What Is Deflation?
What Will Case Deflation?
Human Genome Project:
Accelerated Law Of Returns:
What Is Deflation?
Deflation refers to a general decrease within price levels of goods and services. Put another way, the value of currency increases, thus enabling one to purchase more goods and services with the same amount of money.
Deflation can occur for a range of reasons, including:
- Technological advancements
- Fall in monetary supply
- Declines within confidence
Put another way, deflation is caused by either a fall in aggregate demand, or a increase in aggregate supply.
Within this article, I want to specifically focus on technological advancements causing deflationary pressures. Increases within technological advancements can result in the increase in aggregate supply. Costs associated with producing goods with decline drastically, thus resulting in the lowering prices of overall goods.
It seems reasonable to assume that within the next few decades, through technological advancements, society will experience significant deflationary pressures.
Whilst we are currently experiencing short-to-medium term inflationary forces, over the longer term (10 years) deflation will become a much more pressing issue.
What Will Case Deflation?
Case 1:
Technology is deflationary for a range of reasons.
Firstly, technology reduces the demand for labour, which puts downward pressure on wages and employment levels, which in turn reduces demand for goods and services because workers have less money to spend. Technological innovation leads to automation, tools that make workers more efficient, and the elimination of some job roles.
Whilst it is currently unknown as to how much of the labour market will be replaced entirely, or partially via technological progress, there are some suggestions that this displacement could become fairly staggering. Regardless however, it seems rational to assume as a base case that there will be a symbiosis between humans and technologies, and this alone will drastically make workers far more efficient, and perhaps eliminate the necessity for excessive hiring within the labour market.
For example, via the use of AI & humans in conjunction, this could result in massive productivity improvements for workers.
“According to our research, during the next eight years AI software could boost the productivity of the average knowledge worker by nearly 140%, adding approximately $50,000 in value per worker, or $56 trillion globally, as shown below.[2] We expect the value of a knowledge worker empowered with AI to increase ~15% at an annual rate, compared to the 2.7% consensus expectation for annualized wage growth through 2030.”
Furthermore, another more pessimistic case is pushed forward by researcher. This case state that instead of just a sole symbiosis between humans and technology, technologies will displace a large portion of the work force entirely.
“McKinsey’s mid-point scenario suggests that AI could automate 15% of labour tasks by 2030. According to our research, however, the displacement could be much higher for two reasons: technological advancement and the adoption curve.”
“The current slope of AI advancement is steep because innovations in hardware, training methods, and neural network architecture are compounding to accelerate progress beyond Moore’s Law. OpenAI, DeepMind, and other organizations have demonstrated that AI models should be able to achieve near human-level proficiency in many narrow knowledge worker tasks. Our research also suggests that AI training costs are dropping at a rate of ~60% per year, potentially breaking down barriers to many exciting large model projects.[3] In our view, higher allocations of human and financial capital to AI projects will continue to accelerate the rate of innovation, as shown below.”
Within this case, technological innovation will displace a large portion of the work force, instead of just a sole symbiosis.
Regardless, it seems very rational to assume that in the future technology will reduce the demand for labour via the automation of work, or just the improvement in efficiency of workers. This inherently is deflationary because workers may have less capital to spend on goods and services, if their jobs are eliminated completely, or if there is less demand within the labour markets.
Whilst stating this, the demand side of deflationary technologies may be counterbalanced via fiscal policy decisions. For example, the use of Universal Basic Income, or mass stimulus may become a necessity.
It is wise to note that deflationary technologies within current date are perhaps being overwhelmed by the mass amount of stimulus that has been given to consumers directly, thus increasing the monetary supply drastically.
Fundamentally, whilst this argument does seem rational at first glance, there are still vital questions that must be answered:
- Will technologies actually replace humans? It may be successfully argued that to conflate technologies and humans together is inherently wrong. This is because, humans and technologies are within entirely different categories. Humans are good at contextual understanding, whereas technologies are good at crunching numbers. One may argue that computers will never be able to become fully sentient, and therefore a symbiotic relationship is far more likely in comparison to a full displacement.
- And, that the advancement of technologies does not mean that humans will not work, or will be unable to find work. In fact, looking back at the tractor, one can see that the invention of the tractor actually increased workers demand, rather than decreased. This thesis rests upon the idea that more jobs will be created with the use of more technologies. However, currently we are unaware of what those jobs are.
Case 2:
The second deflationary aspect of technological innovation affects the supply of goods and services. Technology is allowing more and more businesses and industries to cross an important inflection point; the point at which the production of goods and services can scale faster than the consumer demand for them. As technological improvements lower production costs and increase the speed at which goods and services can be produced, it becomes easier to satisfy the market’s demand for particular goods. If the supply of goods can always meet demand, then there is no room for price increases, generally speaking.
