Wherever businesses are free to compete, the price of a thing is made of two parts. What it costs to make, and a profit on top. The profit is never safe. A big profit tells other businesses there’s easy money to be made, and one of them can take the customers by offering them more for less. So the profit gets competed away until the price ends up just above what the thing costs to make. That’s half of the answer. The other half is that the cost of making things is falling as well, and the fall keeps getting faster. Competition pushes the price down to the cost, and stops there. Technology pushes the cost down, and doesn’t stop.
If prices fall on their own, why does your weekly shop keep costing more? Because almost every price you see has two things pushing on it at once. Technology pushes the cost of making the thing down. New money pushes the price you pay up, because more of it keeps being created, and when there’s more money around, each pound or dollar buys less. It takes far less to grow, ship, and brew coffee than it did decades ago, and the price at the till still went up, mostly because the money lost value faster than the coffee got cheaper to make. New money doesn’t stop the fall in what it takes to make things. It hides the fall in the price you pay, and how much of it you get to see depends on what’s happening to the money.
The squeeze
Falling prices start with the customer. Given two versions of the same thing, people nearly always pick the cheaper one, or the better one at the same price. You do it at the supermarket without thinking, and nearly everywhere else you spend money. That one habit is what forces prices down.
Now say you run a business and you’re looking for a market to get into. A product that sells for a lot more than it looks like it costs to make is a signal. It tells you there’s room to come in cheaper. You can’t win its customers by offering the same thing at the same price, because they’d have no reason to move. You win them by charging less, or by offering something better, or both. The business already there then has a choice. Match you, or lose its customers. Matching means cutting its price, or spending money to catch up with your better product. Either way its profit shrinks. And once it has matched, the next business comes in and the same thing happens again.
So why doesn’t the price keep falling all the way to nothing? Because there’s a limit on each side. A business can’t sell below what the thing costs to make, not for long, because then every sale loses it money. But any price held well above that cost leaves room for someone else to come in cheaper and still make a profit. So the price gets pushed down from above and held up from below, until it settles just above what it costs to make one more of the thing, once the business is up and running. Economists call that the marginal cost. The little on top of it is what it takes to keep the business running.
Profit doesn’t disappear in all this. It moves. You make your money while the price is on its way down. When it reaches the bottom, the money and the people who earned it move on to the next thing that’s still scarce, whether or not the business survives. Storing photos went to free, and the profit moved into tools for organising and sharing them. The calculator app went from something you paid for to a free line of code, and the developers moved on. And the money customers save on the old thing is what they spend on the next one. That’s why people keep investing in things whose prices are falling. Money was made in streaming, where the price per play collapsed, in budget airlines, and in software that businesses rent instead of buy, while the price kept dropping, because lower prices bring in more customers.
Competition looks like a fight between businesses, but what it does is force each one to serve the customer better than the last one did. Where anyone is free to enter a market, that’s the only way to win. So a free market makes things plentiful and cheap over time, instead of letting whoever got there first charge whatever they like.
A business can try to hold its price up when its costs fall, and for a while that works. Customers stick with the names they know, so brand and habit slow the fall. But a price held above cost is exactly the signal that brings the next rival in, so habit only ever slows it. Only one thing holds the fall back for long, and that’s a wall. A licence that keeps new businesses out. A regulation written by the big firms already in the market. Protection from the government. Or first access to newly created money, which lets a big firm outlast smaller rivals it couldn’t beat on price. A monopoly that lasts a while is normal, and it can happen in any market. A product that gets better as more people use it can keep one winner in place for decades, but it stays there by being cheap or free, so it blocks rivals without stopping prices falling. A monopoly that keeps prices high for decades is almost always leaning on one of those walls. That’s a market that has been blocked, not one that failed. And it’s that wall, not falling prices, that stops people building new businesses. You can’t compete head-on with a rival the law protects.
Why the fall is speeding up
Competition can only take a price down as far as the cost of making the thing. Once the price gets there, it has nowhere left to go. So competition on its own would run out of room, and fiercer competition would only get there sooner. What has no end in sight is the fall in the cost of making things. That fall keeps getting faster, and it’s where the speeding up comes from. There are five reasons for the speeding up.
