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The digital economy is making us poorer - but that can't be right

Use of WhatsApp as an example of productivity growth and economic measures tells us we're worse off. Are we therefore measuring the numbers wrongly?

According to economic numbers, WhatsApp is making the world poorer. That a billion people are getting a lot of their telecoms needs from something which is free is not, of course, something which makes the world poorer – far from it. But then we did all already agree that economists get it wrong, didn’t we?

This is not just some trivia for a particularly geeky pub quiz, it’s a problem which illuminates one of the great economic questions of our time – what the heck’s going on? Or, perhaps more accurately in the jargon, in the productivity paradox. That in turn has large implications about what we should be doing more generally in the economy.

This all starts with Nobel Laureate Robert Solow’s quip in 1987, that “you can see the computer age everywhere but in the productivity statistics”.

The importance of this coming from another Laureate, Paul Krugman, who made the point that productivity isn’t everything, but in the long run, it’s pretty much everything.

It is the relationship between hours put in and output coming out which determines our standard of living. If we all produce more per hour we work – rising labour productivity – then we must collectively be getting richer. If we’re not, we’re not. It’s rather important.

Our problem is that we know, absolutely, there’s a technological revolution going on, but we just can’t see it in those economic numbers. This is leading a rather large number of the more political economists, people like former US Treasury secretary Larry Summers, to float that we’re suffering “secular stagnation,” something which really means that capitalism and markets are failing and government should jolly well spend much more of our money. Certainly important if true.

Adam Smith’s idea to leave the money fructifying in the pockets of the populace no longer cuts it, so politicians must direct investment and training to a very much greater extent, they say. A most attractive proposition to both economists and politicians of a certain mindset.

What about free?

What’s rather more important to work out is whether it’s true. I’ve touched upon this before in these pages, looking at Andreessenian goods and the consumer surplus. This can all be said to be another part of that same argument. The correct answer almost certainly is that of Google’s economist, Hal Varian, who said that GDP doesn’t deal well with “free”. Gross domestic product is generally our starting point for how well we’re doing and many of these new digital goods, those products of our technological revolution, are indeed free.

We in the UK are bombarded with horror stories about how our productivity growth is terrible, has been for the last decade, and see above for the importance of that. However, one answer is that this is a cyclical matter – in fact, it’s just what we wanted to happen.

To stylise the numbers a little imagine that GDP, total output – and thus equal to the total incomes, or total consumption, they are by definition the same – fell by 10% as a result of the banking crisis. Sure, we didn’t want that to happen – bad bankers – but what happens next?

One answer is that 10% of all workers lose their jobs and have neither income nor consumption; another is that no one goes on the dole but that we all lose 10% of our income and our consumption. That first answer is largely what used to happen, that second very much closer to what happened this time. Yes, it’s arguable as to which is better – and of course we’d prefer not to have had the banking problem – but the entire point of striving to have a flexible labour market was to move from the first to the second solution. As such a cyclical problem it solves itself, eventually.

The stronger set of worries over this secular stagnation is that we’re in a new normal at which point something must be done and only government can do it. You don’t have to share my near laissez faire views to think this is something that must be proven rather than just assumed – we do have some experience of what happens when government directs the economy a great deal more.

Declining productivity

Which brings us to the WhatsApp answer to that geeky pub quiz question. GDP is incomes, production or consumption – which are equal as long as people don’t lie about taxes – while productivity is any of the three divided by hours of work put in. WhatsApp has some 200 people within Facebook working on it at wages we don’t know but say $30m a year total (Facebook did tell me one number, not the other). That’s incomes of course, so we’re measuring that in GDP.

But WhatsApp is free to the user. There is no fee or even any advertising. We have absolutely no production here, nor any consumption – GDP is measured at market prices and if there’s no market price it’s not included. That’s why housework isn’t in GDP either. All we’ve got is the cost of producing something, hours of labour input, with no output.

Read more about digital and economics

The net effect of this is that WhatsApp is recorded as making us all poorer. We have expenses but no output; we have hours of labour but no output; therefore productivity as measured is declining.

It’s true that WhatsApp and, say, Vodafone are not directly comparable. One is moderating and managing the spectrum over which we communicate, the other not so much. Yet one has hundreds of thousands of people providing telecoms to hundreds of millions perhaps, while the other has 200 people providing services to a billion. Yet that lower labour version is being recorded as reducing productivity and thus making us poorer? It might be that the fault is in our statistics, not in ourselves.

If you prod any of the serious economists putting forward the secular stagnation idea they’ll all agree that this digital goods argument and mismeasurement idea has legs. But also that it’s not large enough to explain it all. Others will present counter-evidence showing that it is. I tend to believe the second but agree that’s prejudice on my part.

But we do end up with that difficult point here. Whether government must take over more of the economy or not to defeat secular stagnation and low productivity growth depends upon how we’re measuring the effects of the digital economy. And we know, absolutely, that we’re doing that measurement badly. Hardly a great basis upon which to make such a large political decision.

This was last published in September 2017

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If uber drives me to work, or to a party, it is counted.  If I drive myself it is not counted.  As was mentioned, if I hire a maid it is counted.  If I do my own housework it is not counted.   Any proper measure needs to be able to quantify the benefit of do-it-yourself (DIY) vs hiring others to do it.

There are other productivity changes in our culture.  The IBM mainframe was backward compatible.  A big insurance company is still running COBOL written in 1977 with no reason to change.  But java and modern technology is not backward compatible.  Thus more techies are hired to constantly update new applications.  There is less business benefit per techie hour.

Our culture has a new version of Bastiat's broken window story.  We are constantly replacing Bastiat's window, even when it is not broken.  

Government, especially government employees, really thinks that employing more people to do nothing, or nothing productive, is good for the economy because it seems to reduce unemployment.

Maybe we need a replacement for GDP that measures a) DIY productivity and b) separates out non-productive activity that sees exchange of money.



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Very interesting read this morning. Thanks to @sprintrebob for the Bastiat's Window reference which got me thinking.

What happens to the transfer calculations and the assumptions when the funding of the purchasing activity is through the use of credit/debt vs using capital?
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Does it make a difference if the credit/debt is money in the private sector that could have otherwise been used as capital?  Or if the credit/debt is the government printing money or a QEII type of money supply expansion? 

Along the same line of thinking, if a stock (or the entire market) is over-priced and has a correction, was that difference between the over price and the correction real?

Or in the housing correction, if I bought my house for $100k and then it increased in the boom to $250K and then in the bust it fell to 50K what part of the valuation was real and what part was bad measurement?  What part of an inflated appraisal was bad measurement?
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Because WhatsApp is also used in a Business context it should have an important contribution to the development of "productive" sectors of the economy, so we could measure the indirect benefit (increase in business, productivity etc.) resulting from better communications using WhatsApp. The amount payed for a Service doesn't necessarily reflect ist economic value and the indirect increase of GDP resulting. The economic value of Google was there long before it "materialized" in company earnings.
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