Economics Index and Qualifications
By Richard Bruce BA, MA, and PhC in Economics
Former Instructor St. John's University, New York City

Rapid Technological Progress and Say's Law

Physicists say that the laws of physics break down in the extreme gravity of a black hole. The black hole is a singularity.

The idea of a singularity has been adapted to futurism. Just as the laws of physics break down under the extreme conditions of a black hole, in a technological singularity our laws, theories, and models of human society will break down. So the physics singularity of the black hole has been used as a metaphor for science and technology progressing at exponentially faster rates, until our familiar laws of social science begin to break down.

Say's Law

I believe that this is what is happening now. One of our oldest and most important theories in economics is Say's Law also called the Law of Markets. Jean-Baptiste Say proposed Say's Law in his principle work A Treatise on Political Economy published in 1803.

In Say's day people sometimes argued that new labor saving technology should be suppressed to save jobs, or deliberately inefficient production should be adopted to create jobs. Variations of this argument are always with us and Say's Law is the basis for the standard arguments against these policies.

Say said that the market would automatically create jobs. His key idea is that the capitalist would not sit on his savings. The capitalist would always find profitable ways to invest. To sit on his savings and give up the opportunity to make interest or profits would be irrational. So the capitalists would always build factories, buy equipment, or otherwise invest the capital. Workers would be put to work building the factories or making equipment. Thus, the investment of savings would push the economy back toward full employment.

In many cases the capitalist or other savers would put their money in banks, buy bonds, or use other methods to lend the money to capitalists who would in turn invest it. Either way the workers would be employed.

About twenty years later Say came back and issued what I like to call Say's Caveat. He said that his law would only work as long as the capitalist could find profitable investments.

Many economists rejected this warning, but others developed variations on the idea. Marx said that monopoly capitalism would accumulate savings until profits and interest were driven toward zero. Then when the capitalists failed to invest their capital there would be mass unemployment and a crisis in capitalism. He thought this would lead to revolution. The great depression in the 1930s saw something like this happen.

John Maynard Keynes said investors would not invest or lend at very low interest rates because they would prefer to stay liquid. This would allow them to move quickly into investments when higher interest rates or expected profits became available. Keynes and other economists pushed for deficit spending to suck up the excess savings.

Currently many economists write about interest rates on safe investments being close to the lower bound, that is zero, and therefore making monetary policy ineffective. Fiscal policy, government deficit spending, is frequently recommended to suck up the excess savings.

All of these ideas are based on variations on Say's Caveat to Say's Law.

Say's Law & the Technological Singularity

What does this have to do with the technological singularity and accelerating technological progress? I am suggesting that we are now entering an era where technological progress is so rapid that the type of heavy investments that can absorb the savings of the human race will not be made because they can not earn back the investment and turn a profit before technological progress makes the investment obsolete. This may make Say's Law obsolete. We may need policies to create demand, which economists call effective demand. Effective demand means people who not only want something, but can pay for it.

Not everyone agrees that technology is accelerating. Peter Thiel, the technology investment wizard, has been saying in the last few years that technological progress is slowing because the tech companies are sitting on their money rather than investing it. I am suggesting the opposite is happening. It is not slow technological progress that is discouraging investment but rapid progress. Rapid progress makes large investments that pay off over long periods uneconomic. Only small investments that pay off quickly make sense, and those can not absorb all the money that is being saved.

Examples of progress discouraging investment

Light bulbs provide an example of how rapid progress can discourage heavy investment. They told us that we should spend twenty dollars for more energy efficient light bulbs. They would last many years and the electricity that would be saved would pay for the pricey bulbs.

However, there was a probem with this argument. The light bulbs' prices were rapidly dropping so the economic solution was to continue to use the less efficient incandescent bulbs and wait for the price of the efficient bulbs to drop. Recently I saw that LED light bulbs were on sale for a couple of dollars a piece. So I bought a bunch. I still got stung because soon after that I found that my power company wanted to give me the bulbs for free.

A similar argument can be made about many sources of renewable energy. It is commonly reported that wind power, both on land and at sea, various forms of solar power, geothermal, and other renewable energy sources are continuously getting cheaper. As these energy sources require a large upfront investment and pay for themselves over a long period of time with cheap energy they seem like the perfect way to suck up excess savings. But if the cost of generating energy with these rapidly advancing technologies is always going down why not wait. Next year's wind generator will be more cost effective than today's.

Furthermore, there are many rapidly developing technologies to produce electricity: wind, solar, geothermal, nuclear, and many others. It is very likely that the investor will bet on the wrong one. This provides another economic reason to put off investment.

Let us consider other examples that are central to our own lives. Consider your home, your car, and your computer. All are important to you, but you probably spent vastly more on your home, much less on the car, and far less on your computer. A major reason for this is that the technology of houses changes very slowly, cars much faster, and computers far faster still. We do not invest heavily in technology that changes rapidly, and without those heavy investments there are excess savings that drive interest rates to zero.

Economics in the Post Say Era

So Say's Law, an idea that has had enormous influence over the past two centuries may be obsolete. The result has been a couple of decades of near zero interest rates, slow measured economic growth, and mass unemployment. Mass unemployment caused not so much because technological progress reduced the need for workers, but because it reduced the need for capital and therefore savings. This drove interest rates to near zero and discouraged the investment expenditures that would have kept the workers employed.

We will have to adjust to the new rapid progress and change our policies to accommodate the changes, but as we do the technology will continue to accelerate which will require us to accommodate the changes at an ever more rapid rate. Welcome to the technological singularity. As Bettie Davis said in the movie All About Eve, "Fasten your seat belts, it's going to be a bumpy night."

Here is an index to my other pages on economics, and a short review of my qualifications in this field.

Another web page that discusses this issue of rapid progress and investment is this one on Blockbuster

Tell me what you think. Here is my contact information..

Posted October 18, 2019

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