This happened with the railroad in the nineteenth century, and the effect has been seen several times in the twentieth century as a result of the internal combustion engine, refrigeration, interstate highway systems, telecommunications, and most recently the combination of the microprocessor and telcom to form the Internet.
This deflation effect was most evident in the relationship of food supplies to agriculture that were altered by the railroad. Prior to the advent of the railroad the only effective means for bulk transportation of grain and other foodstuffs was via waterways. This meant that communities that were outside of thirty or forty kilometers from a waterway had to produce all of their own food and be sufficiently provisioned to survive famines brought on by droughts, floods, early and late freezes as well as other anomolies in the weather. Families usually had a root cellar and granary with an extra year's worth of food, just in case. Looking at it that economy at the national level, the system used food very inefficiently. Each community had to produce far more food than it could consume, and much of the extra food produced would eventually spoil.
The introduction of the railroad connected all of those communities over a period of two or three decades with a highly effective means of bulk transportion. This development allowed for much more efficient use of food, as well as opening up vast tracts of interior land for export agriculture. Initially the railroad might have seemed "bad" for local farmers because the increased efficiency in the use of food reduced the total food consumption per person - if you count the food that was continually produced and socked away for "hard times." The railroad allowed food to be quickly moved from areas of surplus to areas of want - eliminating the possibility of a true famine in North America - as well as making possible the growth of metropolises such as New York City and Chicago.
Within a decade after the initial reduction in food demand caused by the more efficient use of food, railroads started being used to transport grain to ships and thence to other countries for sale. While the railroad initially hurt career farmers, in the long run, it created a gigantic new market for them in the form of global exports. In fact this led to the complete destruction of the passenger pigeon and almost made the Buffalo extinct as well, as millions of them were slaughtered and canned in the American midwest and then exported for sale via the railroad.
During most of the twentieth century big companies created efficient production and delivery lines for their products. Mass marketing accompanied mass production and almost everybody bought the widgets and gizmos advertised in CBS, Time Magazine and their local newspaper and sold by their local department store.
The super efficient industrial machine only worked in one direction, however. Mass producers had the infrastructure to move newly manufactured goods to markets all over the country, and even the world. However, there was not a matching efficient pathway for used goods to be routed from sellers to buyers. This was good for manufacturers and bad for consumers. The result of this imbalance was the rise of two social institutions seen at their grandest scale in America - yardsales and landfills. Yardsales provided an inefficient means for consumer families to get rid of some of their "junk". Goodwill could absorb old clothes and some used furniture. Landfills took the rest of it.
A similar process to the railroad's revolution of agriculture is taking place as a result of the rise of the Internet and the microprocessor. Geodesic networks have transformed several industries over the past three decades, now it is changing the way that goods are produced, delivered and sold as we have know it.
The communications revolution of the last three decades was made possible by a change in the network routing methods used by telelcommunications companies. Prior to 1970 virtually all telephone calls were routed over hierarchical exchanges. An interstate call cost substantially more because it had to go up three levels on the hierarchy and then back down. International calls were even more prohibitively expensive for the same reason.
Then came the invention of the "ethernet". Some smart scientists discovered that it was possible to send packets of signals over a network in such a way that they could find their correct destination without being routed through a hierarchy. This allowed point to point routing. This was the beginning of the "Geodesic Network." Within two decades telecommunications prices fell dramatically and the telecommunications industry found itself with massive overcapacity - the initial deflation that follows the widespread adoption of a more efficient technology.
At the same time this was happening in the telecommunications markets, Interstate highways were being built to network North America with "low friction" paths of transportation. The railroad industry started finding its revenues were drying up, bulk transportation being taken over by long distance trucking companies. Here the same process was at work. The rails were a highly channelized hierarchical transportation network that required offloading and reloading in order to deliver the goods to their final destination. Interstate trucking however, allowed the goods to be delivered directly to the end customer without requiring a transfer station in each town. Today the railroad industry is used only for extremely heavy bulk materials and its passenger business is only kept alive by government subsidies (AMTRACK). The geodesic market killed the railroad.
