But surely people invest for "maintenance" purposes too, where nothing extra is expected. I invest in maintaining my house. I don't expect any "return" from that investment, besides the roof not collapsing.
Maintenance is obviously limited to the number of things maintained and cannot stop deflation, because costs will be approaching zero due to innovation and competition.
Edit: And you do expect a return. You maintain your house, because it has a value and rent costs money, so you have more house in the future if you maintain it now. Imagine a world were rent and the value of your house is approaching zero, would you maintain it? You would have more house if you just kept your money and rented a house.
Because you liquidate all your assets if there is deflation. No companies, no jobs, no food.
Edit: Obviously I am speaking in very extreme terms and ignoring the fact that there is a government acting and that not everything will happen instantly. These are just long-term forces.
You don't have to, it will be worth more next month. It would be stupid to invest into your retirement fund if cash is increasing in value faster, so you take the cash. It makes total sense individually, but when everybody does it, the system will collapse.
Yes, I can see why a deflationary shock can cause behaviour that is individually rational but destroys the economy in the long term. I do not see why there cannot be a steady state with no growth. Presumably if this is widely accepted by economists there must be a standard textbook reference that you can give me?
Edit: And you do expect a return. You maintain your house, because it has a value and rent costs money, so you have more house in the future if you maintain it now. Imagine a world were rent and the value of your house is approaching zero, would you maintain it? You would have more house if you just kept your money and rented a house.