The Industrial Revolution reorganized the economy to replace labor with capital and/or “land” (resources). Progress was easy to measure. In contrast, the Information Revolution reduces the need for capital and resources, through much more efficient allocation. This is hard to measure, leading to policy errors.
Industrial progress was easily measurable by GDP and productivity. Before 1970, a policymaker could be confident that producing more stuff (more capex, more resource use) with fewer people (less labor) would improve quality of life. Therefore, rising GDP and rising productivity were good measures of progress.
That has changed. Free computing and communications instead let you reorganize to increase quality of life while reducing capital, land and labor, all at once, by using those inputs much more efficiently. We can do more with less. This leads to a measurement problem: lower GDP leads to higher quality of life.
What happens when I save money buying used on eBay? My quality of life goes up, because I spent less than buying new. Yet GDP goes down, because fewer new goods need to be produced. Information has replaced industrial production. A macroeconomist, using traditional measures, would wrongly conclude the economy is getting worse, when in fact it’s getting better.
Many of the innovations of the past twenty years look similar:
- Fix things easily with online instructions like iFixit, so new items need not be built
- Rent cars, houses, workspaces, so fewer of these need be built.
- Phone-controlled self-driving cars empower car sharing, so you needn’t own a car
Of course, we can only participate in this increased efficiency if we have skills: reading, computer use, critical thinking. Demand for skills goes up. So we get skilled labor shortages, and unskilled unemployment, at the same time.
What will the traditional Fed chief do when presented with these conditions: rising unskilled unemployment, stagnant GDP, stagnant productivity? Why, they’ll cut interest rates, every time. They are trying to promote capex, to make GDP go up again.
This is a policy error. It falsely presumes that if GDP is stagnant, then quality of life must be stagnant. It also falsely assumes that stagnant GDP means capital is too scarce, when in fact, post IT revolution, the opposite is true. Artificially cheap money actually delays the natural free-market process of using information to replace capital, by making capex artificially more competitive with information.
The real scarce resource in the information-driven economy is not capital, but skills. The policy response to unskilled unemployment is to turn the unskilled into the skilled. I.e. education. Really nothing else will work.