We’re getting closer to understanding one of the big puzzles of our time – the world is in the middle of a technological revolution, but it is difficult to spot in the economic data.
As Robert Solow has pointed out, computers and internet services are everywhere but in the growth numbers. We’re clearly getting richer – services like Skype and Facebook now allow free phone calls but by normal measures of income, economies are no further ahead than they were in 2008. Why is this the case?
There are also concerns over rising inequality. Maybe the plutocrats really are getting all the gains and something should be done about it. The most obvious answer is that the data has been counted wrong – that has long been my contention. As we work out more concerning the world around us, this seems to be where the problem is. Measuring inequality means totting up what the plutocrats are gaining but not what the rest of us are gaining. Real incomes, real possibilities, are rising and so, everyone is richer.
The trick is in how these new digital services and goods are valued. Currently they turn up in GDP statistics at their cost of provision. Facebook gains advertising revenue which pays for the engineers and bandwidth. This is interesting, but it is not the issue here.
Much more important is the value of what consumers gain from the existence of Facebook. Normally, this is at least twice what is recorded by GDP. The problem is putting an actual number on how badly these values are counted. Thankfully there is now a new paper showing that they are counted really, really, badly.
To understand this, take a step back. Gross Domestic Product, our normal measure of how things are going, records market prices. As Hal Varian of Google has pointed out, GDP does not deal with free services. How can it? Free services are not recorded at a market price. Yet much of what consumers gain from the current technological revolution is exactly at that price — free. It is making people better off, but it is not recorded by GDP as the usual measure of wealth.