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 or 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).