We are all used to the idea that the GDP of a nation contains large negative elements as well as apparently positive ones. I write "apparently" because even some consumer goods which don't appear to be immediately harmful and, indeed, seem broadly desirable turn out to have inimical long-term effects. At any moment of time, it is difficult, if not impossible, to know whether any particular new consumer product or service is going to be for the long-term benefit of humanity or not. Of course, personal judgement is involved here and the debate is too important to be left in the hands of the economists alone.

However, putting value judgements on one side, and keeping strictly within the discipline of economics, I am hoping that, in the future, economists will distinguish between two sorts of consumer goods even though, over time, one shades into the other. I am hoping that my book will put flesh on the bones on Karl Polanyi's original observation that consumer goods are bought for reasons of social standing. The consumer goods that are really effective in attracting large investment and boosting economic growth are those which confer (or confirm) higher social status on their purchasers within the cultural milieu at that time. Initially, these goods have very large profit margins and are confined to the initiatory middle-class consumer (trend-setters). In short order these goods attract competitive producers and, by and by, their prices are successively reduced and are descend down the socio-economic strata until they become standard purchases in all levels of society.

A television set is an excellent example of an ex-status good. Originally, it was a very expensive item bought only by the well-off (the class of people I am increasingly calling the "initiatory middle-class") and, quite besides its offerings, it was something that denoted fairly high status in society if you talked about owning it. By and by, however, it has become a staple item and is to be found in the poorest homes.

The personal computer has also had a similar history but, because of its relative complexity of use, it is found in the more intelligent households in developed countries (about 47% in England at September 2003), and sales are unlikely to grow much further in those countries except for replacements, despite its relative cheapness. Initially, the PC, together with the Internet, has been largely responsible for one of the biggest booms and busts in man's economic history -- the way that stock market shares rose and collapsed spectacularly in the period 1990-2000 was similar to what happened during the building of the railways in the early part of the 19th century.

However, the PC has also had another effect. The PC user cannot, at the same time, be watching TV! The total amount of personal time spent in America on the PC in the home has been shown very clearly by dependable polling methods to be almost entirely at the expense of TV viewing. Thus, in its economic effect, the PC must be considered to be a partial replacement for the TV. It is a fairly ordinary consumer good and not a status good as the TV was initially. Although the PC has been a stimulus to economic growth while sales were growing, there has been a decrease in the sales of replacement TV sets and also, because of lower viewing figures, a significant reduction in the sales of other goods promoted by TV advertisements. In fact, the advertising industry, as well as many independent television and consumer good producers, is in a state of crisis at the present time with unemployment effects.

In short, the PC has not been a pure case of having been a status consumer good in which the investment effect is a net addition to the GDP. In reality, it has been a partial replacement for the TV. The reason for this is that the home PC user has only a limited amount of leisure time available.

The lack of leisure time is one of those constraints which Fred Hirsch intimated in his prescient book, The Social Limits to Growth published in the 70s. One of these constraints is personal free time. This, I suggest, could be one of the most important reasons why economic growth in developed countries may not be able to lift itself up anytime soon. The lack of status goods which can appeal to the initiatory middle-class and add to total enjoyment, rather than displace other goods or services, is one very important factor now holding up the recovery of Japan, Europe and America.

One of the weightiest economic writers in England is Samuel Brittan. He is also one of the most objective—all the more so because he is writing about the most important economy in the world, America, from across the pond. He is in no doubt that the developed countries of the world are at the beginning of some serious deflationary times. He is equally convinced that an inflationary strategy on the part of the federal authorities would be very foolish, even though there might be increasing clamour for this from those who are at present carrying heavy debts. The following is from yesterday FT.

Keith Hudson

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TAKE A RAZOR TO THE DEBATE ON DEFLATION

Samuel Brittan

The fashionable shock-horror word is now "deflation". The European Central Bank in particular is often accused of pursuing deflationary policies. Faithful readers will know that I was intensely suspicious of this language long before the bond market shake-out indicated second thoughts in the financial markets on the deflation spectre.

