There’s something unsettling about finding yourself at home in bed, under the duvet, Pringles in one hand, remote in the other, binge-watching ‘House of Cards’.
As you try to come to terms with where you have ended up, can you take some comfort in the fact that a significant chunk of the reasonably well-educated bourgeoisie is also addicted? Are we, at all hours of the night, gorging on Netflix, checking emails, responding to Whatsapp groups, booking an Uber or buying something on Amazon?
Is technology taking over our world and what does it mean for the global economy and for our way of thinking about the world?
In this update, let’s tease out some of the connections – not always apparent – between technological innovation, low productivity, wage deflation and the conundrum faced by central banks everywhere. The central banks’ dilemma is that they are itching to raise rates but finding no reason to do so.
Economics is constantly evolving
At the beginning of every year, when my students sit down in front of me at Trinity College in Dublin, I can’t stress enough the importance of not only what they’ll learn in textbooks, but what they see happening in the world around them. As the world changes, our understanding of the economy should change too. But sometimes it doesn’t.
Too regularly, economists – and in particular policymakers – display a form of ‘groupthink’ and seem wedded to old models that appear impervious to the changes that are taking place in the real world.
Groupthink, when wrong, can lead to huge policy errors and have enormous unnecessary repercussions. As the global economy is growing and unemployment is falling, the default position of central bankers, from the Fed to the BoE to the ECB, is that inflation has to be around the corner.
But, what if it’s not?
What if policymakers in their ivory towers wedded to old ideas do not appreciate that technological change and the likes of Whatsapp, Uber, Amazon and Netflix, are driving deflation not inflation?
Both issues, (1) the deflationary impact of technological disruption and (2) the productivity paradox, are interrelated and have huge policy implications. Let’s explore them and more, but for the sake of clarity, take each one in turn.