May 29, 2015


Trying To Understand Why Marc Andreessen And Larry Summers Disagree Using Facebook (Tim Worstall, 1/15/15, Forbes)

[W]e measure productivity in money terms. The value of output created with some set of inputs. The most usual one we talk about is the productivity of labour as that's the one that most affects general lifestyles. If each hour of labour produces more then there's more that can be consumed by each unit of labour (after we deal with those pesky problems of the distribution of rewards). But the measure is how many $'s worth of whatever is produced by one hour of labour? And that's where at least some of the productivity is going. Take, for example, Facebook. As far as the general economic statistics are concerned, GDP, labour productivity and all that, the output of Facebook is the advertising it sells. Labour productivity is what must be paid for the labour that builds the system that delivers that advertising. Which is fine as a general rule: but valuing Facebook's contribution to living standards as being the advertising it sells is near insane.

We value Facebook far more highly than that: but that advertising is the only part of the value which we do ascribe to Facebook that is actually monetised. And given that GDP, labour productivity and all that are described only in monetised terms then we're missing a very large part of what it's all about. People (for some unknown reason to me) like Facebook. Their lives are made richer by Facebook's existence: they are in fact richer. We're just not measuring that extra wealth that they derive from Facebook's existence.

Sure, this problem exists with absolutely every product. It's called the "consumer surplus" and it is the value that we consumers derive from whatever it is over and above the price we've got to pay to get it. A general assumption is that we derive a consumer surplus from absolutely everything that we do buy: if we didn't gain more value than it cost us then we wouldn't buy it, would we? Brad Delong once pointed out (or perhaps pointed to someone who pointed out) that one way of looking at rising living standards in the 20th century was a factor of about 8. Rich world people in 2000 were 8 times better off than rich world people in 1900. Roughly true by those standard measures of GDP and so on. But if we than added what people could do, the improvements in quality, all something analagous to that consumer surplus. it might be more true to say that people were 100 times better off.

That's how I would explain (some of) that productivity puzzle. A larger than normal portion of the output of the new technologies is not monetised so we're just not counting it as output at all.

Posted by at May 29, 2015 9:17 AM

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