Think of this as Volume 18, Number 4 of the newsletter I have written weekly since March, 1997. Enjoy.
But that age has been dead for a half-century now.
In 1964, a chemist-turned engineer named Gordon Moore wrote an article for “Electronics” Magazine stating that the number of circuits etched onto a single slice of silicon might double every year or two, for as far in the future as he could see.
What became known as “Moore’s Law” has profound implications for economic theory. As computing has become central to everything, it has produced enormous deflation throughout the economy. Moore’s Law now touches every part of the computing landscape – from storage to radios to the transmission of data. Better and better gets faster and faster.
Assembling PCs closer to customers, with “just in time” parts inventory, gave Dell his edge, until the value of those parts, and those PCs, deteriorated further to eliminate that advantage.
The deflation of computing has only accelerated since Michael Dell’s heyday. Today there is no industry that is not impacted by the deflationary impact of ever-faster, ever-cheaper computing. Every industry has become more productive.
Even oilmen are more productive – they can find more oil with modern tools, direct their drills closer to the resource, design and build systems to explode shale and extract it. They can do this on a global scale. But they’re in a race to drive down costs against a host of renewable energy technologies, including the cheapest renewable technology of them all – efficiency.
In the last decade layers of management have been replaced by Customer Relationship Management (CRM) software, by Enterprise Resource Planning (ERP) software, by Human Resources Management (HRM) software. Whole categories of people who used to mediate between buyers-and-sellers, from travel agents to store clerks to middle managers, have been made to disappear. And now you don’t even have to pay for that software, or the computers to run it – just rent it all in the cloud and it updates by itself.
All this represents deflation in action. The value you can extract from each dollar of investment goes up, you need fewer dollars to replace labor with machines, productivity rises and employment has to be redirected, toward things that computers can’t yet do. Like massage therapy or yoga instruction.
Most economists haven’t caught on to this, but especially Austrian economists, whose theories deny government has any power to deal with economic issues. Austrians bemoan increases in money supply, they think gold should be money. They fail to understand that without more money deflation is the inevitable result.
Deflation is much, much worse than inflation. We see this in every recession. Falling prices create unemployment, unemployed people can’t afford the lower prices, so prices go down in a vicious cycle. Pretty soon your dad is getting punched over a can of soup – don’t let your dad get punched over a can of soup.
All the Austrian acolytes, from David Stockman to Paul Craig Roberts to Peter Schiff on down, continue to predict imminent disaster as Quantitative Easing (QE) goes away and the money stashed into vaults since 2008 comes out to play. There will be too much money chasing too few goods, they say. Hyperinflation and economic collapse must result.
But their theories fail to take into account the deflationary impact of Moore’s Law, impacts that are only increasing as devices like the iPad and WiFi radios bring the miracles of cloud computing within the reach of billions around the world.
The only way to prevent the deflation of Moore’s Law is to keep pumping new money into the economy. The speed of that pumping may change with the economic times, but the pumping must continue to keep up with the supply of goods and services Moore’s Law creates.
Inflation may increase and interest rates may rise as the money strike ends. But there are lots of places for it to go. Africa is calling, and so is Latin America. Asia is calling. The last 15 years have seen the greatest move of people out of extreme poverty into something like hope of any period in the history of the world. That can continue, even accelerate, because there remain enormous opportunities in all these places. The question is whether America can compete with those opportunities, and for those opportunities.
Yes, we can.
The greatest miracle of Moore’s Law is deflation in the value of all kinds of goods, and many kinds of services. The only industrial costs that seem to rise are those for chip foundries, which must rise exponentially as chips become more complex, in line with Moore’s Second Law. Raw material costs also rise in cost, but Moore’s Law lets people find alternatives, and keep those price rises to a minimum.
Along with deflation comes one further miracle. What differentiates economies from one another is no longer infrastructure as normally defined. Machines and roads and ports all make great investments, cheaper every year, and more valuable. But they’re not the differentiators.
What differentiates economies is the value of their human capital. It’s the ability of people to do what computers and machines can’t do that now defines economic competitiveness. It’s the value of our labor, our best-trained minds, that is our best defense against deflation. It’s our ability to attract such minds, and investments in that human capital, that pay off best in the competition between nations.
Moore’s Law makes cheap labor cheaper, but it makes skilled labor ever-more valuable. Germany, which exiled the Austrian economists 80 years ago because their theories could not hold society together through the Great Depression, leaving Europe to be torn between the false choices of fascism and communism, has this right.
The productivity of every man and woman, their ability to do what cheap computers and cheap machines can’t do, is what creates national wealth in our time.
This is the economics of Moore’s Law.