Can sophisticated technology prevent severe economic slump?

Most economic commentators are likely to agree that in relation to the period prior to the Great Depression, the present world is many times more sophisticated in terms of advanced technological knowledge. It is then tempted to suggest that with the present advanced technology we are in a position to generate enough real wealth to prevent a severe economic slump.

On this way of thinking, ideas are not themselves scarce unlike material inputs. Consequently, new ideas for more efficient processes and new products can make continuous growth possible.

It follows then that because of the limited amounts of capital and labour, without the technological progress the opportunities for growth will eventually run out.

We suggest that one could have argued along similar lines about the period prior to the Great Depression i.e. prior to the 1929 when comparing it with the end of the nineteenth century. During the first 30 years of the twentieth century, important technological break-throughs occurred, and individuals’ wellbeing had risen significantly in the western world. Yet despite all the sophistication, the world still experienced the Great Depression. A severe economic slump took place in spite of technological progress.

We suggest that regardless of how many ideas people have what always limits the implementation of various new ideas is the availability of real savings.

 

Real savings the key for economic growth

While new ideas can result in a better use of scarce resources, they can however, do very little for real economic growth without the expanding pool of real savings.

In his “Man Economy and State” 2nd edition page 542 Rothbard says, that technology, while important, must always work through the investment of capital in order to generate economic growth.  On this issue Rothbard quotes Mises who says,

“What is lacking in (underdeveloped counties) is not knowledge of Western technological methods (“know how”); that is learned easily enough. The service of imparting knowledge, in person or in book form, can be paid for readily. What is lacking is the supply of saved capital needed to put the advanced methods into effect”.

So regardless of how knowledgeable we are and regardless of various technological ideas, without an expanding pool of real savings no expansion in economic growth is going to emerge.

It is through the expansion in the pool of real savings that an increase in the stock of capital goods is possible. The increase in the capital goods once correctly allocated permits the increase in economic growth to emerge.

 

Loose monetary policy is the key behind the boom-bust cycles

One observes that during an economic downturn highly sophisticated businesses also fail despite sophisticated technology being employed. Careful analysis would reveal that the root of the problem is not the lack of sophisticated technology but rather the wrong employment of resources by the businesses.

Employment of resources contrary to the approval of consumers leads to what we commonly call a loss. One of the major factors contributing to a misdirection of resources is the falsification of price signals by means of loose monetary policies of the central bank.

The persistent falsification of price signals leads over time to a production structure that might be very sophisticated nevertheless in defiance of the wishes of consumers.

Consequently, regardless of the degree of sophistication, once the process of adjustment towards the structure that is in line with consumers top priorities begins, various unwanted sophisticated structures begin to crumble.

As a rule, a tighter monetary stance of the central bank sets this process of adjustment. The liquidation of unwanted structures is what recession or depression is all about.

 

Why the best policy to help the economy during a recession is to do “nothing”

Contrary to popular thinking, the so-called strength of the economy as depicted by various economic data cannot counter the process of adjustment once it was set in motion by a tighter stance of the central bank.

If the central bank were to pursue an ever-aggressive loose monetary stance rather than reversing the loose stance, at some point in time the pool of real savings will start declining.

Consequently, the so-called economy will follow suit. If the central bank were to intensify its loose monetary policy further to “revive the economy” this will only weaken the pool of real savings further and make things much worse.

Both Mises and Rothbard advocated that the best policy once an economy falls into a recession is for the central bank and the government to do nothing.

The reduction in tampering with the economy leaves more real savings with businesses. This enables them to set in motion the process of real wealth accumulation. This in turn makes it much easier to absorb various misallocated activities.

 

The state of the pool of real savings sets the underlying growth trend of the economy

We can envisage the so-called normal business cycle as a situation wherein the economy follows a rising growth trend with cyclical swings oscillating around the growth trend.

Now we suggest that a declining pool of real savings places the economy on a declining growth trend. Whilst an expanding pool of real savings sets the economy on a rising growth trend.

A declining growth trend coupled with a cyclical decline is associated with the state of a severe economic slump often labelled as economic depression.

Note that a cyclical downturn tends to be more severe during a declining growth trend versus the situation when the growth trend is rising.

During a rising growth trend, because of an expanding pool of real savings it is much easier to absorb various misallocated activities, which come under pressure due to a tighter monetary stance of the central bank.

 

Money out of “thin air” and economic embezzlement

As we have mentioned above the key reason for boom-bust cycles is the loose monetary stance of the central bank. This loose stance results in the expansion of money out of “thin air”, which sets in motion an exchange of nothing for something.

On a pure gold standard, an increase in the supply of gold does not set in motion an exchange of nothing for something i.e. an act of embezzlement, but to an exchange of something for something. (One form of real wealth is exchanged for another form of real wealth).

In the absence of an exchange of nothing for something, there is a very low likelihood of a persistent misallocation of resources, which culminates in boom-bust cycles.

Note that the expansion of money out of “thin air” through the setting of an exchange of nothing for something falsifies the price signals and thus leads to the misallocation of resources.

The early receivers of newly generated money set the demand for various goods that prior to the expansion of money were not demanded. Once the easy stance of the central bank is reversed and the expansion in the money out of “thin air” slows down or comes to a halt the demand for these goods slows down or stops altogether – an economic bust emerges.

Obviously, in a free unhampered market we will also have a misallocation of resources as a result of business errors; however, the incurring losses would prevent the misallocations to become of long lasting nature.

In addition, the misallocation of resources or the errors committed by businesses are not going to be widely spread, as is the case with the misallocation caused by the loose monetary policies of the central bank. The errors committed by business are of a local nature related to how well businesses are managed.

When the central bank and government policies set the misallocation of resources in motion these distortions tend to be long lasting since neither the government nor the central bank operate in the profit and loss framework. Also, these policies exert their impact on the economy as a whole and not confined to a particular company or a sector.

Conclusion

We suggest that despite new technologies a major impediment to economic growth has been the relentless central bank tampering with financial markets. Since 2008, this tampering made manifest in the extremely loose monetary policy of the Fed that resulted in the massive monetary expansion of the Fed’s balance sheet and the lowering of interest rates to almost nil. These policies have been likely responsible for a severe erosion of the pool of real savings and thus to a weakening of the process of real wealth formation. This in turn poses a high risk of the US economy falling into a severe economic slump notwithstanding new information technology.

 

 

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