Does the Free Market Naturally Lead to Price Deflation?

In this episode, I am going to review some evidence from U.S. history regarding what we might call the level of prices, even though Austrians don't really like that terminology, and money wage rates.

And what I'm basically doing here is just going to use the case of U.S. history to go through some subtleties when it comes to understanding prices.

Inflation and deflation of the money stock and what that implies for wages and prices, because I think even some Austro libertarians might have a superficial understanding and get into some subtleties pretty quickly when you dive into this stuff.

So the backdrop here is I had recently been watching.

some podcast discussions about the history of labor in the United States.

And there was a famous railway strike in 1877.

And one of the grievances of the time was that, oh, wow, these greedy capitalists are slashing wages and it's not fair.

And the workers are sticking up for their rights and going on strike and everything like that.

And so one of the points I made when I was responding to that, is to say, well, you need to look at the historical context.

Because what happened, as we'll show here, here I'm flashing an index of the general price level for the United States, again, for the rest of this episode.

Let's put aside the quite valid concerns that Austrians have raised about talking about the price level.

But for our purposes, this will do.

for the basic qualitative points I want to make here.

So you can see on this chart that, yep, we see, well, there was like the panic of 1873.

The gray bars here represent recessions.

And prices were falling through there.

But if you see the bigger picture there, what had really happened is that prices basically doubled during the Civil War or the war between the states.

And then they were coming down gradually after that.

And so this notion that you might get is just that all of a sudden, you know, the railroad owners woke up one day in 1877 and he said, you know what, why don't we just start cutting wages? Ha ha ha.

I mean, even on its own terms, if they had the power to do that, why did they wait until 1877 to do it? Right.

So that's kind of the The standard objection that a free market person can give when someone else is talking about how we need labor unions or we need to raise the minimum wage because otherwise, you know, you're just at the mercy of the of the employer.

And it's, again, the standard first go to response.

to push back on that worldview is to say, well, if all the employers can get away with just paying starvation wages, why aren't they all doing that right now? Or if you think the minimum wage is needed to ensure that people at least get some basic level of decent, because the workers have no bargaining power and everyone just has to work to eat, well, then how come the vast majority of people right now in the United States earn more than the minimum wage, right? Shouldn't everybody just be earning the minimum wage? According to like the most naive, hyperbolic view of, you know, a labor activist.

So likewise here, if it really were as just straightforward as, well, the railroads back in the 1870s were cutting wage rates.

Because they could, and there was no organized labor movement, you know, beforehand.