Here is a quote from the first page
Right now the system will consume more food if production is too high through the growth in prosperity. IE the system can never produce too much because consumption will eventually rise to meet it, so prices cannot fall too low.
The problem is that there is no counter system to increase production, so overtime it is possible for not enough to be produced, leading to ever-increasing prices. If there is a simple modifier to production added where increased prices drive up production, then prices will have a very strong tendency to stabilize at some point.
Ah OK. Well, when you said a critical problem I was thinking it was something that would be like the 1.2 patch where the entire economy collapsed within a year. 300% inflation over seventy years isn't that big of a deal, IMO. Especially since troop wages and equipment costs don't increase at all, so the net effect is just making the game easier when caravans haul in probably more than 3K per day.
Edit: This fix would also prevent people from buying up all the supplies to drive prices up and then sell all their stuff for a profit. I also think this might be part of the reason that people report prices tend to even out throughout the world, but I can't be sure.
No, it wouldn't fix that trick. Price increases happen dynamically and effectively instantaneously, while village production takes time to be produced and transported to a town. Additionally, players can (if they want to be bothered) intercept the village parties to buy their production before the villages reach town and or acquire (then convert and sell) competing workshops nearby. Either of those works and have the benefit of not needing to buy existing town stocks at a loss.
Prices even out because caravans are actually working to distribute most goods, like seeing Aserais pop-up in Vlandia. There is a bit of tinkering going on under-the-hood to make sure there are some differences in prices but it also contributes to inflation by making goods (slightly) more expensive than they should be in the long-term.