1.Tools compound
Most improvements help make the next improvement. Better chips make better software, better software designs better chips, and now machines help build the machines. When each gain builds on the last, the steps get bigger over time, not smaller. We’re used to progress coming in steady steps, so each time the steps get bigger we expect them to settle back to the old size. Taken all together, so far they haven’t, and that’s why new technology keeps taking people by surprise.
2.More of the economy keeps turning into information
A song used to be a disc, and now it’s a file. A map used to be paper, and now it’s an app. The design of a product is becoming a file that a machine can print close to the buyer. And more and more, a diagnosis, or the first draft of a contract, comes from an AI in seconds. Once a thing is information, making one more of it means making a copy, and a copy costs almost nothing. So the price of that thing heads toward free. Software did this to one set of tasks, AI is doing it to work that used to need a trained person at a desk, and robots are carrying the same change into warehouses and factories. Year after year a bigger share of the economy is made of things that cost almost nothing to copy, so the fall in the cost of making things, across the whole economy, gets steeper.
3.The competing itself got faster
Taking on an established business used to need a factory, or 60 programmers and years of building. Today someone can rent the tools for about £50 a month and sell to the whole world from a laptop. When starting a rival gets that cheap, a big profit gets noticed and attacked sooner. Competing a price down to its cost once took a generation. Now it takes a few years, sometimes months. So even competition itself, pushing the price down to the cost, happens faster than it used to.
4.The floor under every floor is sinking
Every step in making or moving anything uses energy, including digging up and shaping the materials. So when all the profit has been competed out of a price, what’s left comes down to what the energy costs to make. And the cheapest way of making energy keeps getting cheaper. Each time the total number of solar panels the world has ever made doubles, the cost of a panel falls by about a fifth. That pattern has a name, Swanson’s Law. Batteries for storing the power are following a similar path. Your energy bill hasn’t followed, and you’re not misreading it. The bill is a price like any other, so it carries the money on top, and it pays for a lot more than the making of the energy. What keeps falling is the least it can cost to make energy at all, and since the price of anything made comes down to energy once the profit is gone, the lowest point those prices can fall to is itself getting lower.
5.The fight against the fall speeds the fall up
When new money is created to keep prices rising, wages rise too. So a business faces a bigger wage bill while its customers still want more for less. It can’t pay its staff more and charge its customers less at the same time, so it replaces people with machines sooner than it otherwise would. The café puts in a self-order screen. The supermarket puts in self-checkout. Each round of new money meant to hold prices up brings forward the technology that pushes costs down. That leaves a bigger fall to fight next time, and fighting it takes a bigger round of new money.
Why the fall doesn’t settle down
So why doesn’t the fall ever settle down? For that to happen, one of three things would have to stop. New inventions would have to stop, and they don’t, because solving one problem makes the tools for solving the next one cheaper. New businesses would have to stop coming in, and they don’t, because a new profit keeps appearing somewhere to chase. Or costs would have to hit a bottom that holds, and they don’t, because the least it costs to make energy keeps falling, and energy goes into everything. Taken on its own, any one technology does flatten out eventually. The chips inside computers are getting harder to shrink, and people point at that and say the speeding up must be over. But as one technology flattens, the next is already speeding up, and what counts is all of them added together. AI models keep improving on the same chips. Robots take software out into the physical world. As energy gets cheaper to make, so does almost everything else. Computing, then software, then AI, then robots, with energy getting cheaper to make underneath all of them. No single breakthrough is needed. Ordinary improvements, each building on the last, are enough.
So competition pushes the price of a thing down to what it costs to make, and technology pushes that cost toward nothing, faster all the time. Wherever businesses are free to compete, prices should fall, and the fall should get bigger with time. There’s a word for that, deflation. Here it means prices falling because we got better at making things. Prices can also fall because people have stopped buying, and that’s a different thing with the same name. The good kind of fall is where the hard part of the thesis starts. Nearly all the money we use is created when somebody borrows. A debt doesn’t shrink when prices fall, but the money coming in to pay it does. So a system that runs on debt has to fight the fall. The fight gets bigger as the fall does. An unstoppable fall in costs and a money system that can’t allow prices to fall are heading for each other.