Some years ago it was mostly the political and academic left that accused governments and central banks of following excessively deflationary policies. Today, however, the war cry is heard more loudly from some sections of the business community and the political right. It is difficult to suppress the unworthy thought that some of those behind theclamour are looking for a way out of unwise debts they have previously contracted.

It is as well to know just what we are talking about. Just as inflation is a general rise in the price levels, so deflation is a general fall. Apart from Japan, the industrial world has not seen deflation for 70 years. Once there is a single currency and a single monetary authority, inflation and deflation refer to movements of the price level of the whole area. To raise the alarm about possible German deflation, because the rate of inflation in .that country has fallen to 0.6 per cent -- against a euro area rate of 1.9 per cent -- is simply to ignore the advent of the new currency. To talk about. German deflation makes as much sense as to talk about deflation in Texas or Cornwall unless you believe monetary union ispremature or still immature.

In any case it seems inherently absurd to believe that a 0.25 per cent annual increase in prices is satisfactory, while a 1/4 per cent decrease spells catastrophe. Very often the difference between these low rates of inflation and deflation will depend mainly on the price index used. A Ya per cent rate of deflation based on the European Union's Harmonised Consumer Price Index usually translates into a 0.25 per cent rate of inflation on the British Retail Prices Index.

The problem is how to combat unhelpful deflationary panic without endorsing the assurances of monetary authorities that world output will stage a gradual recovery in the course of 2003 and move back towards trend in 2004. There is a real danger ahead, but it is badly described by the deflationary war cry. It is that of a recession or slump in which nominal short-term interest rates are already near zero and cannot go any lower, even though the economy needs stimulation. It is this that has triggered a discussion, led by the US Federal Reserve, of "unconventional policies".

These policies may be required to prevent a decline or abnormally low increase in output and employment, irrespective of whether prices are slightly falling or slightly rising, as they often have been in past recessions. There have been periods, such as the 1880s in the UK, when prices fell by 0.6 per cent per annum, yet output grew by a highly respectable 2.2 per cent Less happily, in the US in the years 1933 to 1937, after the Great Depression, the stimulatory effects of monetary expansion were syphoned off into wage and price increases by mistaken New Deal policies, thus retarding the recovery in output. When J.M. Keynes invented the "liquidity trap", he made no mention of deflation but simply analysed the difficulty in some circumstances of getting interest rates low enough to stimulate output and employment.

The principle that is required for cutting through these complexities was provided by William of Occam, a 14th-century British philosopher. The principle, known as Occam's razor, states "Entities are not to be multiplied beyond necessity." This is usually extended to mean that the simplest explanation should be preferred to more complex ones and that single encompassing hypotheses should be sought.

The simplest inclusive statement of the problem that may be facing monetary policy is that of the zero interest rate bound (ZIRB). This problem encompasses both the case when the need for stimulus is associated with falling prices and when it is not. It also excludes periods when prices are falling slightly owing to productivity improvements and there is no need for stimulus.

I have discussed how central banks might deal with ZIRB in previous articles. The most thorough analysis has been provided by Ben Bernanke of the US Federal Reserve. Possible instruments range all the way from extending central bank operations to longer-dated securities to the finance of budget deficits by monetary creation, which Mr Bernanke regards as the practical equivalent of the economist Milton Friedman'a helicopter drop of money from the sky. The bond market may now think it less likely that these devices will be tried; but fashions in financial markets change very quickly.

Let us suppose that nominal demand -- or the national income in nominal terms -- is rising by 3 per cent. Would you rather have a 4 per cent increase in output offset by a 1 per cent fall in prices? Or no increase in output but a 3 per cent rise in prices? The deflation mongers implicitly assume the latter outcome would be better because there is a positive rate of inflation. This is no way to conduct a sensible debate.

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