There is much afoot about how we measure our economy. Classically since the ‘40s we have used GDP and related measures to describe how well we are doing. See GDP: A Brief but Affectionate History and my book review. Over the last number of years there is growing recognition that GDP as a proxy for our modern worlds’ welfare is less than accurate. Much has been written: I have several books sitting on my desk waiting my attention on alternative approaches.
Some proponents believe that digitization of our economy is adding complexity. A 2014 paper by Erick Brynjolffson and Andrew McAfee (see Beyond GDP: How Our Current Metrics Mismeaure the Digital Economy) suggests that as products and services go digital, their financial contribution to value or benefit is being lost in the reporting of GDP. The classic example concerns the rise and fall of Encyclopedia Britannica. In its heyday the firm published the proud book set sold lots of these things and their sales (and costs to serve) added to revenue data that is rolled up in GDP. With the shift to digital, and now even internet-based search, the company revenues for its books collapsed. Now finding much the same information from these classic books is relatively free and much faster. Thus so the proof goes, digitization is making a mockery of GDP: we are better off yet GDP is not reflecting this.
I am not quite getting it. What I mean to say is that as described, yes, GDP is not capturing the now improved value to consumers of digital, and yes GDP is smaller then it would have been with the encyclopedic (non-digital) book sales. I believe this an oversimplification and misrepresentation of the impact of digital on our economy and how we work, and so until we take a broader look at how our economy works, we can’t assume digitization messes with GDP. Before I explore this idea, let me quote from a newer paper by Erik Brynjolfsson and colleagues. This is from, “Measuring Welfare with Massive Online Choice Experiments: A Brief Introduction”:
“Wikipedia is truly a free good without any advertising revenue…. Because it has zero price, Wikipedia is excluded from GDP measures… As a result, the contribution of encyclopedias to GDP decreases because people shifted from paying for Encyclopedia Britannica to consuming Wikipedia for free. However, consumers are clearly better off because they now have access to a much larger quantity of encyclopedic reference for free. Therefore, GDP and welfare can move in opposite directions for such transition [digital] goods.”
I would argue that this is but one half of the ledger for the accounting of welfare or value and GDP. Searching for information is faster and freer than before, as in there are fewer barriers to finding information. Therefore it is taking less time to get to the point at which information, once found, is adding value to the process, product or service that triggered the need to look for the information in the first place. The cycle time for “time-to-find” is shorter. If those processes, products or services turn over faster as a result of answering questions served by Wikipedia, then presumably hey are reaching their completion state more quickly. In other words, the resulting knowledge is complete faster; and value is being created faster. Thus GDP will be increased as a result if those processes, products or services that required searching for information report sales.
If the ‘time-to-find’ is improved, as in shorter cycle time, but the resulting product or service cycle time itself is not impacted, it could be argued that Wikipedia’s value was negligible. If its impact cannot be traced, why bother? The only wrinkle is if the process, product or service that led to the need to search for information is itself a digital process, product or service. In which case, the argument is endless.
Let me trivialize this and expand on the challenge. If we apply this broader view to a personal transaction such as searching for movie tickets using digital services like apps on a smart phone or web page versus thumbing through a news paper. When using smart phones and the internet to find information about potential movies to go watch, one clearly has more options, more visibility, in a fraction of the time it used to take. Even with analog and paper, friends would find a movie then phone friends to share the information. So there is an improvement for sure, I grant that.
However if we scale this and ask a few other questions, one wonders what the benefit is. For example, with such ease at our finger tips, do we go see more movies? Is the industry healthier (as in increased sales, and GDP) or larger? At a micro level, does the expanded search and speed actually change which movie I go to see? Won’t I still go to the preferred time slot? Is it not the case that the consumer behavior has changed (i.e. they can now search for a movie much later in the day than they had previously needed to) but that the benefit is not actually material economically?
I guess we could argue that a consumers’ day is now freed up and they have a little more time available for other things. That does make sense. But do I use the extra 5 minutes to sit on my behind and watch TV and vegetate? Or do I use the extra few minutes to browse Wikipedia? Or do I spend more time at work being productive?
A related point made elsewhere concerns he idea that much innovation over the last few years has not actually help improve our lives or economy. Take again the smart phone and email. I have argued before (see Are We More Productive? – The Final Conundrum) that the time it takes to read and respond to an email has not changed that much in 30 years. The only difference is that once emails were green screen based and mainframe. Now they are in color and in you hands. We are not that much more productive with emails and smart phones; we just do more of theme since the phone is with us during more of the day than our spouses and partners ever are. That’s is called increased production, which is very different from productivity.
The point being that in all the innovation and digitization, how much better off are we? How many apps do you have in your smart phone that you have not accessed in the last month? The last year? The blessing is your phone will fail or be upgraded every now and then. At least that will force you to clean out the dross…. maybe.
The key point I want to make is not that digitization is not good for us, nor does digitization mean our GDP and welfare measures are messed up. I believe digitization is helping improve our lives and our choices. But I also believe that we don’t understand nor think enough about the true impact of digitization on our work, our lives, and our economy and well-being. The answer probably lays in the scope and boundaries of our analysis.
I think Mr. Brynjolffson is doing great work and I love reading about it I just feel we all need to continue and do more in this area to get a fuller understanding of what Is happening around us.
Sent from my iPhone. Excuse the typos.
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