Dunconomics

Technology is often promoted as though it will make life better and easier. As an IT professional, many of my colleagues speak highly of great cost savings that computer solutions bring. This seems to be true on a small scale, but if you are like me, you wonder if modern life, full of the high-tech marvels, is as labour-free as promised. To me, it seems the more we innovate, the busier we become. This seems counter-intuitive. Technology and process improvement do bring a sense of accomplishment and potentially reduce waste but also bring seeming sad circumstances. Like loss of jobs to automation (e.g. supermarket self-checkout) and contemporary consumerism with associated environmental impact.

This article has a wide target audience. If you are disgusted by modern disposable technological trends and you often think about leaving the rat race to raise grass-fed cows, read on. You may be surprised to learn how the current top-down economic system is causing this unsustainable madness and how to solve it. Or, if you are a business owner who lives comfortably in a high-rise penthouse, continue reading to hear how much of your wealth is being stolen. Maybe you are a decade away from retiring but you struggle to keep up with these new computer contraptions at work. You wonder why things can’t be like the good old days of pen and paper.

If you have a good relationship with your personal stockbroker, this article may not be for you. I am no expert with no formal training in economics but I will try to give a broad lay perspective on what I think is a profound tragedy regarding the relationship between economics and technology. I live in Australia but all concepts are applicable to any nation.

I’ll try to be brief with the following economics primer. Try to stay awake, so the main point makes sense.

If you read or watch the news you probably hear that most governments try to regulate inflation at 2-3%¹. The term “inflation” is commonly used in its utility meaning – the rising cost of living. It means your money will not buy as much stuff and things will cost more, on average, over time. For example, a loaf of bread may have cost $3 last year compared to $3.10 today. But if you get paid more, this should not be a big deal, right? That’s the idea.

To calculate the cost of living, real product and service prices are recorded and indexed. The most common index is the Consumer Price Index (CPI). This is what is mostly quoted in the news. Governments gather thousands of consumer prices and compare them with previous periods.

Sourced from Australian Bureau of Statistics

Go to US CPI data

Governments do this by manipulating an economy with a central bank. It’s true that this institution is a bank, but in the context of this article, you only need to think of it as the entity that creates the national currency (AKA money). The main way the central bank increases the cost of living, is by continuing to print the currency (now-a-days this is mostly done digitally but is conceptionally the same). They are the issuer so they can make as much as they want. By printing more dollars, yen or euro, the currency is not as rare and therefore becomes less valuable. This is the literal meaning of “inflation” in economic terms. Realise that money is valuable because it is rare. The more money that is available, the less valuable it will become. See M3 money supply diagram below².

Go to US M3 data

Much economic study aims to predict this relationship between money supply and the rising cost of living. This is because the relationship is organic and somewhat unpredictable. Economists must consider details such as the velocity of transitions (how fast people are spending money or saving it) and even what people feel something is worth from a historical context. This is why real prices are used to calculate CPI.

Lets summerise this axiom as:

Creating money increases the cost of living

Before I send you to sleep, now it gets interesting.

One day the following thought struck me. Printing money increases the cost of living while technology integrators, such as myself, are reducing the cost of living by helping businesses cut costs. In effect, they cancel each other out. Let me clarify: When costs are rising, sometimes businesses raise the costs of their products. Yet other times businesses reduce costs by using technology³. IT professionals and engineers are among other occupations which frequently aim to save businesses money. Here are some examples of this:

• A computer software package allows a small business to spend less money overall on third-party bookkeeping fees. A hired accountant can now spend half the time as invoices can now be sent via email.
• An automotive manufacturer installs a robot welder which increases the speed of production. Even this example results in decreased costs because there is less labour required per vehicle.
• A food producer decides to use a new preservative for transportation. This allows the food to be shipped further to increase customers with less wastage from food expiring.

In theory, on a national scale, these technological changes would have a “deflationary” impact on the cost of living. In essence, technology is pushing the cost of living down. Let’s summarise this axiom as:

Technology decreases the cost of living

Sometimes process improvements may only have a positive impact such as changing a manufacturing procedure to produce more with fewer resources. On the other hand, the food producer above may discover that their preservatives are potentially harmful and render food less nutritious⁴. Overall, I propose this, at best increases dependence on technology and at worst leads to a gradual lower quality of products. When the central bank inflates the currency, encouraging price increases, the market is absorbing much of the cost through technology.⁵

The below diagram may help describe this hidden cost of inflation. Seen below is a comparison between CPI (AKA the cost of living) and money supply. It seems logical that an increase in money would proportionally decrease the value. But as shown in the diagram below, the cost of living is measuring far lower than the accelerating inflation. Our current dependence on technology explains this discrepancy.

Note that CPI is an arbitrary number, interested only in difference. The above index graph is only comparing the difference since the late 50s (the earliest available data). But the picture doesn’t look any better if we reset the index to money in 1990:

Simply stated,

Technology is absorbing much of the cost of inflation

It should be noted ‘quality change’ is often considered in CPI calculations⁶. But think about the challenge of the thousands of technology improvements particularly in a modern world. Every business manager from a small business to a Fortune 500 multinational, makes cost-saving decisions frequently. Many would impact quality which may be unnoticed by consumers. This is a monumental task to calculate these cost savings. The governmental Australian Bureau of Statistics (responsible for calculating CPI in Australia) says, “For some types of quality change, it is doubtful if any accurate measure of the change can be calculated. For example, in the case of services, consider changes in medical operating procedures (e.g. keyhole surgery) that involve less pain and a speedier recovery, or educational services making a greater use of computers. In these cases, generally no quality adjustments are applied.” Realise that this statement is only relevant for changes in quality and not applicable for improvements which have no impact on consumers.

