It seems like everything is always going up in price. Is that because of corporate monopolies or something? Do costs of living get higher as a society becomes more industrialized/advanced?
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I’m not sure there’s an ELI5 way to explain this, but I’ll try. It’s a lot of different factors. It’s kind of tied with inflation.
Housing is a big one, housing is more expensive relative to average and median income than it used to be. That significantly increases the cost of living. It’s also highly regional in nature. Some areas are just more expensive to live in.
Cost of oil. That affects transportation costs, machinery cost, etc. That means cost of clothing goes up, cost of food goes up, and so on. That’s one thing that will basically have downstream effects on everything.
Corporate consolidation. Less competition and the pursuit of ever higher profits means that the cost of some things goes up. Again, that will vary for different sectors of the economy. Want to know whether things rose in price to get more money, look at profit margins. The costs of goods going up for a business means they’ll go up for you even if profit margins don’t go up.
Lack of regulation enforcement, deregulation, and regulatory capture. I am lumping all of those into one since they have the same effect. They let businesses get away with stuff they wouldn’t have gotten away with before.
Unintended effects of regulations, bad regulations. I am a firm believer in regulations. Most industries have shown they cannot be trusted to do the right thing. That being said, poorly written regulation can also have a negative effect on costs by putting unnecessary burdens (and therefore costs) on businesses.
Public services. I am a big fan of having running water from the city, sewers, libraries, etc. However, those also cost money and we pay for it through taxes. Same for maintenance of those services. The price of maintaining those services go up, you can expect your taxes and by extension cost of living to go up. Even if you’re renting, you’re going to pay for it through rent increases.
As for your second question:
>Do costs of living get higher as a society becomes more industrialized/advanced?
Usually, yes, if only by the fact that you will get more access to services that do cost money to maintain.
Central banks can manipulate interest rates which affects how much people, businesses, and governments are spending, since it makes borrowing easier, which generally controls how much inflation there is. They typically target having a small amount of inflation since it is believed to be optimal for the economy. Though it tends to leave low earners behind as many necessities like housing end up inflating higher than the CPI rate and the wages don’t quite keep up.
The largest factors of cost of living that have skyrocketed are housing costs and education.
For education it’s a bit complicated but the short answer is that universities are not as cost efficient as they used to be. It used to be a small number of people would go to college, and schools would spend most of their budget directly on instructors. Nowadays, schools spend a much larger percent of their budget on other stuff like buildings, administration, student life, etc.
Housing is a bit simpler because obviously a larger number of people all trying to live in the same space makes land prices go up, and then that causes a spiral of everything else – construction supply stores have to pay more for rent, construction workers need more money to pay for their own housing, etc. We don’t really create new metro areas which means the amount of desirable land has stayed the same, with twice as many people competing to squish into it. Before WWII we got around the problem by creating new metro areas, and after WWII we built a bunch of suburbs, but now we’ve run out of space to build new suburbs and no longer build new metro areas.
Inflation is a phenomena of a market economy. It seems to be necessary to have a small amount of annual inflation (about 1-3%) to grow an economy. This is mainly caused by an increase in overall money in a system resulting in the psychological phernomeon of people being willing to pay ever so slightly more for things. Think of it this way, if you are at the store with $5 and a banana cost $1, you buy the banana because it is worth your ratio of possession to cost. But if you then go clean someone’s car and make $15 for it, and go back to the store, you still see bananas are $1. But you can be comfortable bidding $2 for a banana now, so if some other dude comes in and tries to buy the last banana for $1, you might be more inclined to offer $1.25 for the banana.
When inflation outstrips real gdp growth, that’s a problem. When inflation outstrips wage growth, that’s a problem. When money becomes more valuable (deflation) it usually indicates there is significantly less of it floating around, meaning the market is in serious trouble of collapsing.
But healthy economic expansion often has this weird artifact effect of more money means prices go up. In theory, a brilliant balancing act of central interest rates may be able to completely control inflation, but why bother? Most people understand money to be a depreciating asset and so invest serious amounts of it into a home or equity or GameStop (jk). And this only helps fuel the market growth by giving liquid to companies in exchange for ownership, allowing them to make new things and in theory generate revenue and profit for your tiny piece of them (dividends). And so the system works really well with the small bit of inflation incentiving people to not stack cash in their garage. And it mostly works, contrary to Reddit opinion. Market capitalism has brought us incredible things compared to its predecessors. There are serious problems that arise from it, but that’s why the government exists, to course correct the model when it gets too harmful to society. When an absentee and complicit congress does nothing for two decades, you get problems.
Let’s start with inflation.
Suppose you have 10 apples. Now suppose 20 people want those apples. Only 10 of those people can get those apples, right?
So how do we decide who gets the apples?
One way is that we can allow the 20 people to bid on those apples: to offer you money for them. And the highest 10 bidders win the apples. But that means apples are going to be a lot more expensive than, say, if you had 20 apples and asked people to bid on them, because there isn’t a shortage in apples.
Supply—that is, the amount of apples you have—and demand—that is, the people who want them—alter the price of things. If we don’t have enough of them, people wind up bidding more for that thing—and the prices goes up. If we have more, then people don’t have to bid as much—and the price goes down.
