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A compute cycle has fallen in price faster than anything else in the world except perhaps shares of the East India Company or Dutch tulips. People still buy co

A compute cycle has fallen in price faster than anything else in the world except perhaps shares of the East India Company or Dutch tulips. People still buy computers. And TVs and cell phones and flash drives and etc, etc, etc. Surely if the falling price of a good with respect to the currency it's purchased in would prompt people not to buy then nobody would purchase computers. And yet it's a thriving industry. Please help me reconcile this fact with the author's statement that would indicate that precisely the opposite should be happening.

maxerickson 13y ago
What sort of everyday value can I get from the bitcoins in my wallet? The material goods you mention are good for all sorts of things. (My point being that they are not great comparisons, I'm staying out of the argument about deflation)
- msandford 13y ago
  You've missed the point. From the article: "When prices fall, people put off buying things. And when people put off buying things, companies put off investing. And then the economy slumps—and keeps slumping. " I will make a more specific claim: the author is arguing that when the price of things in a given currency fall, people delay purchasing. This can be re-stated that as the ratio of money to goods declines, so too will the purchase of goods. The ratio of money to a specific good declining can happen in one of two ways. Either 1) the currency as a whole appreciates in value relative to everything in the economy (usually called "deflation") or 2) the good becomes cheaper to extract, manufacture, grow or otherwise produce which then allows business to price it less expensively In either case 1 or 2 the ratio of money to a good has decreased. We normally would say it has "gotten cheaper" Computers are a good which has gotten cheaper in real terms and nominal terms and especially in absolute terms. A desktop computer used to cost $2000 or more for anything decent (adjusted for inflation perhaps $5000 or more), today a quite respectable laptop can be purchased for $800 which has hundreds if not thousands of times the capability of the $2000 machine from 20 years ago. The world as it exists today does have a computer industry, in fact it's huge. Compared to 1993 it's at least 10x larger, and surely quite a bit more: http://en.wikipedia.org/wiki/File:Personal_computers_(million)_ITU.png http://en.wikipedia.org/wiki/File:Personal_computers_(millio... So according to the author's "when things get cheaper people stop buying" argument the computer industry should have been shrinking over the last 20 years, not growing. But we can clearly see from the world that exists today that the computer industry has grown over the last 20 years. How should I reconcile the author's argument with the reality I see around me? I feel I have no choice but to conclude that the notion that "falling prices causes people to reduce their purchases" might not be a universal truth, or perhaps it contains only a little truth inside it.
  - maxerickson 13y ago
    I'm just saying I don't think you can expect the same behavioral responses to 1 and 2. In the case of 1, I minimize all of my purchases during periods where I perceive higher levels of appreciation. In the case of 2, I only buy what I need of that good (which is approximately what I do anyway). So it isn't a particularly interesting comparison to make.
    - msandford 13y ago
      Sure, but for most people even in case 1 you still have to have food, clothing, shelter, etc. Those needs don't disappear just because you want to speculate. Now you might be able to speculate quite effectively buying when prices are low and living off of your stores when prices are high. But everyone can't do that by definition, so we're saved from case 1 totally throwing a monkey-wrench into the works.
  - matwood 13y ago
    Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines. From the Bernanke article I originally linked.
gnaritas 13y ago
Deflation in a sector != entire economy deflating; this is a red herring.
- msandford 13y ago
  Deflation in that sector has led to investment and growth. I would argue that the impetus is on you to prove that economics isn't scale-free. In other words, what works for an individual with thousands of dollars also works for a company with millions. I.e. that math doesn't change as the numbers get bigger. $1 + $1 is $2 the same as $100b + $100b = $200b. If an individual accrues wealth by saving and investing (how most people do it) that's basic arithmetic. Expenditures less than income over a period of time. Works for companies large and small. If we believe that this works at scales from the individual which is an organization of one person all the way up to organizations of hundreds of thousands or millions, why would it suddenly stop working that way once it's a "whole economy" that's nothing more than the organization of all individuals?
  - gnaritas 13y ago
    Because economies aren't individuals, your spending is my income and my spending is your income. Household economics does not scale up to an economy, the rules for an economy are entirely different. And I don't have to prove anything, deflation has a well established meaning: reduction of the general level of prices in an economy. One or a few sectors dropping prices simply is not what economists mean when they talk about deflation. Now you're welcome to make up your own definitions of words, but then you're not really communicating with everyone else nor understanding what they're actually referring to since you're ignoring what they mean by those words.
  - nhaehnle 13y ago
    You're running into a textbook case of the Fallacy of Composition. The essence is that the economy is full of feedback cycles. Your savings and spending decisions affect the size of the economy. Now, from an individual household perspective, your spending is only a drop in the bucket. It is small compared to the size of the economy, and it is small compared to the revenue of any individual firm. Any feedback effect your behavior may have is a rounding error compared to the sum of the effects of everybody else's behaviours. Therefore, it is reasonable to disregard the feedback effects when you make individual decisions. However, when you evaluate the economy as a whole, there is nobody else and the feedback effects are suddenly the dominant term. Disregarding those effects when making economy-wide policy decision is therefore a recipe for disaster.
saalweachter 13y ago
Uhh, people totally do defer buying computers because the price per compute is constantly falling. If you are running a large-scale operation, you do not over-provision. You do not buy computers you won't need till next year till next year, because they'll be cheaper and better next year. This is a direct consequence of the deflationary environment created by constantly improving computation. Heck, even normal consumers put off buying a new iPhone X because the iPhone X+1 is launching in 3 months, so why buy the crappier one for more money today?

