Measuring the New Economy

From Slate.com via Carpe Diem:

"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.

Ditto Facebook, free flash games, ichat, etc.  I think the point is dead on, though I have no idea how to fix it.  Maybe as a value of the consumer's time?  If your time is worth $15 an hour, and you spend it on Facebook, then your benefit must have been at least $15?

Thinking about this, it strikes me that there is no GDP credit for leisure time, either.  There is almost nothing more valuable to me .  If everything in my life stays the same but I can use technology or other factors to restructure my time to get one extra hour of leisure, isn't that of huge value?  But there is no credit for it in GDP or earnings accounts.

The article discusses consumer surplus, which strikes me as the heart of the matter.  GDP and earnings metrics track what we pay, not how much value we receive.  If one hypothesizes that consumer surplus is rising as a percentage of purchase price, then we are missing a lot of wealth creation.

  • Reformed Republican

    Of course, these measurements only matter if you think the economy is something that needs to be managed and controlled.

  • NL

    "There is almost nothing more valuable to me [than leisure time]"

    This really supports the "Multiplicity" theory.

    http://www.coyoteblog.com/coyote_blog/2011/03/getting-really-close.html#comment-47153

  • http://counterrevolutionaryact.blogspot.com Chris K.

    RR hit the nail on the head. GDP numbers are like census numbers just another way for the government to track and direct "programs" and our money against us.

  • Caroline

    @RR. good one!

    I'm surprised someone at the fed hasn't started including some kind of estimate of leisure time to mess w/ GDP. With unemployment and entitlements as they are surely there's a lot of it. ;)

  • Don

    Chris K. and RR,

    I disagree. Those numbers are useful in that they allow us to evaluate what works and what doesn't. For instance on the rare occasions when small government folks have won the argument on a given sector (say telecom or banking), those numbers (as relates to that sector) allow us to give hard facts that backup the basic assumption that government regulation is detrimental to success (as defined by productivity and, by extension, time/cost efficiency).

    This is why Boudreaux's comments on CafeHayek and elsewhere are so devastatingly accurate, he has the numbers to back it up. Very few big government types escape a debate with him unscathed.

    The reason for the census is laid out in the constitution,as are the questions that you must answer (basically, how many people lived at a given address on a given day).

  • Don

    Caroline,

    It's called the "Quality of Life Index".

    http://internationalliving.com/2010/02/quality-of-life-2010/

  • el coronado

    call me a cynic, but i rather suspect the good professor's tortured 'logic' ("just because it *looks like* it's shriveling and dying doesn't mean it's not *secretly* actually getting bigger and more profitable!!") has more to do with providing cover for the idiot sitting in the White House - or is he out playing golf again today? - than with any actual economics. how come his thesis doesn't make any mention of the (non)effect of the phenomenon he describes on the (real) unemployment rate of 20%? what's more important economically, i wonder? jobs, or "how much fun you have killing zombies on the xbox"? the savings rate, or "i'm up to 5000 songs on my ipod!"

    does anyone really believe this load would have been trotted out if bush were in office? or palin? or any other non-democrat? making an argument for including intangibles in GDP calculations would allow haiti to claim that IT, not us, is the REAL paradise on earth. "great weather! lots of nookie! no traffic jams! almost no obesity, either!!"

  • Bill

    They got a ton of leisure time in Europe. We over here in the states (mostly rightly) point out their relative low numbers of hours worked, household income, home ownership, car ownership, living space square footage, etc. When you do realize how much education they have, and the time they spend hanging out in cafe's and participating in many city fests and official holidays, well, it is pretty tempting. Not sustainable given their demographics and entitlements, but, pretty tempting.

  • http://harries@free.fr blokeinfrance

    Economists do have metrics for this. One famous one is time worked for light. There's a whole series from candles to lightbulbs over three centuries, showing enormous gains. Noone goes to bed when it gets dark anymore, but they used to. Now the EU is phasing out incandescent bulbs in favour of mercury lamps which are more "economical" but cost five times as much, so I guess the series is having a breakdown.

  • Zach

    It's like your comparison between wealth and money. Compare my life to Louis XIV. Louis has my ass kicked in terms of land ownership, the quantity of money in possession, and the number of servants employed. Practically everything else in my life is unbelievably better than Louis. Food. Cars. Phones. Medicine. Food (again). Transportation. Information access. Food (yet again). Lifespan. But in the eyes of liberals, Louis had numerically more money than I do, so he has the better life.

  • epobirs

    The contraction of some industries is very hard to track when the methodology of sales is changing. How many bands that sell their tracks or entire CDs direct from their own site report their revenues to the organizations that measure music sales? Yet there are more of these entities dealing directly with their customers every year. Nobody writing novels should go without some sort of tip jar on their site, as books measured in mere kilobytes are now so easy to download. Should authors be required to reports the receipts of their virtual tip jars?

  • Dan

    Zach,

    Thanks for branding a whole group of people (liberals). I for one trend toward the liberal on a number of issues, but I don't agree that Louis XIV had things better than me, and for the same reasons you state. I know you want to paint all liberals as socialists, but that is far from the truth.

  • http://harries@free.fr blokeinfrance

    A measurement of wealth by utility:
    In 1800, on the average wage you would have to work for six hours to afford candles that would burn for an hour with the brightness of a modern 18-watt compact fluorescent bulb. Today, you have to work for less than half a second on the average wage to afford such a quantity of light – and it comes without smoke, wick-trimming or high fire risk.
    Most candle makers have long gone out of business. And the candlestick makers union reckons we're in a permanent economic depression.