Now suppliers—that is, the people who grow apples—it costs them so much money to grow an apple. Notice when people bid on the apples, *they don’t bid on how much it cost to grow an apple.* Only on how important the apple is to them.
So you can get into a situation where, because there are too many apples, you can’t sell apples for as much as it cost you to grow apples. At which point, most people say “well, then, I don’t want to grow apples anymore.”
Or you can get into a situation where there are so few apples, they become incredibly expensive—and incredibly profitable. And other people may come along and say “gosh, if I were to plant some apple trees, maybe I can make a whole bunch of money when the trees mature!”
So price—which has nothing to do with the cost of growing apples—serves as a sort of signal: do we have too many apples in the world? Or do we have too few apples in the world?
Now let me throw one more thing in: suppose the government tells you that you can’t grow apples for some reason. (Suppose people think apple trees are ugly, for example, so they don’t want you to plant them.) Now we have a situation where, despite the fact that we may have too few apples, we can’t grow anymore. The people who are allowed by the government to grow apples—they can become rich: remember, the price of an apple has nothing to do with the cost of growing an apple, other than the fact that if you don’t get paid more than it costs to grow, you’ll probably stop growing apples.
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Now extend this to everything in modern society.
Housing prices are going up for a lot of complicated reasons. But at its core, houses are like the apples in my example: we have too few of them, and we can’t make more at a price that is affordable to people yet allows builders to make a profit.
We see monopolies form because the government prevents others from competing—like the example above about how the government doesn’t want you to plant apple trees because people think they’re ugly. And the monopolies become rich because the cost to grow an apple has nothing to do with what people are willing to pay for an apple.
And we see variations of this: the government making it more expensive to plant and grow apples, say, because they decide that you have to file an apple report every week on how your trees are doing—and that makes you have to hire someone to fill out the reports, causing your prices to go up. Growing an apple costs the same—but dealing with government reports makes it more expensive for you to sell your apples. (And remember: the price people pay is not what it costs you to sell an apple—which means you’re less likely to want to grow apples if you can’t make money at it.)
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It’s a long ELI5 but the point I’m trying to get across is the idea that for some industries, like housing, we have shortages which drive prices up. For some areas, like health care, administrative costs have been driving up prices, especially in the United States. And in other areas we see monopolies form either because of natural barriers to entry, or (more often) because of government restrictions which make it hard for competitors to enter a market.
But at the bottom of the stack, it comes down to 20 guys wanting 10 apples, and bidding on who gets to buy them: if we could somehow grow another 10 apples we may be able to feed everyone, and not just a few.
I’m 30 years old and I’ve seen the price of my McDonald’s order damn near double from the time was a teenager.
One big factor in housing is dual incomes. With both people working, they can afford to pay more.
Houses are also getting bigger. We like to say houses were cheaper in the mid-1900’s, and they were, but they were also much smaller and had fewer amenities.
The primary factor is money supply growth. All the specific increased costs people are pointing out are the result of central banks creating massive amounts of new money.
Imagine an arcade sells trinkets for the tickets you win at the games. There are things to buy for 1, 5, 10, 100, and 1000 tickets. Most people buy the cheap stuff, a few people buy the 100s, and once a month someone buys the iPod for 1000.
But then someone hacks all the games so that they spit out 10x more tickets than they used to. All of a sudden, the customers are going to be flush with tickets and they’ll want to buy the more expensive items more often. The arcade can either run out of the big items at the old prices or increase the prices to keep up. They’ll raise the prices, things will stabilize so that people are buying the iPod about as often as they used to, but then someone hacks the games again, everyone will have too many tickets again, and they’ll have to raise the prices again. This is how money supply growth works.
Saying cost of living is high because housing costs are high is like saying the iPod is 12000 tickets because the arcade raised the tickets prices of things. True, but why?
The upper classes, who obviously have all of the economic power, have designed it this way in order to prevent the formation of a new class that could threaten their position. The best (legitimate) way to gain wealth from nothing is to work hard and to save and invest the money you make so that it will grow. The purpose of continual inflation is to continuously undermine that process.
The best way to think about inflation is direct theft of your assets by the class that creates money (and thereby causes the inflation). If they print enough money to cause 15% inflation, then in effect they have stolen 15% of all assets from the lower classes. They themselves (as a class) are not effected as badly because they are, of course, the primary beneficiaries of all the printed money, and are adept at preserving assets across generations.
It would be important to understand that “living” in the sense of this measure is subjective and changes over time.
Of course, without thinking, we tend to assume that “living” is what we encounter daily and is somewhat fixed. But this is obviously not true.
Just 30 years ago, smart phones did not exist. The internet was a playground for small group of relatively tech savvy people. Mobile phones were pretty much a “rich person” thing. Laptop computers weighed 5kgs and cost a few thousand US dollars each. You watched movies in theaters or VHS tapes. Music came from radios or CDs.
Go back another 20 years, and VHS, CD, mobile phones and the internet did not even exist. Computers were mostly owned by government or businesses. Going on international trips and tours were luxuries. In the US, TV would be 3 channels of broadcast programs.
As economies develop and technology improves, more and more of these things become cheap enough to be incorporated into our expectations of “living” and therefore the “cost of living” tends to increase. We expect a higher baseline and the people/technology who provide those expectations have to be paid.
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