Thursday, March 10, 2011

Maybe The Yardstick's Deficient, NOT Growth

Slate.com has an article titled "Why hasn't the Internet helped the American economy grow as much as economists thought it would?" about Tyler Cowen's e-book "The Great Stagnation."  Here's a really interesting point:

"Maybe it is not the growth that is deficient. Maybe it is the yardstick that is deficient. MIT professor Erik Brynjolfsson explains the idea using the example of the music industry. "Because you and I stopped buying CDs, the music industry has shrunk, according to revenues and GDP. But we're not listening to less music. There's more music consumed than before." The improved choice and variety and availability of music must be worth something to us—even if it is not easy to put into numbers. "On paper, the way GDP is calculated, the music industry is disappearing, but in reality it's not disappearing. It is disappearing in revenue. It is not disappearing in terms of what you should care about, which is music."

As more of our lives are lived online, he wonders whether this might become a bigger problem. "If everybody focuses on the part of the economy that produces dollars, they would be increasingly missing what people actually consume and enjoy. The disconnect becomes bigger and bigger." 

But providing an alternative measure of what we produce or consume based on the value people derive from Wikipedia or Pandora proves an extraordinary challenge—indeed, no economist has ever really done it. Brynjolfsson says it is possible, perhaps, by adding up various "consumer surpluses," measures of how much consumers would be willing to pay for a given good or service, versus how much they do pay. (You might pony up $10 for a CD, but why would you if it is free?) That might give a rough sense of the dollar value of what the Internet tends to provide for nothing—and give us an alternative sense of the value of our technologies to us, if not their ability to produce growth or revenue for us." 

MP: In other words, we're using a 1930s, Machine-Age era system of national income accounting that might not capture production and consumption accurately in the 21st century Information Age.  As Don Boudreaux hypothesized  recently: "What has stagnated isn't the economy but, rather, economists' and statisticians' capacity to measure economic activity and its contribution to human well-being. Rather than stagnating, our economy and our wealth continue to grow so impressively that they are outstripping last-century's economic categories and measurement techniques."

Pandora and Wikipedia are two great examples of Internet-Age services that are free to users, and so probably wouldn't show up at all in "Personal Consumption Expenditures" purposes for GDP, or contribute in any way to GDP growth, the way that LP, CD and encyclopedia sales did in previous years.  But they probably create millions of dollars of "hard to measure" economic value, enjoyment and well-being every quarter for consumers and businesses (e.g. many restaurants in my neighborhood now use Pandora).  

18 Comments:

At 3/10/2011 10:24 AM, Blogger Lee Coppock said...

Here's another example: Carpe Diem! I used to have to buy the Wall Street Journal to get good economic analysis, but your blog and others now are provided at zero marginal cost to me. And the analysis is better!

 
At 3/10/2011 10:40 AM, Blogger Cooper said...

Another great example is Youtube, hour wasted? or consumer surplus?

 
At 3/10/2011 10:47 AM, Blogger Don Greer said...

You know, this makes me wonder: has the government's heavy handedness (WRT taxes, intentional inflation, etc.) and the presumed instability in the Dollar (in some quarters) possibly driven us back to an quasi barter type system? I don't mean at Walmart, but on the Internet, where transaction costs are vanishingly small, the cost of the government overhead becomes non-trivial, and perhaps this is what has led to companies like Pandora, etc. looking to alternative models for revenue streams.

The place where we DO see cash (e.g. Google, Yahoo, etc.) are agrigaters who eventually turn the things being bartered (eyeballs, mostly) into cash.

Not sure that idea plays out, but I think it's an interesting idea.

 
At 3/10/2011 12:11 PM, Blogger Buddy R Pacifico said...

Quote by Slate author Brynjolfsson:

"That might give a rough sense of the dollar value of what the Internet tends to provide for nothing—and give us an alternative sense of the value of our technologies to us, if not their ability to produce growth or revenue for us."

So, the internet provides dollar value for nothing and gives an alternative sense of value. What happens when providers, such as the NY Times, begin soon to erect paywalls, to recoup costs?

Some of the consumer surplus will evaporate for those of us that access "all the news that is fit to print". I hope that Mark Perry, Tyler Cowen, Scott Grannis, Don Boudreaux, Vic Neiderhoffer and so many other excellent financial and economics bloggers don't go paywall -- the value loss will be devastating to their readers.

 
At 3/10/2011 1:37 PM, Blogger Marko said...

