking is that prices are fluid: they can go up, but they can also go down. This is one of the biggest misconceptions we have about capitalism. In the reality of the capitalist world, prices can never go down. Take the example of hamburgers. Fifty years ago, a hamburger cost half a dollar. Nowadays, you can usually pay between $5 and $7 for one. That’s a more than 100-fold increase in 50 years. In the meantime, the price of a hamburger has never gone down.
Every once in a while, you’ll see a newspaper article about “consumer prices stabilizing” or “consumer prices falling”. This gives us a sense that prices have gone down and are stabilizing. However, this is only a temporary and tangible effect that only happens when the flow of money is blocked. When consumption (demand) slows down, prices may temporarily stagnate or fall, but this has other side effects.
Most notably, it hurts the common man by destabilizing employment. With consumption not being stimulated, companies don’t need to produce more goods, and therefore don’t need to keep the people they currently have employed. In other words, when consumption slows down, workers lose their jobs. So, while stabilizing prices by slowing consumption may mean less money out of your pocket right away, there’s a bigger risk that you could lose your job altogether.
The textbook law of supply and demand
So why are prices constantly rising in capitalism?
We’ve all learned in school how prices are determined. It’s the law of supply and demand. The demand curve slopes downward to the right because when prices rise, consumers decrease their demand, but when prices fall, consumers increase their demand. The supply curve shows an upward slope to the right because producers increase production when prices rise and decrease production when prices fall. The point where these two curves meet is where the price is determined. In other words, when demand is high and supply is low, prices are expensive, and when demand is low and supply is high, prices are cheap.
But something is wrong. If the price of a hamburger keeps going up, doesn’t that mean that there has been a continuous shortage of supply since 50 years ago, or conversely, that demand (consumption) has been increasing. But is there really a shortage of supply in our society? There are countless cases of unsold goods piled up in warehouses. It’s not easy to understand. Or, on the contrary, is it that the demand has continued to increase compared to the supply? This is also not easy to understand based on our daily lives. High demand means that people have a lot of money and keep buying things, but does it mean that our economic life has gotten better? Even if the salary increases slightly, the price of goods also increases, so it is not enough to improve our lives or consume a lot.
In the end, we come to the conclusion that this phenomenon of rising prices cannot be explained by the law of supply and demand alone. But is there another law? The secret to the constant increase in prices is that the amount of money has increased. When the amount of money increases, the value of money decreases, and as a result, prices increase.
More money in circulation causes prices to rise
The value of anything decreases when the quantity increases. If 10 people are given 10 loaves of bread, we can say that bread is very valuable. Since one person can only eat one loaf of bread, it is considered very precious and therefore “valuable”. However, what if 10 people are given 1,000 pieces of bread? Psychologically, they think, “I have a lot of bread,” and as a result, they don’t value one piece of bread as much as before. In other words, the value of bread decreases as the amount of bread increases.
Similarly, as the amount of money increases, the value of money decreases. Since the value of money decreases, we conclude that the price of goods increases. So, even if the supply of bread doesn’t decrease, the bread that used to cost one dollar now costs five dollars.
When we say “prices are rising,” we mean that the amount of things you can buy with the same amount of money is decreasing. For example, if you could buy a whole mackerel for $3 in 2000, in 2010 you can only buy a small mackerel tail for $3. This means that the value of money has decreased. In other words, the real meaning of “inflation” is not that things have become more expensive, but that the value of money has decreased.
In 1970, $1,000 could buy about 28.57 ounces of gold, because the price of gold was $35 per ounce at the time. As of September 10, 2024, the price of gold peaked at $2,532.7 per ounce. Therefore, $1,000 could buy about 0.395 ounces of gold today. This represents a roughly 72-fold increase in the price of gold, and a corresponding decrease in the value of money. This change is the result of a combination of increased monetary volume and economic factors.
You can think of it this way. To control prices, we just need to control the amount of money. Without more money, the normal “law of supply and demand” would work, and prices would rise and fall. Unfortunately, capitalism does not have the power to control the amount of money. Or, more precisely, the amount of money must be constantly increasing. That’s what a capitalist society is. Without an increasing amount of money, the capitalist society we live in cannot function properly. It’s like saying that if an employee doesn’t get paid, their livelihood is threatened. So saying “reduce the amount of money to control prices” is akin to saying “work harder for our company because we won’t pay you”. Unfortunately, in a capitalist society, it is “naive” to expect prices to go down.
Why do governments introduce ‘price stabilization measures’?
We’ve said that prices are constantly rising under capitalism, but one thing we’re curious about is the fact that governments constantly introduce so-called “price stabilization measures”. The bottom line is that while they can “contain” the rate of inflation, they cannot fundamentally lower or stabilize prices.
We sometimes read in the newspapers.
“The government expects consumer price inflation to stabilize at 1.7% this year.
When you hear this, most people think, “Well, prices are stabilizing,” but the fact remains that prices are still rising by 1.7%. It doesn’t mean that they’re not rising, it just means that they’re only rising by 1.7%. It’s just that the rate of inflation isn’t going up very fast, it’s just steady. In the end, the fact remains that prices will continue to rise.
True, the government is trying to stabilize prices by curbing utility bills, providing tax incentives, and improving the distribution structure. However, there is a limitation that they cannot be widely applied because they are not in line with the market principle of capitalism.
