O, Brave New Techno World

Will technological innovation save the world economy?

On a recent trip to Silicon Valley Niall Ferguson discovered that the techno-crowd is brimming with optimism about the future. It is convinced that its techno-widgets and programs will save the world.

The rest of the world does not share the optimism. Policy wonks and bankers in Washington and Wall Street are preparing for even more gloom and doom than we have now.

In Ferguson’s words:

I had never previously appreciated the immense gap that now exists between technological optimism, on the one hand, and economic pessimism, on the other. Silicon Valley sees a bright and beautiful future ahead. Wall Street and Washington see only storm clouds. The geeks think we’re on the verge of The Singularity. The wonks retort that we’re in the middle of a Depression.

Yet, even the techno world has its dissenters. Among them, Pay-pal co-founder and Facebook investor, Peter Thiel.

In a debate with Google executive chairman Eric Schmidt, Thiel asked this question:

Why, if information technology is so great, have median wages stagnated in the nearly 40 years since 1973, whereas in the previous 40 years, between 1932 and 1972, they went up by a factor of six?

Could it be that the techo geniuses of Silicon Valley are living in a bubble? Are they completely detached from economic reality?

Thiel is correct, for a simple reason. High technology exerts deflationary pressure on wages. If you can move your business, whether it is manufacturing or programming, to a place where the wages are significantly lower and the quality of work is as good or better, why would you not do it? 

When you do, wages will decline or stagnate for everyone in that business.

Of course, the Wall Street crowd understands one other thing that the tech wizards do not. When your nation is drowning in debt deflationary pressure becomes calamitous.

If too many workers can no longer command the salaries that justified their mortgages, surely the housing market is going to be negatively impacted. As it has been.

Governments try to deal with the deflation problem by producing more and better inflation. They print money; they borrow money; they read Paul Krugman and post “What Me Worry “ signs around their offices.

Then they try to raise revenue by increasing tax rates. Except that in a high tech world people and businesses can easily move themselves to low-tax nations. The bureaucrats are left scratching their heads, trying to figure out how it happened that when they raised tax rates they collected less tax revenue.

It’s the free market, internationalized. It means that the last vestiges of mercantilism, symbolized by the monopoly that one part of Manhattan has on financial markets are being broken… as we speak.

Yesterday, a friend suggested that we could wipe out the debt if only the government institutes a 1 cent tax on every trade in the financial markets.

It sounds like a great idea, a way to teach those program traders a much-deserved lesson.

Such a plan depends on two things.

First, the profit margin of the computerized trades. What if they are making around 1 cent per trade? 

Second, the willingness of the traders to continue to do business in America.

If the techno-traders move their business to Singapore or London or Dubai… we will find ourselves with lower tax revenues and fewer jobs.

And then, a technologically driven world also sustains specific vulnerabilities. What if the power grid can be shut down by a hacker or by an accident of nature? Witness the recent blackouts in India or those in Washington, D.C.

One cannot help but echo Ferguson’s view, which sounds more realistic than depressimistic:

It’s a dangerous world. Ask anyone who works in the world of intelligence to list the biggest threats we face, and they’ll likely include bioterrorism, cyber war, and nuclear proliferation. What these have in common, of course, is the way modern technology can empower radicalized (or just plain crazy) individuals and groups.

I wish I were a technoptimist. It must be heart-warming to believe that Facebook is ushering in a happy-clappy world where everybody “friends” everybody else and we all surf the net in peace (insert smiley face). But I’m afraid history makes me a depressimist. And no, there’s not an app—or a gene—that can cure that.