I am not so sure this is really such a new phenomena. Way back in the day when Rupert started bringing his concertina to the pub on Wednesday nights for a sing along, the lives of our ancestors improved but it was not reflected by economic activity - or was it? I bet the pub sold more beer when Rupert showed up, and likewise doesn't the current crop of "free" stuff produce measurable economic activity? Wikipedia and Pandora don't appear like magic out of thin air. You need the ever expanding internet infrastructure, you need an appliance to view it on, you need add revenue for some of these free sources. Wikipedia is run on donations, but so are soup kitchens and that is not new.

Do you know what I mean?

 
At 3/10/2011 1:42 PM, Blogger Junkyard_hawg1985 said...

Great post! There are multiple examples where the GDP yardstick is WAY off. In addition to music, I can think of others:

1) Newspapers. The internet provides news that is fresher with a much greater ability to read in depth.
2) Internet shopping. This reduces the price of a particular item vs. a brick and mortar retail establishment. The end product is the same in the hands of the consumer, but since they paid less, it shows up as less GDP.
3) Wal-mart. Their purchasing and distribution plan completely eliminated many wholesalers. These wholesalers added cost (GDP) without adding value.
4) Lasik eye surgery. I had it 8 years ago and I haven't spent a dime on glasses or optometrists since (lower GDP). The key product is the ability to see well. Lasik provides that same ability at a lower cost.
5) More efficient heating and cooling units. The efficiency of these units have increased dramatically. The electricity and gas used to provide heating and cooling have dropped significantly (lower GDP), yet the inside of the houses are as warm as they were in the winters when more gas was being used. The key end product is temperature in the house.

I will add that it is not all to the good though. Think about education. Total spending per pupil has more than doubled. Despite the higher spending, the student's education is about the same level as before based on test scores (the output from the spending is educational proficiency). Spending more on administrators, salaries and benefits have not provided a better eduction product to students. We just spent more money which shows up as higher GDP.

 
At 3/10/2011 1:44 PM, Blogger Benjamin said...

This is a fascinating topic, and a reason the Nipponistas and other inflation worry warts are wrong.

How about my cell phone? Unlimited national calling, international calling for 1.2 cents a minute, is an answering machine, sends text, photos, G-d knows what.

Remember land lines? Before answering machines. You had to have a secretary to run a business, often.

New cars have air bags and last longer than old cars. If you have a crash, and walk away and are not in a wheelchair for life, how much is that worth?

I wonder also about $1 stores, where I do much of my shopping. I buy things for a dollar that years ago cost $2 and up, such as toothpaste, lemon concentrate, a bread.

BTW, the CPI today is where it was in August of 2008.

And yet we get the screaming-meemies from people like Richard Fisher of the Dallas Fed.

And yes, the web is paying off bigtime. The economy is dead now because President Bush jr. killed it, by wrecking our financial system, running deficits during a growth economy,and entangling us in two unwinnable wars (at a cost of $3 trillion).
Our "energy policy" was a rural sop: Ethanol.

Had the econmy kept expanding at a normal rate, we would all be giving each other high fives.

 
At 3/10/2011 2:20 PM, Blogger Junkyard_hawg1985 said...

I do think that Benji makes a valid point about the cost of war and the yardstick of GDP. War boosts the measured GDP but does terrible damage to wealth. Russ Roberts at Cafe Hayek does a great job explaining this related to WW2. Based on GDP and employment, the economy hummed. If you actually wanted to buy something like Nylon stockings, a car or sugar, they simply weren't available. GDP is a lousy economic yardstick in this case (and others). Net wealth creation is what matters.

Here's the Cafe Hayek link:

http://cafehayek.com/2010/09/war-is-bad-for-children-other-living-things-and-the-economy.html#

 
At 3/10/2011 2:32 PM, Blogger PeakTrader said...

The "misunderestimated" president (for the 45% who still believe Obama is doing a great job):

Bush inherited the worst stock market crash since the Great Depression and a recession. However, the Bush Administration turned the recession into one of the mildest in history (which wasn't a recession based on annual per capita GDP), after the record economic expansion.

Over a five-year period in the mid-2000s, U.S. corporations had a record 20 consecutive quarters of double-digit earnings growth, two million houses a year were built, 16 million autos per year were sold, U.S. real GDP expanded 3% annually, in spite of 6% annual current account deficits (which subtract from GDP).

The U.S. economy was most efficient, while Americans stocked-up on real assets and goods, and capital was built-up. It was one of the greatest periods of U.S. prosperity, and in a structural bear market that began in 2000.

The Bush Administration was adept at minimizing the recession in 2008, including providing a tax cut in early '08 for the Fed to catch-up easing the money supply, until Lehman failed in Sep '08, which caused the economy to fall off a cliff. However, appropriate policy adjustments were implemented quickly.

