Fed Policy – Does The Tech Age Indicate It’s Time To Re-Write The Whole Economic Textbook?

Summary

  • Last week the Federal Reserve made its expected quarter point rate hike, triggering the traditional debate on monetary policy.
  • But how relevant is traditional monetary and economic policy analysis now as we enter more fully into a technology economy?
  • It may be time to start re-writing the economic textbooks as industrial capitalism passes and a new tech-based economics emerges.

So last week the Federal Reserve made its expected quarter point rate hike. This in fact really means the Fed adjusted the rate at the discount window by one quarter percent as that is in fact the only rate the Fed is able to change itself. The usual commentary has ensued – is the Fed being too aggressive given that inflation is flat, how does any of this go to addressing unwinding the Fed’s $4.5 trillion balance sheet, etc.?

But I want to take a step back and question the macro-investment and macro-economic theory going on here in a much larger context. The context I want to put it in is in terms of the technology revolution that I and some of my colleagues at, for example, the Boston think tank, maxos.ai (e.g., Andy Singleton) believe is fundamentally changing the laws of now passé industrial capitalism.

If we look, for example, at the effect of the multiple waves of quantitative easing post-credit crisis, does it fit in with either Keynesian or Friedmanite economic theory? Well not really. Large amounts of money poured into the economy did not have the effects a Keynesian might hope – it liquefied the system and perhaps therefore saved us from depression, but it created very little productivity uplift.

Where was the multiplier effect? Well the Keynesian may argue that quantitative easing was merely monetary intervention and not real fiscal intervention, but then could we have a multiplier effect anymore even if you really did invest heavily in infrastructure?

Today the bulk of infrastructure work would be done by machines, intelligent cobots, etc., with some help from men. So large infrastructure investment is very unlikely today to create significant jobs. It will create demand for clever machinery and therefore in fact a significant fiscal stimulus is likely to hand money to capital (i.e., the owners of the intelligent machinery) and not labor.

What about the Friedmanites? Well as monetarists they would have told you that all that QE should have created inflation. But that did not happen either. In fact, the Fed has been potentially criticized for raising rates when very little inflation is evident in the system. So why doesn’t the Friedmanite model assist us much anymore either? Well again the tech revolution helps us understand the problem.

You see in an advanced tech economy the predominant asset becomes IP. But IP is just not the same as widgets. It has very unique properties that undermine many of the traditional equilibrium models of classical free market economics. For a start there is an infinite source of IP (unlike other goods) and more importantly, IP is infinitely replicable. IP is rather like one of Richard Dawkin’s memes. If I hand you IP we now both have it.

It is not like a shoe where I either have it, or, if I give it to you, you then have it. With many of the largest companies in our economy having balance sheets filled with effective IP, this has real implications on the ability of markets to find natural equilibria. For example, it is simply not true that the more demand there is for IP, the higher the price will go up due to scarcity of the product – again remember IP is infinite in source and infinitely replicable.

So in other words, the core models of demand/supply equilibrium that one learns in first year economics and that underlie free market economics simply stop applying in an IP-driven economy. It is no wonder then that this feeds through the whole Friedmanite economic construct and results in it producing erroneous results – i.e., multiple layers of QE simply did not produce material inflation.

I believe, in other words, we are on the verge of a total revolution in economic science. Just as the laws of economics were radically changed by the industrial revolution (relative to the agrarian/feudal age), so now with the tech revolution we are seeing an ending of industrial economic theory typified by BOTH Keynesian and Friedmanite thinking.

Even the laws of physics (or at least key constants in physics) are said potentially to change through what is called “symmetry breaking,” and for sure our laws of economics have shown themselves not to be immutable through time.

So, in other words, if the industrial revolution involved mechanization of labor, it is commonly said the new technology revolution is a mechanization of the mind. The flood of technology changes the whole politico-economic landscape. It causes, at least initially, endemic chaos, and it renders somewhat senseless many (if not all) of the antique economic ideas of the industrial revolution (left or right) – Keynes, Krugman, Friedman, Hayek, et al.

Of course, as this whole economic left/right spectrum seems to sink, ironically people tend to radicalize (at least for a while) ever further left or right. As the Titanic goes down, people grab on to the last pieces of floating detritus and hold on for dear life. The swan song of the ideas of industrial economics is at its loudest at the moment of death, and this in many ways is the world we see around us today.

So, in fact, we see people bewildered by a new economic maze, alienated by it financially and socially. They are left confused by the sheer pace of change. And this in itself results in them flocking to demagogues from the right or the left who offer simple (albeit tired and unoriginal) solutions. Who promotes those “simple solutions?” They might be a populist like Trump, or, on the left, a radical socialist like the labor leader Jeremy Corbyn in the U.K., or Bernie Sanders in the U.S. or the radical left leader Alexis Tsipras in Greece. Or the new despot in Hungary (Viktor Orban), or French nationalist Marine Le Pen.

What our new laws of economics for a technology (post-industrial) age look like is still hard to say and something for much greater research. But, in summary, the macro-focused investor, as he looks at say Fed policy, needs to be very cognizant of these tectonic shifts in our economic landscape. If he is to make any sense of larger economic trends, he is very unlikely to do so using the Keynesian or Friedmanite-type tools of the now bygone age of industrial capitalism.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.