Consumer deflation is the whole point of the industrial revolution and its aftermath. Whereas it took 18 man-hours to turn a pound of cotton into cloth in the 1760s, it took only 90 minutes to do the same a century later. A person therefore needed to work a twelfth as long to clothe himself. Most of the great industrial robber barons got rich by making things cheaper. Andrew Carnegie cut the price of a steel rail by 75 per cent in 30 years between 1870 and 1900; John D Rockefeller slashed the price of oil by 80 per cent over the same period. Henry Ford’s first Model T sold for $825. Four years later he’d cut the price to $575.
It’s still happening today. Wal-Mart, Aldi and Ryanair won their market shares by ruthlessly charging us viciously lower prices. And here lies a cause for optimism in the midst of this recession. Even though jobs are being lost, houses repossessed and firms bankrupted, the underlying deflation caused by innovation is still going on – indeed, on the web, it’s accelerating. All over the internet, people are dreaming up ways of making things available to you more cheaply, more conveniently, more copiously and more quickly. That is what will cause prosperity to return one day.
(emphasis mine)
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