How deflationary is the internet?

Discussion in 'Economy' started by william the wie, May 31, 2011.

  1. william the wie
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    william the wie Gold Member

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    I was reading a minyanville article about the mini-tech bubble and one of Toro's catch phrases about the internet being the greatest engine of deflation ever invented got me wondering are there any measures of how deflationary the internet is in different sectors of the economy? And how does this affect the utility of economic models that treat price deflation as a bad thing?

    Communications obviously is deflationary and the "internet" has become a code word for communications in general despite the legal need for certified mail, the need for UPS/USPS delivery of physical product and no doubt other things I have forgotten about. So how deflationary are we talking about? Are we going to lose Walmart and Target soonish? Is quality of product generally increasing as with computers, decreasing, staying the same or does that depend more on the sector of the economy and the firm or what?

    This also has political impact because if quality is generally on an uptrend and prices on a down trend then economic policy may be as useful as a football bat.
     
  2. expat_panama
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    expat_panama Silver Member

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    Price trends like inflation/deflation have a big impact on us individually and on the nation as a whole, so we need to know what's going on. This also means doing the homework because while using big words is fun, nobody gets anywhere with sloppy talk. Let's agree on what the word means (from here):

    Deflation
    A situation in which a currency gains value, often resulting from a decrease in prices. Many economists believe that deflation is the result a fall in demand for goods and services, which causes producers to reduce prices. This reduces their profits and causes a reduction in investment, which contributes to a further drop in demand. Because of this deflationary spiral, deflation is often associated with recessions and depressions and has been known to cause unemployment. It is also called negative inflation. See also: Lost Decade, Inflation.​

    Everyone says new technologies eliminate jobs and make people spend less money. Everyone's wrong. New technologies open up whole new job markets while everyone stampedes to buy the new toy that yesterday they didn't know they couldn't live without. Internet is good.

    Deflation is when people stop buying things and stuff is sold at close out prices, even at a loss. The real havoc deflation brings is all the financing for new business construction/expansion will have to be paid back at last year's price levels but with this years incomes. Mass layoffs, mass foreclosures, deflation is bad.
     
  3. william the wie
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    william the wie Gold Member

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    Technically all productivity increases are deflationary by all but Austrian definition. Likewise all innovations. The big problem is product quality improvement since it can only be quantified well after the fact.
     
  4. KissMy
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    KissMy Free Breast Exam

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    Not as deflationary as the Internal Combustion Engine.
     
  5. expat_panama
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    expat_panama Silver Member

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    The past 100 years has seen more innovation and productivity increases than the 1000 before. What definition of deflation do we use to say world currencies have been deflating?
     
  6. william the wie
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    william the wie Gold Member

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    Really good question so let me sharpen the argument.

    Economists claim the following are contrasting statements:

    Getting more for less, higher productivity, is GOOD.

    Prices dropping, deflation, are BAD.

    Maybe I'm being stupid here but that sure sounds like classic cognitive dissonance to me.
     

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