In his article “The
Big Meh”
Paul Krugman complains that despite all the information technology advances
the effect so far has been negligible as far as economic growth is concerned.
Krugman writes “That the whole digital era, spanning more than four
decades, is looking like a disappointment. New technologies have yielded
great headlines but modest economic results. Why? ... The answer is that I
don’t know — but neither does anyone else.”
Indeed if one looks at the real gross domestic product to the potential
real gross domestic product ratio the economy does appear to be hovering
below potential with the ratio of 0.977 registered in Q1 this year.
Contrary to Krugman, we suggest that economists such as Ludwig von Mises
and Murray Rothbard have provided a clear answer to the issue of technology
and economic growth.
In Man,
Economy, and State, 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.
Most modern theories that emphasize the importance of new ideas and new
technologies give the impression that these ideas and technologies have a
“life of their own.” Many experts hold that because of the limited amounts of
capital and labor, without technological progress, the opportunities for
growth will eventually run out.
We Need Funding To Implement New Ideas
Ideas, unlike material inputs, are not themselves scarce. Consequently, it
is argued, new ideas for more efficient processes and new products can make
continuous growth possible.
We suggest that regardless of how many ideas people have, what matters is
whether these ideas can be implemented. What always limits the implementation
of various new techniques is the availability of funding. While ideas and new
techniques can result in a better use of scarce resources, they can however,
do very little without the pool of real savings.
So regardless of how clever we are and regardless of various technological
ideas, without an adequate pool of funding nothing will emerge. It is through
the expansion in the pool of real savings that an increase in the stock of
capital goods is possible. And it is the increase in the capital goods per
worker that permits economic growth to emerge.
To Get More Funding, We Need Savings
Obviously, new ideas and new technology can be introduced during the
production of new capital goods (i.e., new technology) and will be imbedded
in the capital goods stock. The crux of the matter however, is that capital
goods cannot emerge without a prior increase in the pool of funding or pool
of real savings.
Take, for instance, a baker John who produced ten loaves of bread. He
consumes two loaves of bread whilst the other two loaves — his real savings —
he employs to purchase a new part to improve his oven. With a better oven he
can now raise the output of bread to twenty loaves. If he still consumes only
two loaves, then with a larger savings (now stands at eighteen loaves) he can
enhance further his oven by introducing new parts, which will enable the
introduction of new technology. Note that all this is made possible on
account of real savings.
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 was 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 responsible for a severe erosion of the pool of
real savings and thus a weakening of the process of capital formation. This
in turn has undermined real economic growth notwithstanding new information
technology.
For Krugman and his followers savings is bad news — it is seen as less
demand — hence one shouldn’t be surprised that Krugman is puzzled as to why
new ideas haven’t manifested in a more robust economic growth. Contrary to
Krugman, boosting so-called aggregate demand whilst undermining the capital
formation process, and hence the ability to produce goods and services,
cannot strengthen economic growth over time. In fact this way of thinking
results in the notion that something can be generated out of nothing.
