AEI is asking where’s the next productivity revolution going to come from? The answer being that it’s already here.
So when will the next productivity boom happen?
If the US economy is going to generate sustained 3% annual growth, or anything close to that, it will require much faster productivity growth.
As I say, the answer being that this is already here. We’re measuring the digital economy wrongly. Hal Varian says that GP doesn’t deal well with free. The thing is, we know, absolutely, that we’ve got our measurements wrong. The only thing we don’t know is how wrong are our measurements?
To give my favourite current example. WhatsApp is used by some billion people around the world for some to all of their telecoms needs. It turns up in economic statistics as a reduction in productivity.
In more detail, WhatsApp is free to use and carries no advertising. That means there’s no sale associated with it. We measure consumption at market prices – a price of $0 means no consumption. Consumption is one of the three ways we measure GDP – each of the three should be the same as the other two but isn’t because lying about taxes.
The other two calculations are all incomes, or all production. Things that are sold at no price do not add to production given that we measure it at market prices.
Income, well, there’re 200 or so engineers at Facebook who work on it (I checked with Facebook itself). Say their salary is $250k a year each. Probably too low but we’ve got to use some number or other. $50 million then. That’s incomes added to GDP.
So, in our three methods of calculating GDP – they should all be the same but that doesn’t matter here – we’ve value of WhatsApp (more accurately, WhatsApp adds value of $x each year to the global economy) of $50 million. Or $0 or $0.
Yeah, me too, 1 billion getting their telecoms is more of an addition to the global economy than $0, right?
It gets worse though. Productivity is GDP divided by hours worked. And if WhatsApp’s addition to GDP is nothing and yet we’ve 400,000 hours a year of labour (200 peeps times 2,000 hours a year) then that comes through as a reduction in productivity.
Yeah, me neither. Vodafone uses 200,000 people to provide telecoms to hundreds of millions, WhatsApp uses 200 to provide for 1 billion, the second is listed in our econ stats as a reduction in productivity?
Seriously, we know that we’re measuring the digital economy wrongly, our only argument is how wrongly. My bet is – and I wouldn’t insist but I’d shout vociferously that this is true – that if we measured digital output in better terms then we’d see that the productivity revolution is right here and right now.