Can technology prevent a recession?

Dr Frank Shostak
BrookesNews.Com
Monday 4 June 2007

According to many Wall Street economists and analysts, it is a mistake to compare the 1929 period with the present. It is argued that in relation to 1929, the present world is many times more sophisticated in terms of advanced technological know-how. Also, it is maintained that with present technology we are in a position to generate enough real wealth to prevent an economic slump. Indeed inspection of various statistics and observation of our way of life tends to support this thesis.

For instance, the living standard of individuals, at least in the western world, appears to be higher than 70 years ago. It seems therefore that on the back of this argument we should not worry about the possibility of a depression. Yet one could have argued along similar lines about the 1929 period when comparing it with the end of the nineteenth century.

During the first 30 years of the twentieth century, important technological break-throughs occurred, and individuals' well being had risen significantly in the western world. Yet despite all the sophistication the world still experienced the Great Depression. In other words the worst recession took place in spite of technological progress.

One observes that highly sophisticated businesses are failing despite the modern technology employed. Careful analysis would reveal that the root of the problem is not the lack of technology but rather the wrong employment of resources by the management. Employment of resources contrary to the wishes of the individuals in the market place leads to what we commonly call a loss.

One of the major factors contributing to a misdirection of resources is the falsification of price signals by means of loose monetary policies of the central bank. The persistent falsification of price signals leads over time to a production structure that might be very sophisticated nevertheless in defiance of the wishes of consumers. Consequently, regardless of the degree of sophistication, once the process of adjustment towards the required structure begins, as a result of the reversal in the loose monetary stance by the central bank, various unwanted sophisticated structures are starting to crumble.

It is this liquidation of unwanted structures is what recession or depression is all about. The severity of a recession is dictated by the magnitude of misallocation of resources.

Dr Shostak is a former professor of economics who now works in the private sector