---
type: claim
domain: internet-finance
description: "The bull case for AI abundance rests on a 200-year pattern: when prices fall because production costs collapsed (not because demand collapsed), the result is expanded prosperity — automobiles, air travel, computing, mobile phones all followed this pattern — and AI is doing this to the entire services economy simultaneously"
confidence: experimental
source: "Bloch '2028 Global Intelligence Boom' (Feb 2026); historical technology deflation data; challenged by Citrini who argues the circular income flow breaks before deflation benefits reach consumers"
created: 2026-03-05
challenged_by:
  - "Citrini argues productivity gains flow to capital/compute owners, not through households — 'the output is still there but it's no longer routing through households' — making this deflation structurally different from prior cycles"
---

# technology-driven deflation is categorically different from demand-driven deflation because falling production costs expand purchasing power and unlock new demand while falling demand creates contraction spirals

The central mechanism disagreement in the AI macro debate is whether AI-driven deflation follows the pattern of technology-driven deflation (bullish) or demand-driven deflation (bearish). The distinction is categorical, not just quantitative.

**Technology-driven deflation** (costs fall because production costs collapsed): automobiles, televisions, air travel, computing, mobile phones. In every case, deflation coincided with *more* economic activity because affordability unlocked demand from populations previously priced out. The 200-year track record is unambiguous — "betting against it has been the wrong trade every single time."

**Demand-driven deflation** (costs fall because nobody is buying): a death spiral where falling prices → lower revenues → more layoffs → less spending → lower prices. Japan's lost decades are the canonical example.

**Why AI might be different from both:** Citrini's "Ghost GDP" mechanism describes a third category — *output-driven deflation where the gains don't route through households*. Productivity surges, output grows, but the gains flow to capital and compute owners. "The output is still there. But it's no longer routing through households on the way back to firms, which means it's no longer routing through the IRS either." Labor's share of GDP in Citrini's scenario dropped from 56% to 46% — the sharpest decline on record.

Bloch's rebuttal: purchasing power is the real metric, not nominal wages. A household earning 10% less but spending 20% less on non-housing expenses is *better off*. AI-driven services deflation at 8-12% annualized means the average household saves $4-7K/year on services whose value proposition was navigating complexity (tax prep, insurance, financial advice, real estate commissions). This is "the most progressive economic event in modern American history, achieved without a single redistributive policy."

**The timing problem:** Even if Bloch is right about the equilibrium, Citrini may be right about the path. If white-collar income drops arrive 2-3 quarters before deflation benefits reach consumers (because institutional pricing is sticky, contracts are annual, and habit persistence delays consumer behavior change), the interim gap could trigger financial contagion that makes recovery harder. The question is whether the economy survives the transition to the new equilibrium, not whether the equilibrium itself is good.

**The Internet Finance implication:** If technology-driven deflation is indeed categorically bullish, then internet finance's role is to accelerate the repricing of intermediation — compressing the painful transition period by making markets more efficient faster. If the transition itself is the danger zone, then internet finance tools (permissionless capital formation, AI-augmented small business launch) are precisely the mechanism that could shorten the 9-month disruption period Bloch describes.

---

Relevant Notes:
- [[internet finance generates 50 to 100 basis points of additional annual GDP growth by unlocking capital allocation to previously inaccessible assets and eliminating intermediation friction]] — the GDP growth claim assumes technology-driven deflation dynamics; if demand-driven deflation dominates, the growth may not materialize
- [[cryptos primary use case is capital formation not payments or store of value because permissionless token issuance solves the fundraising bottleneck that solo founders and small teams face]] — Bloch's scenario of 7.2M new business applications validates the capital formation thesis through traditional channels; crypto could accelerate this further
- [[internet capital markets compress fundraising from months to days because permissionless raises eliminate gatekeepers while futarchy replaces due diligence bottlenecks with real-time market pricing]] — if the transition period is the danger zone, compressed fundraising is a mechanism for shortening it
- [[giving away the intelligence layer to capture value on capital flow is the business model because domain expertise is the distribution mechanism not the revenue source]] — Bloch: "The intelligence tax did [unwind]... AI deflation was a de facto transfer from the owners of scarce intelligence to the consumers of it"

Topics:
- [[internet-finance overview]]
