GDP misses out the value of stuff the net makes free

In the New Yorker, James Surowiecki looks to Erik Brynjolfsson and Andrew McAfee's forthcoming book The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies for a discussion of one of the major problems with using GDP as a means of assessing the economic health of a nation. Because GDP uses the dollar-value of all transactions as a proxy for economic vibrancy, it discounts to zero any productivity improvements that result in expensive things becoming free. For example, if every technology company has to license a Microsoft operating system for every one of its servers and products, that's great for GDP: it adds billions to the national bottom line. But when GNU/Linux comes along and zeros out the cost of operating systems for your data-center and embedded systems, GDP drops.

But the impact on the nation is a net positive: first, because existing products get cheaper as they no longer include a Microsoft tax; second, because new products and services emerge that would not have been profitable/possible with the Microsoft tax included. It's not great for Microsoft, its employees, suppliers, and shareholders, but their pain -- which is real and terrible -- is dwarfed by the wider benefit.

Surowiecki also touches on the much more important question about automation and its impact on GDP: the existing economic system awards the entire dividend from automation to capital, at the cost of labor. When the factory you're working in figures out how to halve the labor inputs to its products, it fires half the workers and splits the savings between price-drops and higher dividends to shareholders. It's true that workers get some benefit from lower priced goods, and its possible that they own a piece of the company (say, through a 401(k)), but the widening gap between the rich and the poor, and the asymmetrical recoveries being experienced in developed nations -- GDP growing while wages and employment stagnate or drop -- show who the winners are in this game.

Economic orthodoxy holds that automation will offset lowered wages and employment by creating new classes of jobs. That has happened before, albeit with a wrenching and brutally painful lag between the disruptive growth of a new technology and the creation of the new jobs. It's long overdue in the modern economy, and there's reason to suspect that it may not come, or if it does, it will be insufficient to absorb all the idle labor created by automation.

Whatever the answer is, I can't believe that it's preventing automation. There's nothing noble about the fact that all of us use toilets but only some of us have to clean them. Rather than opposing the self-cleaning toilet, we should be agitating for opportunities and support for people whose toilet-cleaning jobs are obviated by technological change.

I've posted about Brynjolfsson and McAfee's work before; if you're interested in this subject, you should also check out Federico Pistono's Robots Will Steal Your Job, But That's OK, which is a free download.

Brynjolfsson is the co-author, with Andrew McAfee, of the forthcoming book “The Second Machine Age,” which examines how digitization is remaking the economy. “We’re underestimating the value of the part of the economy that’s free,” he said. “As digital goods make up a bigger share of economic activity, that means we’re likely getting a distorted picture of the economy as a whole.” The issue is that, as Kuznets himself acknowledged, “the welfare of a nation . . . can scarcely be inferred from a measure of national income.” For instance, most Web sites are built with free, open-source applications. This makes running a site cheap, which has all sorts of benefits in terms of welfare, but G.D.P. ends up lower than it would be if everyone had to pay for Microsoft’s server software. Digital innovation can even shrink G.D.P.: Skype has reduced the amount of money that people spend on international calls, and free smartphone apps are replacing stand-alone devices that once generated billions in sales. The G.P.S. company Garmin was once one of the fastest-growing companies in the U.S. Thanks to Google and Apple Maps, Garmin’s sales have taken a severe hit, but consumers, who now have access to good directions at no cost, are certainly better off.

New technologies have always driven out old ones, but it used to be that they would enter the market economy, and thus boost G.D.P.—as when the internal-combustion engine replaced the horse. Digitization is distinctive because much of the value it creates for consumers never becomes part of the economy that G.D.P. measures. That makes the gap between what’s actually happening in the economy and what the statistics are measuring wider than ever before.

Gross Domestic Freebie

(Image: BEA)