The average length of a word in the English language is 5 characters. Within the previous anecdote exists a simple, albeit thorough rejection of the Phillips Curve that informs most modern definitions of inflation.
For background, Wall Street Journal Fed-watcher Nick Timiraos observed in a recent column that that the Fed’s ability to achieve its 2% inflation target “will prove difficult if the economy keeps chugging along.” Timiraos was making the point that economists in the Fed’s employ make, that economic growth causes prices to rise based on supply outpacing demand.
The obvious problem with the supposition is that supply and demand mirror each other. Readers surely know this intuitively. The more we’re individually growing the greater our ability to consume. There’s no price action to discuss here.
From there, it’s worth pivoting back to the 5-character, average length of a word in the English language. For context, in the 1860s the first transcontinental cable was laid on the ocean floor. It connected North America with Europe. The age of rapid communication had begun, though this was not the communication that you, the reader, are familiar with today.
If you wanted to send word or news to Europe the cost was $10 per word, with a 10-word minimum. $100 to send the briefest of brief messages overseas. $100 is a lot of money now, while in the 1860s it was a princely sum.
Please consider all of this with Twitter in mind. It’s free for non-paying users to post Tweets of up to 280 characters, after which there’s theoretically no limit to the number of people you can reach and where you can reach them.
280 characters at times is challenging when it comes to conveying a coherent thought, but 56 words (based on 5-character average word length) is surely better than the 10 for $100 that prevailed in the 1860s. And it’s free. Call it progress, which is the point. Or should be to Timiraos as he reports the near-monolithic belief among economists that prosperity pushes prices up.
While he might reply that he’s merely providing readers with insights into the thinking of Fed economists, some skepticism on his part is in order about what they’re thinking. Economists think economic growth causes prices to rise, but “economic growth” is merely wording representing what happens when talent is matched with financial capital.
The goal of the above combination is greatly enhanced productivity. In other words, economic growth is a consequence of investment, and the goal of investment is generally to attain much, much more for less.
It’s all a reminder that if an economy is growing, prices as a rule have to be falling. About falling prices, the latter shouldn’t be construed as a comment that the “general price level” falls when prices are in decline. Figure that lower-priced goods merely introduce new wants for us, or reduced adherence to tradeoffs as our dollars buy more. A falling price signals a rising price elsewhere, and vice versa.
Still, for the purposes of this write-up it has to be said that contrary to the beliefs of economists, falling prices are the surest, most obvious sign of booming growth. It’s when an economy is growing that investment in search of talent grows, and the combination once again results in advances that relentlessly push down the cost of everything. Applied to the present, Twitter users find free communication of 56-word thoughts limiting in ways that thinkers of the 1860s wouldn’t have.
Progress is cheaper everything. Put more bluntly, economists get it backwards. And in getting it backwards, they ignore that inflation is a currency phenomenon that occasionally reveals itself in prices.