In further continuation of our series of articles on Business Cycles, another question that is often raised is whether technology impacts business cycles. I had a query on the subject from another Singapore reader Ms. Jovin Yeo in 2002. I am giving below the clarifications that were sent to her.
1. Advancement of technology always leads to new investments, new jobs based on new skill sets, leading to displacement of old technology and jobs which are no longer relevant. This is beautifully illustrated by Dr. Theodore Levitt of Harvard in his paper on " Marketing Myopia". This sets of what is known as 'ripple effect' and the economy adjusts it to new situations fairly quickly. People lose jobs in some industries but job creation also takes place in new areas.
2. However, advancement of technology alone does not lead to a boom and bust, a characteristic of business cycle. It is the Malinvestments in businesses based on new technology coupled with general downturn in all other sectors that leads to a business cycle. Businesses by inherent nature carry certain amount of risks. When investments in new businesses based on new technologies take place, purely from the speculation point of view, the risks are higher. The impact is felt when the investments do not yield results and there is a loss of jobs in the very sector that created it.
3. In view of the above coming to the conclusion that advancement of technology will lead to a business cycle will not be a correct interpretation. Business fluctuations exists in all industries will always remain but we very rarely feel the effect when we are not in that particular industry. Please refer to the second paragraph from my article reproduced : "In a downturn or recession, unemployment will rise, companies may be forced out of business, and prices tend to fall. Such economic cycles must not be confused with business fluctuations. A fluctuation of supply and demand, or of prices, may occur in a specific segment of the economy (or in several segments) without severely damaging the whole economy. In a business cycle the whole economy is affected simultaneously, in both its upswing and its downturn. Some geographic areas of a country may be more affected than others, depending on the types of local industries or agriculture."
4. To sum up: Advancement in technology may lead to localized loss of jobs but does not lead to a business cycle. Malinvestments in industries can also lead to loss of jobs like it happened in dotcom companies but them alone do not lead to a business cycle. When this happens and when all other sectors are also on a downturn then it leads to a business cycle of boom and bust.
Malinvestments -
The 'Malinvestments' are of various types. This term was coined by the great Austrian economist Ludwig Von Mises. The most recent example is that of AOL buying Time-Warner nearly a decade ago. The charge taken by it had exceeded the GDP of Hungary. This means the price paid for the acquisition was very high. The shareholders cannot complain as they did not question the decision then. This does not absolve them of their own greed and avarice. Another example is the price paid by Microsoft for acquiring Hotmail at the peak of dotcom boom. Sure a few people have gained a lot and became role-models but somebody else also lost. Who are the real losers? Ask any innocent person you know who has lost his or her job at Enron/Arthur Anderson/Global Crossing/Adelphia and many more such cases. Ask the ordinary equity shareholders in such companies. Ask other stakeholders like customers, vendors and finally the government. Ask thousands of old people who have lost their savings in pension and mutual funds which invested in such companies stock. Ask the neighborhood old lady in canvas shoes whose pension cheque has not come. Ask SEC, Senate and Congress committees and the Courts who have to investigate and give a ruling. Imagine the thousands of man-hours wasted doing unproductive work. Imagine the shattered lives of thousands of people, the angst, the suffering and the frustration awaiting early settlement. It is a lose/lose situation for everyone. Good corporate governance means taking care of all stakeholders leading to a win/win situation.
Good corporate governance is the key to survival and growth and for that we need business leaders who have to have the courage of Sir Winston Churchill, the brains of Albert Einstein, the wisdom of Socrates, the foresight of Nostradamus, the empire building skills of Alexander the Great, the ruthlessness of Chengiz Khan in removing corruption, perseverance of Abraham Lincoln, the integrity of Sir Thomas More and the empathy of Mahatma Gandhi. The problem is Socrates had to drink hemlock, Lincoln and Gandhi were shot dead by fanatics and More was beheaded. Churchill was branded as a crisis manager and thrown out by ungrateful people after the job of saving England was done. Einstein was branded a Jew and had to take refuge in USA and Nostradamus was declared a mad man. Alexander died very young away from home and I do not know what happened to Chengiz Khan but I am fairly sure he would not have died a natural death. Any takers ?
© Copyright. Written on June 10, 2008. Without prejudice. All rights reserved
Does technology impact business cycles? - To learn more about this author, visit Madhavan T Gopalachary's Website.
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Madhavan T Gopalachary
(Visit Madhavan's Website)
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mmg.name
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lting.biz/
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