 
At 3/10/2011 3:36 PM, Blogger Paul said...

"The economy is dead now because President Bush jr. killed it, by wrecking our financial system, running deficits during a growth economy,and entangling us in two unwinnable wars (at a cost of $3 trillion)."


So much stupidity in one short paragraph. Benji, your boyfriend makes Bush look like an economic maestro. Are you still holding to your prediction that your boyfriend will balance the budget in his second term? How are you enjoying his FY 2012 budget request? Supporting the GOP budget cuts?

Run away, Benji, like you always do.

 
At 3/10/2011 4:05 PM, Blogger Rand said...

J_hawg:

Here is a real link to Cafe Hayek.

 
At 3/10/2011 5:20 PM, Blogger juandos said...

"Another great example is Youtube, hour wasted? or consumer surplus?"...

Personally I think Cooper is onto something here...

Frank Strategies has a short paper on YouTube's potential you might find worthwhile...

 
At 3/11/2011 3:03 AM, OpenID Sprewell said...

I've been making this tech measurement point for a while now, but I do think the internet skeptics have a point that it's not generating as much revenue as one'd expect. I've made known what I think the solution will be, micropayments: Wikipedia and other free online models will be put out of business by paid encyclopedias that also crowdsource but pay their contributors. It's funny how Buddy's always wailing about IP protections, but yet when it comes to his own dollar, he doesn't want to pay for this and other econ blogs. He's not going to have a choice; with the arrival of micropayments, vast swathes of the currently free internet, the parts that actually provide value like this blog, will go paid. And it won't remove surplus, it will enhance it, because I will have a lot more good material to read when writers can get paid online.

 
At 3/11/2011 10:18 AM, Blogger Junkyard_hawg1985 said...

Rand, thanks for posting the link. Can you help a technological Amish out here and tell me how to make the links?

 
At 3/11/2011 11:45 AM, Blogger Buddy R Pacifico said...

"It's funny how Buddy's always wailing about IP protections, but yet when it comes to his own dollar, he doesn't want to pay for this and other econ blogs."

Sprewell, I respect copyrights but gladly consume intentionally free information. Your push to not pay for copyrighted material, seems to be an attack on property rights. I urge you to reconsider the premise that intellectual property is not property.

 
At 3/11/2011 12:11 PM, Blogger Buddy R Pacifico said...

J_Hawg,

Rand may have a better explanation or link but here is a concise primer on how to make a link.

 
At 3/11/2011 12:25 PM, Blogger Jason said...

Flow of information is probably at an all time high with the Internet. But I wonder if this is a (yet another) bubble. Legacy businesses are being brought to their knees by businesses that make far less revenue. Either the legacy businesses were wildly, inconceivably inefficient, or the new businesses are giving away services that would otherwise be paid for. Regardless, how long can this continue?

I say enjoy it while it lasts, we will eventually have to pay for access to the information again.

 
At 3/12/2011 1:56 AM, OpenID Sprewell said...

Buddy, where did I "push to not pay for copyrighted material"? I'm all for paying, my problem is with govt monopolies like the copyright and patent offices as the enforcement mechanism for payment. As for property rights, that is an overly simplistic view of the situation. Imagine if we created a machine that could clone all physical objects at minimal costs. You stick in an orange, you get a copy of the same orange back. You stick in a chair, you get an identical chair back, all done at negligible cost. At that point, what value would physical property have? With unlimited supply, the price of many goods would drop to almost zero, practically worthless. Well, that is what has happened to a lot of information with the arrival of the internet, now that we can copy and distribute information at very little cost. Bellyaching about IP "theft" in this information age is pointless, it is now impossible to enforce the draconian copyright laws on the books on the average consumer. I do think good writers and podcasters will continue to get paid however, they just won't rely on copyright to do it.

Jason, yes, it is a free information bubble and it can't last: that's why the NYT is finally going behind the paywall, mimicking smarter organizations like the WSJ and Economist who've been making money that way for awhile. It won't save the NYT, or the WSJ or the Economist for that matter as all the pre-internet media businesses will go bust, but at least they can stanch some losses in the meantime. As for whether it's legacy businesses being wildly inefficient or the new ones giving away too much for free, it's both. As for enjoying it while it lasts, I think you underestimate how many great writers and creators don't do anything on the internet right now because they can't get paid doing it. Once they can get paid with micropayments, the flowering of information on the internet that we'll see will put everything we've seen so far to shame.

 

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