Today the Internet has combined three technologies that are doing the same thing to mass production and distribution for manufactured goods. Cheap global communications combined with cheap computer and efficient person to person payment systems have created a revolution in the sales process. Ebay is the greatest example of this process at work.
Started in 1995, Ebay is an online marketplace that allows anyone to list an item for sale, either as an auction or as a list price. The Ebay community has 100 million registered users, of which 40 million are very active. Person to person payment technologies such as PayPal and e-gold have allowed Ebay to provide a global marketplace for new and used goods. It is the used goods that are where the slack is being taken out of the old system.
According to Ebay's financial reports for the year 2003, the company hosted 971 million product listings and the total value of items sold was $24 billion, up 60% from the $15 billion reported in 2002. The company is expecting a similar growth in growth sales for 2004. All of this happened during a time period where U.S. manufacturing and jobs activity were sluggish according to official economic reports.
What's going on here?
EBay is only the largest of many auction sites on the web, and auction sites are only one of the many types of business processes operating via the Internet to increase the efficiency of the markets worldwide. The reason Ebay is rapidly growing while the rest of the world's manufacturing and sales industries are barely treading water is that the Internet auction markets are taking the overcapacity out of the global markets. They are reeling in the slack of an obsolete mass production and marketing industrial base. Why buy at retail price when you can buy the same thing in good used condition for half the price? The people of the world are buying used or they are buying new overstock products through the same Internet distribution channels.
The era of mass production made mountains of widgets and gizmos and shoved them down the willing throats of consumers in the free world through the advertising channels of mass media and department stores. This moutain of stuff was at no time greater than the last two decades of the twentieth century. When a new market arises that makes better use of that stuff, it is only to be expected that the demand for newly manufactured widgets and gizmos will decline for a season while the overcapacity is worked off. The world is in a deflation, and the world needs a deflation in order to achieve the most effective use of the time, money and resources in the world.
Indeed the world markets have clearly entered a deflationary period, but central banks and socialist welfare states are trying to keep the old system alive by inflating their way out of a deflation. More to the point, leaders of the socialist world are gravely concerned that their factories are laying off workers because people aren't buying enough widgets and gizmos. Rather than recognizing that too many gidgets and whizmos have been produced, the government leaders have arrived at a scheme designed to make people keep buying stuff. The problem in their mind is that people must not have enough money to buy all the stuff they want, so by creating more money and loaning to them for almost nothing, they can stimulate people to keep buying stuff and keep the factory workers employed making widgets and gizmos.
The injection of trillions of dollars, euros and yen into the world's capital markets via low interest rates is certainly stimulating spending in some sectors. But the end result of trying to inflate ones way out of a deflation is the creation of distortions in the global economy that the markets aren't asking for. Those distortions represent overcapacity that will in-turn be corrected by the markets in the future.
The West built an industrial society on the pillars of mass production, mass marketing, and bulk transportion. That system produced great wealth that was in turn coopted to build the socialist welfare states of the Europe, North America and Japan.
The new Geodesic Economy is replacing all three pillars of the old infrastructure with far more efficient systems that allow participants in the world's market to buy what they want and have it shipped to them for less time and money than the old system required. The new system has lowered the cost of marketing and delivery so much that it allows used goods to be recycled into the market to such a degree that they are undercutting the prices of new manufactured goods.
The more the welfare states try to protect the old system the more wealth they drive toward the markets that have not developed the multiple layers of bureaucracy and taxation that stifle the free movement of money, goods and services. And so we see the West trying to inflate its way out of a deflation, while simultaneously waging a war on terrorism that places extremely strict controls on the movements of money, people and materials. We are really witnessing are death throes of the welfare state and the end of the Industrial Era.
January 27, 2004