Are the best things in life free?

Sunday 03 June 2018

Article

Writing in The Times, Philip Aldrick has posited that a lot of the value, or “consumer welfare”, of the digital economy is not captured in the GDP statistics, partly because many of its services are free. Consumers barter their data for free apps, saving time or adding enjoyment and hence creating an unmeasured “consumer surplus”. Could that be why measured economic growth is so sluggish?

It’s an intriguing argument, but it’s not clear that it entirely stands up to closer examination.

For one thing, although many digital services appear free to the consumer, they rarely are. It’s part of Google and Facebook’s brilliance that they seem to be free, and therefore possible concerns over privacy, or competitive dominance, or lack of regulation, are shrugged off. Hey, but it’s free, what’s not to like?

But Google or Facebook are not free, any more than entry to the shopping centre, or free-to-air television or radio, or your local weekly newspaper. They’re paid for in the cost of goods, through advertising or paid search, which is captured in GDP. Increasingly, this is the “rent” of the internet.

And as 25% of global ad spend has now shifted to Google or Facebook, the consumer is paying elsewhere: TV content is moving from free to paid (Netflix), the number of magazines is declining, and the quality of journalism is suffering.

(Admittedly not all technology services are paid for. Voluntary services, such as Wikipedia or open source software, are definitely not captured in GDP. But that’s the same for charity volunteering or caring at home. Nothing is new here.)

The article makes a further argument that the consumer’s “reservation price” for these digital services is high — perhaps higher than the actual price of the advertising. In other words, there is a big consumer surplus. But this is very difficult to measure, and besides is always the case with any good or service and has never been captured in GDP.

Neophilia always seems to be with us

My father was born in 1916 and only recently passed away. He always told me he was sceptical of the commonplace notion that the pace of change is increasing. In his first half-century, he witnessed the invention of insulin, television, talkies, penicillin, the jet engine, the nuclear reactor, the transistor, the contraceptive pill, the polio vaccine, the digital computer, satellites, and the first man to orbit the earth. Not to mention the ubiquitous adoption of the telephone, motor car and domestic appliances. His second half-century didn’t seem nearly so exciting. 

The first scheduled transatlantic jet passenger service was 60 years ago, in 1958. From the Wright Brothers' first flight in 1903 to that service, took only 55 years.

Put against these innovations, the ability to ask your phone to make a call to book your haircut is, possibly, mundane.

Measuring rate of change is extremely difficult. But neophilia always seems to be with us. Every age fancies that it is seeing fundamental transition to new economies and new times. There is a real danger of underestimating the past, and overestimating the specialness of the present.

Is the ability to carry a phone in your pocket more ground-breaking than the invention of the phone in the first place? Or, indeed, the telegram? Is Youtube more of a gain than the BBC’s start of regular television broadcasting in 1932?

And coming back to the central argument of the article in The Times, is the consumer welfare created by digital services greater than that created by, say, electricity, or the railways, or immunisation, or the condom?

Perhaps artificial intelligence will indeed usher in a new era of growth and wealth creation. But these things are very difficult to be confident about, especially from the foggy vantage point of the present day.

History as a succession of quantum leaps

Another commonplace fallacy, I think, is that gains in wealth and productivity mainly result from breakthrough technology, or by innovation at the leading edge. It is tempting to look at history as a succession of quantum leaps or technological miracles, and to lionise the men who invented them. But perhaps our wealth comes as much from continuous improvements in the adoption and application of existing technologies. Who has created more economic wealth and led to a greater advancement in productivity: Steve Jobs? Or Ingvar Kamprad, who founded IKEA and enabled every household to have cheap, modern, stylish wooden furniture? (By the logic of the article, his contributions also didn’t show in the statistics, as labour was transferred from the priced environment of the furniture factory to the unpriced environment of the consumer struggling with an allen key and flat-pack instructions.) And if our rate of economic growth and productivity gains looks slow, we need to ask why have these incremental gains run out?

These are complex arguments. But we should avoid the temptation to believe that our current rate of innovation is unique, and therefore the numbers are wrong. Equally likely, in my view, is that the numbers are right, or at least as right as they have always been, and the rate of economic growth in rich countries is indeed lower than it was in, say, the 1960s.

We should not assume that technology is making lives better

If that is the case, or even if it could be, there are deep implications for business and for policy-makers. We should not assume that technology advancement is steaming ahead and making lives better even though it is not yet apparent in the statistics. But perhaps neither should we think that increasing the rate of innovation is the solution for everything. Or that a group of billionaires in California will come to our rescue and solve the world’s problems.