The Laws Of Information Technology And Deflation
Prices always go up.
This is the belief that most have. Actually, with many things, this is the case. However, there is one field which tends to go unnoticed when it comes to a discussion like this. What is important is the fact that it is growing as a percentage of the overall economy.
What this means is the calls for hyperinflation are nonsensical. There is no way for that to happen when a growing percentage of your economy falls under the laws of information technology.
Before getting to the specifics, lets dive into what this is.
Laws of IT and Deflation
Historically, we can sum up the laws of IT by their different components.
We have:
- semiconductors
- storage/memory
- software
When it comes to the individual aspects, we see a doubling with regards to cost/performance of 2 years, 3 years, and 6 years. This means we have an annual deflation rate of 50%, 33%, and 16%. The key is the last one, software, is moving at a faster pace.
In fact, we might be able to assign the same to semiconductors, at least looking at GPUs.
The point here is we have a massive amount of downward pressure as the tentacles of this expand.
There is another component to consider. Technology tends to push the price of things to either the zero or near-zero level. Here is where we see things that use to carry a cost suddenly become available at no charge.
An example of this is long distance phone service. Today, we can interact with people all over the world at zero marginal cost. Another is the idea of paying commission on stock trades. Since people were eliminated from the process, companies could offer the service for free.
One of the keys to this is we are seeing this expand. The Internet was a boom in that it really advanced the digital world. Online activity has operated under this premise for the last couple decades. However, we are seeing this move forward.
The Impact
Let us take a look at some examples of who this spreads.
It is one thing to think about software, but what about something unrelated. Let us look at televisions.
Here is what happened in that industry:
Then we have mobile phone service:
Audio/Video equipment:
Photography equipment:
None of these are online digital products. When you look at the list above, these are not things that immediately come to mind. Instead, they are real world products and services yet they still managed to see deflation over long periods of time.
This provides us with some insight into the future.
The Tentacles Are Spreading
Most do not factor in free.
For example, how many people, when discussing this topic, step back to think about what photos use to cost? Do think consider what it could take to get a set developed and to distribute to the family members?
The answer is no. Instead, they just snap photos on their phone and upload them to Instagram or whatever the preferred application is.
It is getting to the point where we do not even need to take the photo. We can have software generate it for us.
How is this a factor?
Let us consider the idea of music in films. There was a time, not long ago, when there were postings for jobs to create the music for a film. This could be everything from background music to jingles.
Those are all gone. Instead, those making films are simply having software spit out the music. This is something in the background that is not rivaling the quality of a chart topping song. Instead, we are dealing with a few chords that enhance the emotion being conveyed within a scene.
AI music seems to be good enough for this.
What does that do for the cost of the production? It has a way of decreasing it.
Obviously, this is not something major. But what happens when this spreads into healthcare, education, and construction? These are a few areas where we see massive price increases.
Much like overpopulation, the inflation equation has people looking in the wrong direction. Those who believe in a future of hyperinflation do not understand technology. When you have 7%-10% of the US economy under the laws of IT and another 10%-20% being affected by it, how is that even possible?
The answer is that, long term, it is not.
Posted Using InLeo Alpha
I know we've discussed this before... but I really do think inflation is the most likely scenario in the coming years. I don't think the USA will see widespread hyperinflation or deflation.
Cell service might be lower in cost... but I would guess the average price for mobile devices is more expensive now than in 1997 and families spend more on communication technology now than in 1997. So yes, the technology is deflationary but companies have found ways to offer more to charge more. I'd also guess that telecommunication companies are making more profit now than in 1997.
Is making a movie cheaper now than 20 years ago or do they take those cost savings and spend it elsewhere? Furiosa cost 168 million to make. Mad Max cost 350,000 USD to make in 1979 ($1.6M today). The value of streaming services is incredible in comparison, but with so much content being split amongst different services, most families are probably spending just as much as cable. Movie theatre tickets aren't cheaper today.
I would say in most cases, the deflationary aspect of technology just means more profit and will not affect inflation.
I really don't think the use of AI in healthcare, education and construction will see lower, better prices for consumers. If anything, large companies will invest heavily in AI and push out smaller companies to make a strong monopoly for themselves... contributing to higher inflation.
I would absolutely love to be wrong... truly.
Depends upon what period you are discussing. Overall, certainly, in the next 5 years you will might not see much difference from the historical norm.
But when we look at technological deflation, it is penetrating throughout more of the industry.