maxerickson 13y ago

What sort of everyday value can I get from the bitcoins in my wallet? The material goods you mention are good for all sorts of things. (My point being that they are not great comparisons, I'm staying out of the argument about deflation)

msandford 13y ago
You've missed the point. From the article: "When prices fall, people put off buying things. And when people put off buying things, companies put off investing. And then the economy slumps—and keeps slumping. " I will make a more specific claim: the author is arguing that when the price of things in a given currency fall, people delay purchasing. This can be re-stated that as the ratio of money to goods declines, so too will the purchase of goods. The ratio of money to a specific good declining can happen in one of two ways. Either 1) the currency as a whole appreciates in value relative to everything in the economy (usually called "deflation") or 2) the good becomes cheaper to extract, manufacture, grow or otherwise produce which then allows business to price it less expensively In either case 1 or 2 the ratio of money to a good has decreased. We normally would say it has "gotten cheaper" Computers are a good which has gotten cheaper in real terms and nominal terms and especially in absolute terms. A desktop computer used to cost $2000 or more for anything decent (adjusted for inflation perhaps $5000 or more), today a quite respectable laptop can be purchased for $800 which has hundreds if not thousands of times the capability of the $2000 machine from 20 years ago. The world as it exists today does have a computer industry, in fact it's huge. Compared to 1993 it's at least 10x larger, and surely quite a bit more: http://en.wikipedia.org/wiki/File:Personal_computers_(million)_ITU.png http://en.wikipedia.org/wiki/File:Personal_computers_(millio... So according to the author's "when things get cheaper people stop buying" argument the computer industry should have been shrinking over the last 20 years, not growing. But we can clearly see from the world that exists today that the computer industry has grown over the last 20 years. How should I reconcile the author's argument with the reality I see around me? I feel I have no choice but to conclude that the notion that "falling prices causes people to reduce their purchases" might not be a universal truth, or perhaps it contains only a little truth inside it.
- maxerickson 13y ago
  I'm just saying I don't think you can expect the same behavioral responses to 1 and 2. In the case of 1, I minimize all of my purchases during periods where I perceive higher levels of appreciation. In the case of 2, I only buy what I need of that good (which is approximately what I do anyway). So it isn't a particularly interesting comparison to make.
  - msandford 13y ago
    Sure, but for most people even in case 1 you still have to have food, clothing, shelter, etc. Those needs don't disappear just because you want to speculate. Now you might be able to speculate quite effectively buying when prices are low and living off of your stores when prices are high. But everyone can't do that by definition, so we're saved from case 1 totally throwing a monkey-wrench into the works.
- matwood 13y ago
  Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines. From the Bernanke article I originally linked.

gnaritas 13y ago

Deflation in a sector != entire economy deflating; this is a red herring.

msandford 13y ago
Deflation in that sector has led to investment and growth. I would argue that the impetus is on you to prove that economics isn't scale-free. In other words, what works for an individual with thousands of dollars also works for a company with millions. I.e. that math doesn't change as the numbers get bigger. $1 + $1 is $2 the same as $100b + $100b = $200b. If an individual accrues wealth by saving and investing (how most people do it) that's basic arithmetic. Expenditures less than income over a period of time. Works for companies large and small. If we believe that this works at scales from the individual which is an organization of one person all the way up to organizations of hundreds of thousands or millions, why would it suddenly stop working that way once it's a "whole economy" that's nothing more than the organization of all individuals?
- gnaritas 13y ago
  Because economies aren't individuals, your spending is my income and my spending is your income. Household economics does not scale up to an economy, the rules for an economy are entirely different. And I don't have to prove anything, deflation has a well established meaning: reduction of the general level of prices in an economy. One or a few sectors dropping prices simply is not what economists mean when they talk about deflation. Now you're welcome to make up your own definitions of words, but then you're not really communicating with everyone else nor understanding what they're actually referring to since you're ignoring what they mean by those words.
- nhaehnle 13y ago
  You're running into a textbook case of the Fallacy of Composition. The essence is that the economy is full of feedback cycles. Your savings and spending decisions affect the size of the economy. Now, from an individual household perspective, your spending is only a drop in the bucket. It is small compared to the size of the economy, and it is small compared to the revenue of any individual firm. Any feedback effect your behavior may have is a rounding error compared to the sum of the effects of everybody else's behaviours. Therefore, it is reasonable to disregard the feedback effects when you make individual decisions. However, when you evaluate the economy as a whole, there is nobody else and the feedback effects are suddenly the dominant term. Disregarding those effects when making economy-wide policy decision is therefore a recipe for disaster.

saalweachter 13y ago

Uhh, people totally do defer buying computers because the price per compute is constantly falling. If you are running a large-scale operation, you do not over-provision. You do not buy computers you won't need till next year till next year, because they'll be cheaper and better next year. This is a direct consequence of the deflationary environment created by constantly improving computation. Heck, even normal consumers put off buying a new iPhone X because the iPhone X+1 is launching in 3 months, so why buy the crappier one for more money today?