Is all technology deflationary?
Peter Warburton - 11 December 2019
Generalised technical progress that shows up as enhanced productivity in contested markets is equivalent to a price fall. However, where this condition is not met, the notion that “technology is deflationary” cannot go unchallenged. There are at least three avenues of objection to this assertion, which is usually cast in terms of the powerful global company that swallows up the franchises and profits of existing firms, removing intermediate cost and handing a saving to the consumer, or alternatively providing a service to the consumer at no charge. One, individual firms can only alter relative prices. Two, we don’t believe in altruistic oligopolists, much less, benevolent monopolists. Three, when the retailer shifts a cost burden to the consumer, it is reasonable for the consumer to pay less.
First, there is the macroeconomic objection that individual firms can only alter relative prices. If the price of certain product categories falls, then consumers transfer purchasing power to other categories whose relative prices rise. Cheaper chips, dearer pizza. Technological change, and the resulting re-ordering of market power and market share, does not change the relationship between credit and money aggregates, interest rates and nominal GDP. It alters the distribution of real gains and losses between businesses and between sectors, e.g. households and firms.
Second, there is the intertemporal objection. We don’t believe in altruistic oligopolists! The forces of price compression associated with internet-only platforms are seldom associated with sustainable levels of profitability. What we see is a form of inter-temporal loss leadership, whereby losses incurred in the establishment of a franchise are presumed to be followed by a long tail of supernormal profits from the now-dominant franchise. Are disruptive companies truly deflationary, or are they essentially stealing market share with a view to building an inflationary franchise? If Apple is any guide, they are well on the way to building an inflationary franchise as a private monopoly. Other global corporations have seized control of their supply chains to the same end.
In terms of nascent disrupters, only in today’s spectacularly easy credit environment can business models that are loss-making for years ahead (figure 1) be entertained. The classic example is Uber, which, even on optimistic assumptions about business growth and market share, is highly unlikely to reach the promised land of supernormal profits.
Very low interest rates foster the creation of (wasteful) excess capacity and exert a deflationary effect, but then a profits downturn (plus rising borrowers’ interest rates) wipes out the excess capacity and reverses the deflationary twist. Is inflation held down as loss-making companies confer an unpriced benefit on consumers? Yes, but this has always been the case. The difference is that formerly we had loss-making divisions or subsidiaries of larger corporations and the consumer subsidy was disguised. Now we have stand-alone, even public company, loss-makers like Uber. As we enter the next downturn in global credit, such companies might well become someone else’s breakfast.
As an aside, another intertemporal dimension is the advertisement of very low prices for the early adopters or customers who order well in advance – these are available for only a short while then the price rises towards that of its rivals. This raises a problem for price measurement, since price sampling attempts to capture universal pricing – where everyone pays the same price. It is difficult to capture time-differentiated prices in regular price indices.
Third, there is the burden-shifting objection. Internet-only platforms deliver goods more cheaply and supermarkets deliver groceries more cheaply, but only by shifting a burden of cost on to the customer, who has to navigate a website, fill a shopping trolley, enter payment details, specify delivery details, or in-store, the customer must scan the items etc. And there is the cost of customised swift delivery, especially for small orders. A debate over the appropriate hedonic adjustment for consumer services is long overdue – has the quality fallen as this burden-shifting has occurred? Should there be a positive price adjustment to reflect it? If the profitability of the tech giants has risen, then perhaps the cost saving in delivery is at the expense of consumers’ time, effort and sharing of personal data?
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