 

For example, self-checkouts in a supermarket do not reduce product quality but do reduce cost. If a business chooses to pass the saving onto the consumer, in theory, this would conflict the central bank’s goal of increasing cost. Lower price signals measured in the consumer index would cause governments to “print” more currency encouraging or forcing more technological improvements.

Central banks then use the CPI in monetary policy decisions¹Reserve Bank of Australia https://www.rba.gov.au/monetary-policy/inflation-target.html. When technology reduces costs for a population, a central bank will usually inflate the currency (via money “printing” or interest rate changes) compounding the problem.

Let’s think about our three characters. First the organic-loving hippy.

Organic farming has a specific definition but perhaps it can be summarised by a general rejection of technology for production. If we didn’t have accelerating inflation, I suspect more people would favor organic farming. Sure, many would still opt for our current conventional food suppliers (especially those escaping poverty), but with a lower cost of living, families would have more left-over wealth which can be used for more expensive food options. This is in contrast with the current sad reality that consuming a purely organic diet is generally available only to the wealthy. Putting the debate of organic benefit aside, consumers should be free to choose this option given it was once the only option (before the Industrial Revolution). So, if one wants to see a greener world, they should be advocating to free our second hypothetical character, the business owner, from the shackles of modern central banking inflation. If the entrepreneur doesn’t have to worry about a perpetual increase in costs, they will have less reason to reduce quality or implement technology as Band-Aid fixes. With more potential for profit, this would be a welcome change for business owners. However, they would need to pay closer attention to the desires of consumers, as more wealth for the general population means they could decide to reject technology for the higher price tag (also good news for the business owner).

 

 

As another example, imagine how cheaper labour, caused by a lower cost of living, would encourage more manual waste recycling businesses to compete with big mining multinationals selling metals and other raw materials. With less dependence on technology, we can see that there would be less need to “get with the times”. More emphasis on experience and maintenance and less on change and improvement which is good news for our hypothetical retiree.

A free market:

A market with inflation

The purpose of writing was to make normal people aware of the problem of inflation without getting deep into formulas and policy specifics – I’ll leave that to people much smarter than I. My biggest goal is that people realise this economic distortion.

There is much debate among economists and policymakers on how much money should be printed. I can agree that there is some room for mild inflation (to minimise stagflation) but also see the issue of allowing governments to make this call. To remove this power from the government there are a few options:

Disclaimer: the following is not financial advice. Seek a qualified financial adviser for financial advice.

• For thousands of years, gold has served as money and continues to be used in the finance industry. Precious metals such as gold and silver have a natural low inflation rate from mining and cannot be easily manipulated. The key distinction is that it must be physically mined. Governments are forced to use a transparent tax method. Unfortunately, in many countries, gold/silver cannot be used as legal tender. Trading in precious metals may sound primitive but remember people would not have to carry around heavy coin bags. Banks could still provide Internet banking and overnight settlements as our current system⁷. In some countries like Australia, governments still mint (create coins) in gold and silver. So, this system is already in place available for the population to trade in it⁸.
• Another option is for governments to use precious metals for currency. This was once a common practice for governments but unfortunately, in most instances, the coins were de-valued using techniques such as mixing in other metals over time.
• Recently cryptocurrencies such as Bitcoin have been making news headlines. These currencies are completely virtual, existing only in a computer database. What makes them special, is that they are decentralised in that a copy of the database is duplicated into a community of computers that no single entity can easily manipulate⁹. This is why they appeal to many investors because, in theory, their investment will not devalue in the long run. Most of these digital currencies have a commitment of little or no inflation.
• Repealing legal tender laws and other laws to allow the market to choose (e.g. capital gains tax). Multiple competing currencies may arise for specific purposes. I.e. cryptocurrency for international trade and precious metals for local communities.

I am not sure what the best solution is. Maybe there is one I haven’t thought of. It’s not likely that a sound monetary system would solve all world poverty but I think there is a strong case that it would profoundly impact every human for the better. With a stable currency, technology would be less about survival and more about helping people. I encourage you to ponder this economic theory as you buy your groceries or use computers at work. Realising this should help remove guilt for using technology yet understand and empathise with those struggling to keep up with it. Technology frequently saves lives and helps people escape poverty so we should be grateful for it. But as we can see, external manipulation of money is the chief cause of gloomy situations of which technology and business is often centre stage. To bring about lasting positive change, we should look to the real cause: monetary inflation. Restructuring national economic policy is a monumental task. My hope is that this essay can increase awareness and discussion. Without this, there is not much hope for policy change. Feel free to help by sharing.

Further research

https://www.cnbc.com/video/2015/12/03/technology-to-blame-for-deflation-pro.html CNBC: Technology to blame for deflation: Pro

Money Creation | How does it work? by EconClips

Fractional Reserve Banking vs Full Reserve Banking | How Do They Work? by EconClips

Senate Inquiry – 2017 Testimony – Money and Banking by economist Darren Brady Nelson

Austrian economics

This essay is licensed under a Creative Commons Attribution 4.0 Internation License (http://creativecommons.org/licenses/by/4.0/).