Keynes Vs. The Tech Industry

Why are economists so opposed to deflation? Deflation, they argue, leads to money hoarding, dropping aggregate demand. People won’t spend money if they expect prices to drop even further in the future. This is the basis behind Keynesian economics. Prevent deflation, even if it means inflation. Print, borrow, and spend money to keep demand up.

This philosophy is founded in the expected economical reaction to expected psychological responses to economic activities. Deflation, caused by the improvement of production, thus lowering prices for goods and services, sets off a sort of a panic in mankind. The “animal spirits” cause us to hoard our wealth, with the expectation of lower prices in the future. This hoarding sets off a cycle of deflation. Money is not spent, demand drops, causing supply to shrivel and prices to drop further, the economy gets in a bind, the hoarding gets worse as, not only are they holding out for the best price, but they’re now protecting their wealth in the difficult economic environment, and the cycle spirals downward. It has a logic to it that you can follow. But the basis of all our government economical decisions are based on the unproven theories of people’s reactions to certain economical factors.

But we have some examples to look at now that illustrate this process and society’s actual responses to deflationary forces. One good example, and most obvious to me since I work in it, is the tech industry. I remember when I was younger and the new 486 processors came out. The were running at 33MHz processor speeds, with 100MB HDDs, and 256K RAM, and the new CD ROM technology. This incredible machine ran you ~$2,000. A few years later that same machine was just a few hundred dollars, and the new machines had the Pentium Processors at 100MHz, with 500MB HDDs and 1MB RAM, and a writeable CD ROM for ~$2,000. Today we have 3GHz (3,000MHz) processors, 1TB (1,000,000MB) HDDs, and 4GB (4,000MB) RAM with DVD/CD rewritable drives for under $500. The tech industry is deflation at its finest.

So let us psychoanalyze the industry’s economic situation. Do you remember the time when everyone said, “I’m holding out on buying a computer because as soon as you get one it’s already obsolete”? Do you remember people holding off on buying a computer because prices kept pummeling down, and they didn’t want to pay full price for the latest and greatest? Absolutely. So, Keynes was right… sort of.

How did the tech industry respond? How did it survive? Tech survives by its ability to innovate new technologies, create new useful gadgets and gizmos, and to optimize its own production. Deflation kept happening, yet tech was still making profits by reducing costs and selling new ideas.

Eventually people realized that the deflation wasn’t going to stop. Holding out to get the best deal was just delaying their own gratification. There would always be a better deal later on, and that would never change. Eventually you have to just decide that it’s time to buy.

And what was the result of the tech industry deflation? Twenty years ago I played one of the best games of all time, The Oregon Trail, on an Apple IIe at school. That same game could be played on a pocket watch now. We have incredible games in 3D now, our cell phones are more powerful than the PCs we had 5 years ago. We have the entire internet at our fingertips anywhere we go. I was out wakeboarding on a lake in the mountains with some friends a few days ago. We had a question about something, my buddy whipped out his iPhone, and looked up the answer. In the middle of a lake! In the mountains! But most amazingly, everyone has a computer and a cell phone. Everyone. 30 years ago a poor person may or may not have heard of a computer. 20 years ago many poor families weren’t so poor that they didn’t own a Nintendo. 10 years ago almost everyone had a PC, regardless of financial status. Today, the number of cell phone users in Africa is astounding as it approaches 50%. The tech industry has boomed as the whole world has come to demand its products. The world has boomed as the technology it has been provided at an incredibly affordable price has improved the quality of life and the productivity of business across the globe. I’m struggling to see the “lose” in this supposed lose-lose situation.

Perhaps we need to rethink this “animal spirits” concept and cheer these deflationary market forces rather than fear them.