So you are trying to compare a smartphone? Even still, the answer is no. This compares high end phones. There are obviously non Samsung and Apple phones that are much cheaper. My latest phone costs about $220.
How so? The data reflects the costs of those services are going down. So what are you talking about in particular?
Of course, technology will eliminate the labor factor. It is why companies can offer stock trades for free. There are no people involved in the transaction anymore. The brokers are gone since we do the trade online and the traders on the floor of the exchanges were automated.
Your phone might be $220, but I'd say on average people are spending just as much on devices as in the late 90s. Even with your graph you can see the iPhone X is about the same price as the Motorola and Nokia. Obviously the iPhone X can do way, way, way more than those phones and has significantly better hardware and features... but my point is that normal people aren't seeing those technological deflationary savings because companies find a way to keep prices high... which helps inflation.
At the moment my household pays $95 a month for cell service through Verizon. This is the cheapest package they offer. We're in an area where we can only get Verizon. AT&T and T-Mobile don't provide coverage here. So even though the costs of individual calls is cheaper, data is cheaper, I don't think people on average aren't paying significantly less than they were in the late 90s. The prices haven't been deflationary even if the cost of the technology has been.
Sure... stock trading has reduced in cost... but so many more things are more expensive than they were.. housing, education, healthcare, cost of living, etc. I'm finding it hard to think that these things will be dramatically cheaper in 10 years. They'll surely be more profitable, absolutely, but they won't be cheaper.
Quite frankly most people misunderstand this topic. But the fact that people dont realize it doesnt mean it isnt the case.
My $220 Motorola is far advanced as compared to that $600 version in 1997. Of course, there is a lot left out of the equation.
I can play music on my phone. In 1997 I needed a CD player. What was that $100.
How about watching movies. I can do that on my phone. What were DVD players? Lets say $300.
Then the movies. They cost a few bucks each at Blockbuster. CDs were around $12 each.
How about when I go to a new city. I had to get a roadmap. That was $10-$20.
Oh what about pictures? That was likely $200 for a digital camera. Then if we wanted to record a video, it was likely the same for a camcorder of some type.
Right here we are look at more than $1,000 just off the top of my head. And we didnt even dive into the fact my phone has more processing power than my laptop I bought in the late 1990s for $1800.
Of course, a $75 phone will likely do many of the same things as mine, with a few less features.
People are spending the same amount of money or more so that is inflationary according to your logic.
So if a restaurant once priced a meal at $30 and they cut it to $20, we would agree that is a price decrease. Does the same hold true if I buy two meals. If my spending goes from $30 to $40, according to your logic, that is a price increase even though I am getting more (twice the food).
Lets take it another way. We cut a wage from $30 to $20 but the person works two hours for each one. Is that wage inflation since they got more money?
What is the cause of that? How does any of that have to do with technology? Are there other factors such as regulation, zoning, and other factors that are constantly asking for more. All of that has a cost to it.
That is a really good point. Mobile devices really do cut the need for a lot of other devices and generally do save people money overall.
I think where we disagree is the macro level.
It seems that you believe in a 5+ year time frame that prices and the costs of living will decrease because of technology. Not to put words into your mouth, but I get the impression that in, say, a 10 year period you think deflation is the more likely scenario, prices will be cheaper for people in 2034 than they are today?
I don't disagree that technology will drive down costs, and will likely drive down prices of specific products or services, but I do think that inflation is the more likely scenario as companies will pocket those technological savings or use technology to drive out competition and create monopolies for themselves in order to drive up prices and profits.
I think you are confusing technological deflation with other factors.
Technology is deflationary. It drives down costs. Does that mean it is the piece of the equation? No there are other factors.
We mentioned housing (construction). What goes into that? Why do things go up in price?
There are many factors.
So just in housing, we can see a variety of factors that are in play before we start to consider materials (which are volatile), the cost of money (which also fluctuates) and equipemtn.
Now take this across the entire spectrum.
Hollywood is cooked because there is no regulation and little safety concern. If there is an error in a movie, little harm comes from it. The same is not said for a drug that was approved or driving a school bus.
Without that, technology is going to disrupt quickly as we are already seeing.
We have education which is government backed, hence prices exceed inflation even though the US had hundreds of colleges. Healthcare is much the same way.
How do companies pocket the savings? This goes counter to disruption. I think you mistake profit margin for total profits they are two different things.
