It’s commonplace to see increasing real GDP as a measure of improved utility in society. But it’s less common to imagine an even better scenario of increasing real GDP and deflation. In such a situation, real incomes are increasing in a strong and sustainable fashion, as we’ll show here.

The word ‘deflation’ itself conjures up zero or negative growth. It’s never associated with growth in mainstream economic thinking. Growth is always seen as associated with inflation and even a lack of growth is usually associate with some inflation, in a situation termed as ‘stagflation’.

Can growth and deflation occur together? Do we need to think about ‘GrowthDeflation’?

Casual Economics provides the theoretical foundation for this being a natural situation.

Economies grow in the long-term due to improved technology in the broadest sense–computing, automation and even processes. Technology improvements lower prices over time, as is observed today in the IT sector. Prices can also change in various sectors due to changes in relative demand. This trend will raise average prices in some sectors and lower them in others. These real economic drivers differ from the inflation we see in our economy today. The latter is entirely a monetary phenomenon, based on central banks exogenously issuing new money when there are no real strains on the velocity of circulation. Since funds are created electronically in modern economies, there is no underlying need to issue money to ‘lubricate’ activity.

The current model of central banks constantly issuing new funds is a dangerous long-term fallacy. It is truly nothing more than a long-term tax on the asset-poor middle and lower classes, shifting wealth to the asset-rich wealthy. It allows governments to make promises beyond their means and print money to achieve goals without paying any price in the short-term. In the long-term, their currencies and true wealth will be eroded, but in the short-term associated with government election terms low, positive inflation pays off.

Causal Economics shows us that inflation increases benefits for those involved in the central banking process and those with significant assets, while also increasing costs for those without significant assets in the economy.

Why is it worth attention to debate about low inflation? How bad can it be? We should give the issue our attention, because accepting inflation of any sort reinforces a distraction from the underlying means of real economic growth–technological advances.

Naysayers of this analysis will point to historical instances of ‘tight money’ choking off credit. The reality is that tight money is always a reaction to situations where inflation got out of control, situations where real growth wasn’t occurring and money was too loose. Tight money is either the policy correction or market correction to such an out of hand situation, to bring risk levels back in line. Sustainable credit conditions are based on risk/return underwriting, not the level of money supply, loose or tight.

Some might say this post is a brief treatment of a complex topic. We believe it is a case of getting to the bottom line in a straightforward manner, by keeping top of mind the principle of coupled cost and benefits, as shown through Causal Economics.

Should we be aiming for some ‘GrowthDeflation” soon?

100% Pure Socialism and Capitalism each convey unstable long-term extremes. Raw socialism will snuff out productive growth and innovation as individual entrepreneurship gives way to reliance on big government, run by bureaucratic elites. It simply removes incentives to innovation. Raw Capitalism will produce powerful capital holders that naturally steer societal rules to their own benefit at the expense of others. Both systems result at their extreme in consolidation of power and natural ‘projection’ of that power. There likely isn’t a person around that wouldn’t be ‘corrupted’ to some degree by such opportunity for power. Few people that project their power for their benefit and that of their family and friends would even see it as ‘exploitation’. There is a natural instinct to take care of oneself and one’s family first and foremost above all else. Power and wealth entrench that safety net.

In each case, concentration of power in elites results in conditions that increase their benefit/cost (B/C) ratio much more aggressively than other over time. In the long-term, those not in the elite class experience flat to declining B/C ratios. Each system incrementally increases decoupling in B and C over time, until the system is strained and breaks. We saw this in the collapse of socialist/communist economies in the 20th century and we are seeing the strains on capitalism today, with increasing cries for socialism.

Sustainable economies and societies couple B and C across all citizens. Each pursues their own freedom and through their economic contribution increases their B/C cost ratio. They are also accountable to the society they live in. Think of a Robinson Crusoe economy. Each citizen must pay a share of taxes to cover necessary government costs. Necessary government costs are those determined by an engaged and educated democratic electorate. Unfortunately, many government costs don’t meet this condition. It’s dangerous if we end up with back-and-forth swings from socialist to capitalist and back again as each is taken to it’s limits. History has shown that this is not a desirable situation.

Is there a more balances approach? It’s time to be open minded given the polarization we see today. Causal Economic Theory suggests that we try what we might call a “Causalist Economy”. This has never truly been done, and it’s pure form would require a lot of change from current conditions, so in a pragmatic sense, it must be tested and analyzed further. Here we want to start the discussion and analysis.

What does a Causalist Economy look like? In it’s pure theoretical form (just as in traditional economics we may look at ‘perfect competition’ in its pure theoretical form), a Causalist Economy would entail:

• Free markets for goods/services and risk.
• Tax adjustments to account or externalities impacting other citizens (ex. like an environmental impact).
• Minimal professional political class (via term limits etc.)
• Valuefare (workfare where citizens can work as many hours as they want each week for a livable wage).
• Balanced trade (absence of subsidies and tariffs and non-trade barriers).
• Zero % money supply growth (monetary policy always distorts) and deflation (as prices drop due to technology innovation).
• A legal system that keeps B and C tightly coupled (i.e. people bear the costs and benefits of their actions).
• Balanced government budgets (fiscal policy is not a viable macroeconomic tool, but rather a distortion)
• Taxes are based on use of taxes, not just people with more paying more.
  • Flat tax allocations for spending that benefits all citizens.
  • User fee taxes where users are identifiable.
  • No income, consumption or wealth taxes.

This is short list of some of the more impactful elements 0f a Causalist Economy based on the principle of Causal Coupling (making sure that B and C are coupled across agents in society).

As with all new theories, the practicality of some of these more radical components need further debate. Our goal here is to start and carry on those discussions, seeking better economic outcomes in today’s turbulent times that beg for new ideas.

We welcome your insights.

The mainstream economics most of us learned in school is known as neoclassical economics, and it quite simply doesn’t explain human behavior. It’s all built on the 100% rational economic man – homo economicus. And well, people are regularly observed to be irrational/emotional. The recent surge in popularity of Behavioral Economics came about to fill the gap. It’s done a great job… but it hasn’t gone far enough.

Mainstream economics and traditional behavioral economics both model decisions based on single period time horizons and reactionary response to random outcomes. That’s not even close to reality, as you know.

Real world decisions require upfront effort – money, exertion or whatever. That is certain. They also require time for benefits to result, and those results are not always fully certain. Think of losing weight, making investments, building a business etc., pursuing a desired mate etc. etc. All of these real world decisions we make cover multiple periods, involve upfront costs and produce subsequent benefits… we hope. Causal Economics is a new branch of Causal Economics that is structured to model these real decisions.

Keep these simple principles in mind and you don’t have to go over all of the math :). But if you do want to see that, visit our foundational article published on ScienceDirect. Let us know what you think and how you’ve applied Causal Economics.