December 22, 2016    5 minute read

Is Technology A Deflationary Force?

An Unexpected Conclusion?    December 22, 2016    5 minute read

Is Technology A Deflationary Force?

As Paul Krugman once said so eloquently, in The Age of Diminishing Expectations:

“Productivity isn’t everything, but in the long run, it is almost everything.”

Productivity is the buzzword of the modern economist. Naturally, then, one would have thought it would be a good idea to find out what this buzz was about. The more one reads, the more one discovered actually, it is a word that people use every day. Phrases like ‘that was a productive morning’ are often used when you clear out your room or finish an essay.

The Productivity Curve

What one means then, is that in the time one had, one completed a good deal of work. If productivity statistics decline, one could say that the economy is slacking and headed for a recession, which in turn could predict price rises or falls. This then has policy implications and a knock on effect for financial markets, portfolio management, pension returns, etc. The list goes on.

In the microeconomist sense, it means exactly the same – how much stuff was made in the time given. There are slightly different measures of productivity, but for the purpose of this piece, it will be output per hour. The reason it is worth mentioning is development in terms of prosperity is often a function of the productivity of the economy.

The Limits

Imagine if you worked every day for a week trying to clear out your room. Each morning would then be classed as productive, which over time, the room floor is revealed gradually to the point that you remembered what a carpet actually looked like. But what happens when your room is looking spick and span? Then what?

Being productive, therefore, has its limits. If productivity figures decline, it might not be because the world is coming to an end, rather technology can only go so far and improve the process.

The limits involve the space of the room – in other words, how big the economy is in terms of landmass and population growth rates. The ability of the person itself clearly also has an impact. In the economist sense, that would be classed as education regarding degrees and other college qualifications. But what if you were given this immense hoover that could suck up everything in a few minutes? Your productivity per hour would be immense. You might not even need to take the hour. Technology, therefore, should have a serious an impact on productivity.

Technology And Productivity

So given that, why is all of that wrong? The biggest productivity puzzle today is about understanding why this big development in technology, or technological progress, is actually hindering productivity, or at least the numbers are declining. Are robots actually worse than humans at assembling various widgets? The problem is measurement error, or rather the lack of measurement at all.

Sony Corporation is worth $18bn. It has offices globally and produces a lot of TVs etc. Whatsapp is worth $19bn, has approximately 50 employees and could operate in a classroom. The output of Whatsapp is not physical widgets, so how on earth can Whatsapp’s ‘output’ translate into the productivity statistics. For a lot of the tech ideas, even though they make life tremendously easier, they are not captured in the numbers. This leads one to conclude that productivity should not be the only measure of bang per buck, given most tech services are somewhat cloud based and not physical things.

Is Technology Deflationary?

As mentioned in the beginning, if the productivity measures are falling, this implies a lack of demand because output per hour will slow down. To operate a cash register, one does not have to be highly numerate. Someone coming out of school could operate it. As a result, the wages of those people will be lower, which in turn causes lower spending capacity.

More fundamental, though, is this: in the old days, firms invested in physical capital goods to expand; Sony, Ford, Oracle are examples. This happens less and less now, causing the price of capital goods to decline due to technological innovation (the idea that Whatsapp could operate in a box). The iPhone in your pocket has as much computing power as the entire Apollo Space project, which is quite scary, to say the least.

The Value

A dollar of savings as a result from declining capital goods buys you much more than it used to. The real value is in the cloud, which is considerably cheaper than tangible storage facilities. Consequently, the relationship between investment and savings and the balance between the two that sets the rate of interest has also been lowered to encourage borrowing.

To create a start-up business today, you need about $500k in crowd funding, while 10-15 years ago, it would have been around $5m-$10m from a bank or via venture capital. Technology could be a significant deflationary force in the current statistical measures but also in the tech revolution everyone that everyone has witnessed.

Productivity is key for long-term development, but it might not be everything. However, it is certainly almost everything.

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