TECHNOLOGICAL GROWTH AND THE PRICE DEFLATION THAT ATTENDS IT

Malignant deflationary spiral

Tim Swanson: One Keynesian doomsday scenario forewarned by technocrats of all political stripes is an environment in which customers avoid products whose prices continually fall. In theory, customers would delay purchases indefinitely, leading to a downward spiral: a decrease in prices leads to lower production, which leads to lower wages and lower demand, which leads to lower prices. Ad infinitum.

However, as an economy grows and becomes more efficient, it should ultimately cost less to produce the same units of goods and service. Price deflation caused by scientific progress and economic efficiencies (e.g., mass production, automation) is actually a beneficial side effect and should be embraced.

Thus, in practice, even with the expected knowledge that their purchased products will become outdated and cheaper within a few months, customers did not shun but rather flocked to computer retailers rain or shine. And the numbers reflect this.

A scant 40,000 PCs were sold in 1976. By 1984, the number had risen to 2 million. At the close of 1986 this number had tripled to 6 million shipments worldwide. By 1990, PC sales had reached 16 million a year. By 1994 worldwide sales had more than doubled to 36 million. At the peak of the dotcom bubble more than 135 million PCs were sold each year. Following the 2001 recession, growth resumed upward, hitting 170 million by 2004.

And while there will be a big dip this year, in 2008 more than 295 million computers were sold worldwide. This figure does not include smartphones, which in 2008, more than 139 million devices were sold globally; up from 37 million in 2005.

All told, more than 1 billion computers were actively in use at the end of 2008 – and that number is expected to double by 2014–2015.

In contrast to Keynesian theory, despite the fact that dozens of large multinational companies compete in an environment where prices have persistently decreased throughout the last three decades, this has not led to lower production or lower wages. In fact, the opposite has occurred.

In fact on top of competitive pressures, between 2004 and 2008 prices of commodities commonly used in PC components more than doubled. Some such as copper and silicon tripled. Yet PC manufactures across the globe not only cut product costs and upgraded machines, but profited handsomely. And without trillion dollar subsidies or bailouts!

However these deflationary benefits may be thwarted in the coming years as government policies worldwide redistribute capital.

What impact will this have on the funding of semiconductor foundries, clean rooms, lithographic lasers, die-testing equipment and automated manufacturing as a whole? What happens when productive capital is diverted to the government bond market to fund deficits? LewRockwell.com

-flynn