At the Risk of Sounding Like an Idiot…

So in reference to a discussion Hank, Professor Smitka and myself almost got into two classes ago I wanted to bring up the idea of economic growth in relation to technology. What Hank and I were questioning in class was more or less the role of technology in increasing Economic Growth. The failure of this position is determining how much technology really improves productivity thus increasing economic growth. This position has been bothering me since then. And I’ve been really driven crazy over it to the point of looking stuff up about it in class (to which I apologize professor). However, one of the latest Noahpinion posts really struck a cord with me. The post, entitled “Murphy’s Law? or, Follies of a Finite Physicist” is a must read. [continue reading]

In part of the piece that Noah suggests with sarcasm he is not done with the idea of virtual reality and its relation to growth. The idea here is that as technology grows and we increase the reality of virtual worlds we can create and simulate worlds with goods cheaper to produce but still as desirable as those goods in the real world. Not to mention that said goods would be a renewable resource. The economic growth of such worlds is unpredictable at the moment, but looking at such growth possibilities in juxtaposition with games like World of Warcraft and Second Life certainly enhances our understanding of what such simulated worlds might work and feel like.

These worlds may not just be for people who game or spend countless hours on the internet either. Our phones as well as our purchasing habits are increasingly moving to strictly cyber interactions. A day is coming when more goods will be purchased online than in stores. Our phones are becoming mobile computers allowing for cyber social interactions anywhere at anytime. My point here is not to speculate on science fiction but to address the value of such technology on productivity and eventual economic growth.

Perhaps the iphone only increases productivity on the margin but in the long run technology may be moving not to increase productivity but to invent complete new sets of goods thus creating demand that won’t be have the same limitations as present goods and services.

Again apologies if this is too theoretical and does not seem Japan related enough. The relation to Japan is that of the top 25 largest  gaming and software companies in the world 9 are Japanese companies. The potential for these companies who are already investing the resources and have the infrastructure to move into the virtual reality world is enormous. Finally, the virtual markets are global and Japan won’t be hurt in these industries by a fatiguing population so long as Japan is still producing software engineers or make attractive enough offers to entice engineers away from rival companies in China. The third largest Game and software producer after the United States.

(To be fair there are companies focussed purely on virtual reality products but I feel its more fair to include gaming and software companies in this post because they are the companies that are attentive to the wants and desires of the actual market and will purchase whatever technology they don’t develop on their own. Assuming such technology does get developed.)


3 thoughts on “At the Risk of Sounding Like an Idiot…

  1. the prof
    I won’t dispute that we have more entertainment options than in the past. But will this really represent an increase in income? Will it lessen poverty in rural Africa? Will it even lead to fewer hours worked?
    Productivity stems in part from reorganizing production to take advantage of new technologies. Where will such new enablers come from? Transportion seems to not just reached a point of diminishing returns, improvements have ceased altogether in the developed world – to which both Japan and the US belong. Unless or until we implant wires in your head, it’s hard to see additional improvements in telecommunications. We have learned how to use information more effectively, a complement to improved physical transportation, but routing algorithms and digital inventory control / automated ordering systems are already pretty advanced. Food production takes less labor, but more capital and potentially more energy (for irrigation and fertilizers and similar chemicals).
    Energy costs might seem one area for improvement. Even so, those will surely be slow, installing new capacity (and transmission systems) is a slow process that will take a couple decades. Ditto rolling out smart grids, the technology is only partly ready, appliances aren’t yet “smart”, and house wiring… However, a lot of the world still consumes little energy, so we won’t necessarily see a decline in fossil fuel prices. In other words, demand will offset technology, leaving things closer to neutral on the price front.
    Let me apply this to Japan. As you have hopefully read (in my retail revolution paper), new formats and better supply chains have meant more convenient access to a wider variety of goods at lower prices. However, in the context of a shrinking population and falling nominal incomes, the displacement of the old and inefficient by the newer and better faces a challenge. In a growing economy, you can add capacity and if you have a superior business model (and the management structue to deliver it) you can be fairly confident that you’ll pick up sales. In Japan, unless it’s in a new product category, a new retailer has to displace existing retailers, who by and large have long since amortized their sunk costs. New retailers however have to pay the cost of entry. So they can only add to sales if other retail formats decline. When marginal costs are low – a mom-and-pop retailer that need pay no rent nor compensate any employees – that process is very slow. Ultimately such formats will die out because heirs don’t want to carry on the family business. The end result, however, is lower productivty (TFP) increases economywide.
    So what of virtual reality? Well, over time that could have other consequences, such as lowering fertility. Virtual children, virtual sex, why bother with the messy and disappointing real world? However, as with other technologies, that would be a slow shift, and the economic impact would arise only over the span of generation. The Matrix, anyone? – ah, but that’s a world in which technology stands still, is it not?
    Virtual turkey, anyone? Virtual sushi? Virtual gourmet, anytime!
    1. reed

      I disagree that either transportation or technology have reached the some sort of plateau. Even if the speed of our modern technology didn’t increase one iota in the next decade, there are massive gains to be made in energy efficiency of household and consumer electronics. Also, Japan is ahead of the US in terms of their mailing system and its ability to deliver food because their mail systems capacity for refrigeration, but there is still room to improve on that system. There is no reason that people should ever have to leave their homes to shop for any sort of produce. We still haven’t exhausted improvements from Moore’s law; the network of things is still developing; our ability to transport services is constantly improving; there is a second panama canal being built as we speak that will be able to accommodation wider ships, making the trek around cape horn necessary for fewer ships…

  2. the prof

    Further: along with noting diminishing returns to technological change (most gains from telecoms, computers, faster transportation, improved health during working years have already been achieved) Gordon also identifies “six headwinds”:

    • demographic slowdown
    • diminshing returns to education [higher education now pervasive]
    • income and wealth inequality [more egalitarian societies grow more quickly]
    • globalization [demand spilling over to trade instead of domestic output]
    • energy & environment [global warming, water scarcity]
    • high debt levels [in developed world]

    Now I am more convinced by some of these than by others. But it really means that he posits not only slower productivity increases but also macroeconomic forces that will slow growth independent of what happens to productivity.


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