Via the use of software, automation and robotics, companies have the ability to drastically increase the ways in which goods and services are produced.
Tesla provides a great example of this, through their increasingly apparent initiative to create a vehicle within the most efficient manner. Elon Musk has openly spoken about the Tesla factory being designed within the most effective and productive way, thus increasing efficiencies. Furthermore, many have gone as far to state that Tesla is building their vehicles within a comparable method to building a “lego vehicle”. Tesla does this through using little parts, bolts and nuts, but instead through piecing the vehicle together within a few clips.
Elon Musk said: “Yeah. Exactly. You’re going to also have just variants between cars. That’s for sure one of the reasons why it’s best to just combine the parts and not have separate parts. Then also go for extreme levels of precision. One of the examples we use at Tesla is Lego. Lego is super precise because the press-fit – I think they’re precise down to about a quarter millimetre or less.”
Tesla is producing vehicles within the same manner as a Lego brick. Namely the use of little parts, within a universal fashion, in which easily fit together. This will reduce the time, and cost of creating a vehicle drastically.
If one compares the ways in which Tesla is creating their modern vehicles to the old methods used by Henry Ford back in the early 1900s, it is clear to see that through the use of robotics and automation, Tesla has drastically increased the efficiencies associated with creating and producing vehicles.
There are many other examples of technology helping the supply of goods and services scale more efficiently.
Things start to get really interesting when the scaling gets efficient enough that it can accommodate the entirety of consumer demand.
Streaming services have dramatically reduced the cost of media consumption and allowed new market participants to scale and compete more efficiently. With a Netflix account, I can watch a nearly unlimited number of movies and shows for the price of one movie theatre ticket.
New music artists can produce studio-quality albums from their basements (via improved recording technology) and make their content accessible to millions of potential new fans overnight (via services like YouTube). By putting the content online its consumption can scale quickly and efficiently.
There are many other examples of technology helping the supply of goods and services scale more efficiently. Things start to get really interesting when the scaling gets efficient enough that it can accommodate the entirety of consumer demand.
There is still the possibility of short-term inflationary spikes. For example, natural disasters, terrorism, and black swan events can cause sudden jumps in short term energy prices.
The nature of software businesses mean supply shocks are virtually non-existent, but obviously not all industries are at that point yet, and the production and delivery of physical goods might remain at risk for many more years.
That being said, it took Clorox about 12-14 months to ramp up enough production to meet increased demand and get their disinfectant wipes back on the shelf during the pandemic; I am confident that it would have taken them longer to get to 2 million canisters per day in, say, the 1970s.
Technology is allowing companies to ramp up faster and shortening the duration of inflationary spikes.
Even in sectors where scaling is difficult today, there are technological innovations that are working to break the cycle of inflation.
Human Genome Project:
The HGP provides a great example of technology causing deflationary forces through lowering production costs and increasing the speed at which goods and services can be produced.
Within the case of the HGP, costs have declined majorly, whilst also an increase within output. This was due to better technologies, more efficiencies, and more productivity improvements.
Wright’s Law is a hypotheses that there is a “20% reduction in cost, when production doubles”. In so far as 1000 units have been produced, the cost per-unit decrease by 20% when production reaches 2000 units. Another 20% reduction is apparent at 4000 units, and at 8000 units, and so on. This idea states that cost decreases as a power law of cumulative production.
We can conspicuously see Wright’s Law in action, through the Human Genome Project. As reported by NHGRI Genome Sequencing Program, the cost of sequencing DNA bases has fallen majorly (more than 700,000 fold) since the first sequencing project.
This outstanding improvement from the Genome Sequencing Program has revealed the exponentially large cost reductions that are occurring, whilst simultaneously increases within output.
Importantly to note, this cost decline occurred over a matter of 20 years.
Accelerated Law Of Returns:
Intertwined closely with Wright’s Law is the ideology of the acerated law of returns. This theory posits that technology change is exponential. Within the next 100 years, we will not experience 100 years of progress. But instead, we will experience over 20,000 years of progress within the next 100 years (at today’s rate). Furthermore, and excitingly, Kurzweil suggests that there is even exponential growth within the rate of exponential growth.
This means that, within a short period when machine intelligence surpasses human intelligence, this will lead to a singularity. A singularity is a term used to indicate technological change that is so rapid and product, it creates a rupture in the fabric of human society.
The philosophy of exponential change, stating that within the next 100 years we will experience over 20,000 years of progress, evidently shows the huge potential to ride large innovative waves within markets.
