New technologies and cost-saving innovations introduced within business enterprises enable more goods to be manufactured and sold at lower per-unit costs. Sellers, in one sector of the economy after another, increase the supplies they offer on the market, and competitive pressure results in a lowering of the prices of those goods to reflect the lower costs of production. The cumulative effect is that the general level of prices will decline over a period of time.
In the period between the end of the American Civil War in 1865 and 1900, the general level of prices in the United States declined by about 50 percent. While the American economy did experience short periods of economic depression during those years (mostly due to the federal government’s manipulation of the monetary standard), this nearly half-century period was the time of America’s Industrial Revolution, and it saw a dramatic rise in standards of living, even though it was accompanied by an expanding population.
An open, free-market system tends to foster the incentives and profitable rewards for capital investment and innovation that bring forth increasing prosperity. Greater output at falling prices provides people with higher real incomes, as each dollar they earn now buys a larger quantity of goods and services in the marketplace. Supply-side deflation, therefore, is an indication of a growing and dynamic market system that is improving the economic conditions and opportunities of the general population.
For that reason, supply-side price deflation has often been called the good deflation.
--Richard M. Ebeling, "Don't Fear Deflation, Unless Caused by the Government," in Austrian Economics and Public Policy: Restoring Freedom and Prosperity (Fairfax, VA: The Future of Freedom Foundation, 2016), Kindle e-book.
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