ECONOMISTS: The smartphone age could be driving one of the major themes in the global economy

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From ‘The Great Transition’

The headlines today are all about the launch of the Apple Watch, but there’s a timely reminder of how dramatically smartphones have reshaped the world in a matter of years.

A report out from Colonial First State economists Stephen Halmarick and James White titled “The Great Transition” looks at some of the forces which are fundamentally changing the behaviour of consumers and businesses around the world. In one of their papers they look specifically at the arrival of the smartphone age and how, by informing decisions every day through access to information, it will transform the global economy. And this is happening increasingly because of the explosion in smartphone ownership – not in the developed world, but in emerging economies.

From the report:

Information, as the grease in the wheels of an economy, determines an economy’s efficiency. The economists’ assumption of rational firms and consumers has long been ridiculed. Yet, is it not unfair to label firms and consumers as irrational? Instead, economists have coined the term ‘bounded rationality’. This is the idea that our decision making ability is constrained by the information available to us, the ability to process this information and the time we have in which to make the decision.

The smartphone broadens our rationality. We have the whole world at our fingertips and the processing ability to use this information to make decisions within an instant. It is not that we will never make a bad decision, particularly when considered in hindsight, but it is true that so many of the economic decisions we make on a daily basis will be better, because of the information available to us. Decisions are better if they efficiently improve our utility or happiness. Decisions will be better because of improved price discovery, better satisfaction of our preferences, increased trust and transparency, lower transaction costs, co-ordination between people and objects and even serendipity.

It’s a simple concept, that better information will improve decisions. But this is happening at an incredibly rapid pace and Halmerick and White argue it is feeding into one of today’s grand themes in the global economy: “secular stagnation”, the phenomenon driven by low yields which is dragging on growth in the world’s developed economies.

The bigger change, however, will be in the way firms operate. Consumers have long paid more for products than a perfect market would suggest they should; due to issues of geography, convenience or a lack of good information. Today, consumers will pay more for a better product but they will no longer pay more for the same product, at least not in sufficient numbers to sustain even a medium-term business model. This dramatically improves the welfare of consumers: they have more choice at a cheaper price. But this does cause great disruption to the incumbent business model. In turn, without stable business models, the willingness of firms to take on more external capital diminishes, one of the observed features of ‘secular stagnation’.

Disruption, or the threat of it, makes companies more wary about big investment programs, so they spend more cautiously, which drags on economic growth. It’s an interesting way of looking at some of the pressures on industry sectors (take Australian retail for a start) in recent years: that the effects of billions of people having small connected devices in their hands is actually changing the flow of money around the globe.