COMMENTARY: Since the rock and roll 1960s, technologists have continued to release hits with the same tracks from the same silicon albums: new experiences, more functionality, higher performance and constantly falling prices.
Consumers and businesses love this because prices go down over time and everyone gets new shiny things. The ivory tower loves these hits, too, with academics like Everett Rogers attempting to explain why some innovations make it and others fail in his startup-essential book Diffusion of Innovations.
But how does technology innovation impact — of all things — the money supply, the glue that holds our entire modern financial system together?
Exactly 20 years ago, the Harvard Business Review published Clayton Christensen’s analysis of a particular flavor of successful innovation he termed “disruptive.” Disruption is when an unexpected knock-out blow is dealt to a previously successful, but now only “incrementally” improving, product lineage. Interest in disruptive innovations became popular because of outsized financial returns. It’s also the kind of battle with lots of winners, due to lower prices and better products.
Central bankers have another term for technology disruption — deflation. Deflation is when aggregate prices go down over time. Technology can deflate our economy in three ways:
- When demand for an existing product is reduced, leading to lower prices;
- When new efficiencies are found and supply is increased, leading to lower prices and;
- When both happen, perhaps the most disruptive version of deflation.
Essentially, technology is by definition deflationary. The sharing economy makes it worse. VC and former entrepreneur Mark Suster summarizes some of the better examples of successful startups that have disrupted and deflated parts of the economy, including Amazon, Google and Skype.
But don’t we always hear that moderate inflation is good and deflation is bad? In fact, the underpinning of our entire global monetary system is based upon the absolute requirement for a constant and mild inflation fueling the economy. This ubiquitous monetary inflation leads to rising consumer prices and ensures fundamentally that it does not get more expensive over time to repay our rapidly growing debts. And maybe all that makes sense since many of us have mortgaged homes, car loans and credit card debt. It’s really hard to imagine an alternative financial reality.
Inflation’s track record, however, is coming under increased scrutiny. Despite of all that inflation, the global economy is beginning to suffocate under ballooning debt loads. It is now clear that inflation does not raise peoples’ real wages over time — and with constantly increasing consumer prices, that is a recipe for a human hamster wheel. Plus, we know that income inequality is growing and that it is quite likely that programs like quantitative easing are accelerating the divide. Issues like these are causing Eurozone economists to ask whether we might be better off just giving some of this inflated money directly into the hands of citizens instead of to the banks.
What is more likely to be correct is that the whole centrally planned and managed inflation gospel is more apocryphal than fact. Forward-thinking technologists are starting to point out that a zero growth or deflating economy may be, contrary to central bank guidance, an actual humanitarian utopia.
Larry Page at Google explains in a wide-ranging Financial Times interview that “… the things you want to live a comfortable life could get much, much, much cheaper.” And wouldn’t that be grand, a world where it gets cheaper to live as time goes on, consumption is moderated to what is necessary, incentives to take on debt are reduced, more free time is created, and resources are sustainably conserved.
What is blocking this vision for humanity?
Oh, that’s right: $223 trillion of public, private and corporate debt, perverse incentives to sell us more of it, and the ardent religion of inflation. If our money system is one big debt balloon, then it seems that technologists are deflating it and bankers are filling it right back up.
It wasn’t always this way. Modern academics have shown that before centrally managed inflation became the norm a century ago, there were benign periods of both natural inflation and natural deflation in our economy. Other economists have also found that we should not be automatically scared by deflation and that “… concerns about deflation may seem to be somewhat overblown.”
One way out may be new deflationary currency options like Bitcoin — yes, prices have been volatile, but volume is steadily growing.
And while central banking still remains outside of our control, maybe we are all unconsciously sandbagging humanity’s best chance to advance to the next stage of social evolution due to our misunderstanding of money — despite our love of deflationary technology.
David Eraker is co-founder and CEO of Surefield. He’s a serial entrepreneur, interested in the intersection of economics and applied technology. He also has been a consultant at Microsoft Research working on free-viewpoint video commercialization efforts; founded and ran Mindsite, a consumer Internet and telemedicine company; and was the founder and CEO of Redfin.
