The tech revolution ate my GDP

Venky Vembu | Updated on February 22, 2019

Our mismeasurement of the economy’s size, even in the best of times, has been amplified by the digital storm

Flying back home from Heathrow airport late last year, I vaporised a sliver of the UK’s GDP. Here’s how I did it: although I had checked myself in online, I had a bag to deposit, but arriving at the terminal, I encountered a long queue of other bag-droppers for my flight.

A hologram of a cheery usher informed me that I would save time if I opted to tag and check in my bag at an automated counter. I went for it, generated a bag-tag after a passport scan, wrapped it around the hand-grip in the prescribed manner, hoisted the bag onto the conveyor belt and waved it goodbye — all in two minutes flat, and without any human assistance.

By getting me to do a small chore that the airline would have otherwise paid one of its staff to do, it had ‘outsourced’ its work to me — for free.

And since the GDP measure does not recognise unpaid labour, there had been a notional erosion in the size of the UK economy, in which I had been complicit.

Of course, I had paid with my labour — and yet, I was happy to make that shramdaan because the time saved in not waiting in a queue meant something to me.

That counts as a win-win proposition all around, except for grumpy government statisticians who like to see GDP growth but can’t seem to assign a value to the convenience that disruptive technologies are bringing to consumers of services.

In the context of the chatter surrounding the credibility of economic data, particularly after the recent revisions of back-series GDP numbers, it is worth reflecting on more fundamental problems in the manner in which the size of the economy is captured.

What the GDP misses

Some of these infirmities are not new: the GDP measure, for instance, has been criticised for the fact that it doesn’t acknowledge housework (when it is unpaid) or, indeed, anything outside of the money economy.

In fact, Simon Kuznets, who founded the system of national accounts that is encapsulated in the GDP number, had himself warned against reading too much into it. “The welfare of a nation,” he wrote in 1934, “can scarcely be inferred from a measurement of national income as defined (by the GDP).”

But the problems in the measure of the GDP go way beyond these obvious criticisms. As Diane Coyle notes in GDP: A Brief but Affectionate History, given that the measure had its roots in the Second World War, it was designed for the 20th-century economy of physical mass production, not for the modern economy of innovation and intangible, increasingly digital, services.

Specifically, technology-driven intermediaries — such as Uber and Airbnb — have rendered the task of measuring the size of the economy somewhat more difficult. Likewise, the explosion of free digital goods — from Gmail to YouTube to Facebook to Skype to Twitter — has had the effect of driving down prices for associated services.

As Erik Brynjolfsson, who heads MIT’s ‘Measuring the Economy’ Project, and his peers highlighted during a November 2018 presentation at the Sixth IMF Statistical Forum, the number of photographs taken worldwide increased from 80 billion in 2000 to 1.6 trillion in 2015: that’s a 20-fold increase in 15 years.

And yet, this increase does not show up in GDP measures because the price index for photography includes the price of cameras and the film, and cost of developing the film — all of which have been vaporised with the advent of smartphones, with inbuilt digital cameras. Further, these photographs are typically shared, not ‘sold’ — so they are not reflected in the GDP measure. In fact, GDP measures actually fell when cameras were absorbed into smartphones.

The ‘consumer surplus’

Of course, smartphones rendered many more gadgets and devices redundant: the alarm clock, music player, calculator, computer, the landline, movie player, recording device, video camera, GPS maps, and so on. The negative effect of this on GDP measures is incalculable, as is the positive effect of the well-being that users of these services derive.

The ‘consumer surplus’ measure — which is the difference between the price you actually pay for a good or service, and the price you would pay for it — attempts to capture that, even if only imperfectly.

Indicatively, you can access Wikipedia or Facebook at zero cost (other than the price of internet access); but the amount you would be willing to pay for them — or the amount of compensation you would demand if you were to lose access to them — is a reflection of their value to you.

Although research in this area is still in its infancy, a paper presented by Brynjolfsson and his peers in April 2018 established that consumers typically give very high valuations for ‘free’ digital goods, far in excess of the market price.

Indicatively, the average person in the US would need $17,530 per year to compensate for lack of access to search engines; $8,414 for email; and $3,648 for digital maps.

A more recent research into a similar area, by economist Jay R Corrigan and his peers, established that the average Facebook user would require more than $1,000 to deactivate their account for one year; they concluded that while the measurable impact that Facebook and other free online services have on the economy may be small, the benefits that these services provide their users are large. And yet, these are not captured in official data.

There is one other area where the measure of the GDP is rendered imprecise: when central banks overestimate inflation, as has happened in recent years, even in India (until recently).

Technological innovation has triggered, in effect, a deflation in prices of gizmos and gadgets: even when prices aren’t actually falling, you can get more features packed in for the same price. Any overestimation of inflation effectively renders an underestimation of the real size of the economy.

Published on February 22, 2019

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