Desperately Sad Research About The Internet And Economic Growth – It Doesn’t Produce It

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That’s one way of looking at this piece of research out of Australia. The internet doesn’t produce any economic growth therefore everyone should stop investing in it. Which is a pretty sad conclusion to reach really. Fortunately, reality is rather better than this, it’s the research itself which is sad, not the result. That sadness being that they’ve entirely missed what everyone already knows about the effects of the internet – and ICT more generally – on the economy. Which is that the problem isn’t with the no effect thing, it’s that we tend to use the wrong measure of the effect. We use the proxy, GDP, instead of what we’re actually interested in, the consumer surplus.

The paper itself is here:

Despite phenomenal technological progress and exponential growth in computing power, economic growth remains comparative sluggish. In this paper, we investigate two core issues: (1) is there really no connection between ICT and national economic growth? and (2) what factors moderate the ICT–growth relationship? We apply meta‐regression analysis to 466 estimates drawn from 59 econometric studies that explore the Solow or Productivity Paradox that there is little impact of ICT on economic growth and productivity. We explore the differential impact of ICT on developed and developing countries and the differential impact of different types of ICT: landlines, cell phones, computer technology and Internet access. After accommodating potential econometric misspecification bias and publication selection bias, we detect evidence that ICT has indeed contributed positively to economic growth, at least on average. Both developed and developing countries benefit from landline and cell technologies, with cell technologies’ growth effect approximately twice as strong as landlines. However, developed countries gain significantly more from computing than do developing countries. In contrast, we find little evidence that the Internet has had a positive impact on growth.

The simple explanation for us dullards is here:

The internet is transforming every aspect of our lives. It has become indispensable. But, so far, according to a new meta-analysis we have published in the Journal of Economic Surveys, the internet has done next to nothing for economic growth.

Vast resources have been thrown at information and communication technologies. Yet despite exponential growth in ICT and its integration into almost all aspects of our lives, economic growth is not demonstrably faster (and at the moment is demonstrably slower) than it was beforehand.

All of which leads to the conclusion that:

But maybe later, down the track
The time it takes for ICT investment to generate economic growth might be longer than expected, and it might need to reach an even bigger critical mass before that happens.

But it’s hard to avoid the conclusion that, for the immediate future, growth will continue to depend upon more traditional sources: trade between nations, education, new ideas, the rule of law, sound political institutions, and curtailing inequality.

Unfortunately, these are under threat from growing nationalism and protectionism in the United States and elsewhere. The evidence to date suggests that we would be better off fighting those threats than investing still more in an information technology revolution that has yet to deliver.

What good little social justice warriors they are to insist that we should all fight inequality instead of partaking in the grandest technological revolution of our times.

Sadly, their entire research being based upon a misconception.

We don’t actually care about economic growth. That’s not the thing we worry about, are interested in. What we are interested in is what the peeps out there get to consume. If that manna quite literally fell from heaven then we’d be better off and the economy would be exactly the same size before the hostly rain. It’s the better off bit which is important, not the size of the economy.

Sure, of course, GDP is a pretty good proxy. We know how to measure it, it’s objective. But it is still a proxy, not the thing itself. Usually this doesn’t matter, sometimes it does. And as Hal Varian says, GDP doesn’t deal well with free. Meaning that in the middle of the digital technological revolution, when much output is offered for free, GDP doesn’t work well as a measure of how well off we all are.

As I’ve said before:

Marc Andreessen were disagreeing… over the effects of technology on the passing landscape…. 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…. Valuing Facebook’s contribution to living standards as being the advertising it sells is near insane… 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…. 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….

Andreessen is… talking to that Facebook example above…. I do tend to think that the gap between “real living standards” and “recorded living standards” is growing simply because so much more of the value of the new technologies is not in fact monetised.

And as Brad Delong said about that:

Tim Worstall is, I think, 100% right here. The key difference is between “Smithian” commodities–where it is a safe rule of thumb that the consumer surplus generated is about equal to the producer cost, so that GDP accounts that value goods and services at real producer cost will capture a more-or-less stable fraction equal to half of true standards of living–and… I might as well call them “Andreesenian” commodities, where consumer surplus is a much larger proportion of monetized value because what is monetized is merely an ancillary good or service to what actually promotes societal welfare. What is the proportion? 5-1? 10-1? Somewhere in that range, I think–at least.

I insist that it’s higher. One recent paper suggested that – and reasonably, it was reasonable research, we’re in the right ball park – the existence of search engines was worth some $18,000 a year, email maybe $4,000. That’s the sort of amount people would have to be paid to stop using them. But, obviously, those numbers aren’t in GDP because they’re not monetised. Varian’s not dealing well with. Google might make $100 a year out of a search engine user. That’s the amount that’s in GDP, not the $18,000. And that’s it, that’s the solution.

It’s not that the internet isn’t creating economic growth, it’s just that we’re not counting up the economic growth the internet is creating. Simply because GDP measures matters monetised, much of that the internet produces isn’t monetised. As I’ve, again, said before:

Just to make an even more extreme version of this argument. WhatsApp doesn’t charge and also carries no ads. That means that in our GDP statistics it doesn’t appear at all. And yet there’s those 1 billion people using WhatsApp. We would simply be insane to insist that 1 billion people doing something has no value: but that’s what we are doing. It’s a measurement problem. As such we need to get better at measuring, not designing any other policies to try to increase productivity.

Actually, it’s worse, the costs of WhatsApp appear in GDP, the output doesn’t so 1 billion people getting their telecoms from the work of 200 engineers actually turns up as the world getting poorer, a fall in productivity.

And the thing is, if all of this is known to some internet scribbler shouldn’t it be known to real actual economics professors? Especially before they tell us to stop investing in the internet and go fight inequality instead? It really is just desperately sad research here.

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When I worked in Planning & Licensing, with Google Street View I could “walk” up and down the streets surrounding a site, getting the lie of the land, seeing what other premises were in the immediate area – all in about ten minutes for free other than the marginal costs of the electricity used by the computer being switched on. In comparison, I’d have to put my coat on, leave the office, find which bus went to the site, travel there, do the ten minutes site examination, wait for a bus back and go back. Typically half a day out… Read more »

Quentin Vole
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Quentin Vole

Good example. OTOH in the life assurance industry where I worked, the main effect of computerisation was to allow much more complex options to be offered. The whole concept of ‘unit linked’ policies would have been impossible prior to the computer. So there hasn’t been all that much in the way of staff reductions – the ‘people time’ involved in administration hasn’t changed all that much – but there is much more choice available to the consumer. Whether that’s a wholly good thing, is another topic for debate.