As for the overall impact, the timing is difficult to guess. We see the laws of IT, as a percentage of the overall economy, still rather small. That said, as more of business gets digitized, we will see prices of things crash. Robotics are the bridge.
Energy, transportation, entertainment, and manufacturing are a few areas to watch over the next 10 years.
Yeah, I guess I fail to see why we should be excited about technology-causing deflation if it doesn't necessarily mean prices will be cheaper for average families.
Will AI and robotics provide disruption? Or will they just widen the barrier of entry to benefit the established companies with capital? If industries can no longer be disrupted then we'll have monopolies and oligopolies and inflation will rise.
Personally I really hope that renewable energy can completely disrupt fossil fuel companies and bring down the price of energy for everyone and everything...
The challenge that society is going to face in my opinion is that, towards the end of this decade, the deflation will be so bad that people are ill prepared.
The idea that inflation bad, deflation good is misguided. Deflationary eras are bad for economies and people. What happens when millions of jobs are lost and industries wiped out? People were always made obsolete. The difference is it happened at a slower rate in the past.
Nobody cares the traders on exchanges are gone and it is handled by computers other than the fact they dont pay trading fees on their stocks.
Some believe this isnt going to happen on a big scale. I disagree but we will see.
Personally I think inflation is good (say, between 2-5%), stagflation is bad and deflation is much worse.
The Japanese didnt seem to enjoy the deflation they dealt with for a number of decades.
I cant speak for most about most of the world but, for the US, it is a long time since we were in a deflationary spiral (the Great Depression). From what I read, few enjoyed that period.
I recently watched a video on that topic, I believe Japan is still dealing with it today. Their meteoric rise before their stagflation and deflation was absolutely massive... they had a GDP that rivaled the USA for a moment there.
Here is a video about a guy using AI to build an international real estate database/service.
In there he mentioned how at least 30% of the real estate agents will be obsolete very quickly.
https://inleo.io/threads/view/taskmaster4450le/re-leothreads-wdnkhgem
It looks like a great tool, an excellent aggregator; but purchasing property is way more than clicking buttons. Real Estate agents need to coordinate all the different inspections and appraisals, navigate the unique circumstances of both the buyers and sellers, facilitate contracts and local regulations. Buying internationally has a bunch of visa restrictions and regulations. A foreigner can buy in the USA easy enough, but to sell that same property, the IRS requires the new buyer to hold onto 15% of the sale price on behalf of the seller to ensure capital gains tax is sold. AI is great for generalized tasks, but I'd guess real estate is too specific, too important and requires too much localized knowledge to make 30% of agents obsolete.
Companies make outrageous claims all the time... it's all part of the game to get investors. We'll see if any of this actually happens.
That is true. No idea if this will take off.
Zillow was going to dominate the rehab and property management market in the US (and maybe elsewhere).
They lost a fortune not realizing that managing single family home rentals is a lot different than apartment buildings.
Oh, I completely forgot about that...
I do also remember that people were excited about the Ethereum blockchain smart contracts potentially revolutionizing the real estate market by putting the entire process on a blockchain... but I'm not sure what ever happened to that.
Feature length films are more expensive. Hell the character actors (not even the main star) gets more money for a film than the 1979 movies.
But does a computer generated film on YouTube that people put together cost the same? Not even close. It is a lot less than $1.6 million.
Sure... but do people care about computer generated films on YouTube? People watch movies for the stories and characters that resonate with them... it's hard to believe AI will be able to accomplish that.
Who is the number on streaming service? YouTube. So there is obviously a lot of content (and hours being pulled away from movie studios and television networks).
It seems based upon the numbers, Hollywood is failing at this. Hence, doesnt it come down to who is prompting the tools that generate the output, regardless of where/how it is created.
This is very educational. With AI, more things should become less expensive or even free. Some are already using it as a helper in programming, learning a new language, editing, and all around assistance.
It already has. Consider the fact that information use to have a cost to it. Now, you can pay for it but it is mostly free.
As more economic sectors are subject to IT regulations, cutting costs and boosting productivity across a range of businesses, technological developments drive deflation and lessen the likelihood of hyperinflation.
Honestly Ai has made a huge impact in the world, especially in the tech world 🌎
Make things easier for mankind,
I adore the stuff you post It cleverly provides an insightful and approachable explanation of difficult economic ideas as well as the deflationary effects of technology. Continue your fantastic effort!
Quite so much that the world of information and technology has really changed for us that most of the time we always underate. Well this comes with a price and that id the deflating
We overlook how things change over time.