A great question of our times is, well, where’s all this economic growth then? We’ve a technological revolution going on but wages and GDP don’t seem to be rising. Is this capitalism in its death throes as the rich b’stards gain everything?
Well, no. Wages are really a measure of what you can consume and if consumption is going up then so are real wages. And we’re not actually interested in GDP, what we want to know is what value can people consume? That being GDP plus the consumer surplus. And as Hal Varian has pointed out we’ve a problem with GDP as it doesn’t deal with free all that well. Or at all in fact. This what we need to know is how much is this new technological stuff increasing the consumer surplus? I’ve been known to have something to say on this:[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]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.[/perfectpullquote]
Others- you know, actual; economists and all that – have tried to measure accurately:[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]According to research by the National Bureau of Economic Research, search engines are worth $17,530 a year per person, email $8,414 and digital maps $3,648. Even Facebook is worth $322. Those numbers are, of course, a joke, and a little titter at their spurious accuracy is appropriate. But given the best techniques we have they’re about right to the number of digits and the size of the first one.[/perfectpullquote]
We can also use other methods to try and estimate that value creation:[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] However, having dismissed this calculation of the economic impact of Facebitch as nothing but a hot, soapy hand job to the corporate ego we do rather face the problem of working out what the hell the contribution of Facebitch to the economy is. And that’s problematic, as a conversation I’ve been having around and about recently reveals. Because in conventional economic statistics that contribution by Facebook is only $12bn globally. And that’s just insane.
Obviously, we can’t use what people spend on Facebook and we’re saying that the firm’s sales aren’t a good guide either. What we want to find is the value that people derive from being able to use Facebook. One obvious way of doing this is to look at the time people spend on it. We all do place a value on our time, as anyone who has ever seen a slow moving queue knows. So the average US user spending 40 minutes a day assigns some value to the time spent doing so. And there’re 133 million Americans apparently doing that. Now what we need is to give a value to that time. A reasonable value to start with is the US average (mean) wage of $24 an hour. We obviously prefer to be on Facebook to working. At the margin that is. Another more reasonable answer is at the minimum wage. This comes from when Joe Stiglitz and Amartya Sen were advising Les Frogs on the Sarkozy Commission. A closely related problem is that there’s a lot of work that’s not monetised: so called “household production”. We would like to have a value for this. It’s a bit of a bodge job but the answer is that it’s undifferentiated labour (ie, people don’t specialise as much as they do in the wider economy) and thus the wage rate for undifferentiated labour should be used to value it: minimum wage. Yes, yes, I know there’re holes in this reasoning. No, we don’t think that anyone would willingly pay $7.25 an hour to play on social media. But it’s also true that people do this a lot, this social media, and thus they must assign a value to the doing of it. And thus we can reach an “economic value in consumption” for Facebook, for the US, of $232bn to $769bn. Which is, I agree, a bit mad. [/perfectpullquote]
Or we’ve another estimate here:[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Facebook, the online social network, has more than 2 billion global users. Because those users do not pay for the service, its benefits are hard to measure. We report the results of a series of three non-hypothetical auction experiments where winners are paid to deactivate their Facebook accounts for up to one year. Though the populations sampled and the auction design differ across the experiments, we consistently find the average Facebook user would require more than $1000 to deactivate their account for one year. While the measurable impact Facebook and other free online services have on the economy may be small, our results show that the benefits these services provide for their users are large.[/perfectpullquote]
None of these estimates is any good. They’re all estimates and using what we know to be the wrong method – they’re looking at expressed preferences in the absence of an actual price which would allow us to see revealed preferences. But they’re probably in the right sort of order of magnitude even so.
2 billion people, $1,000 a year, that’s $2 trillion of value being enjoyed each year by us humans out here.
Yeah, OK, sure, some Burmese paddy farmer wouldn’t need $1,000 to give up Facebook, that’s his entire annual income and then some. But, you know, estimates.
As William Nordhaus has been pointing out, this is how this capitalism, free markets thing works. We consumers get the gains, the innovators get a tiny fraction, perhaps 3%, of the value created:[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.[/perfectpullquote]
We’re getting $2 trillion a year, capitalise that over a couple of decades – sorta right at market interest rates – to give us $40 trillion as a total value. Zuckerberg’s got well under $100 billion at present, very much less than our 3%. Zuckerberg’s too poor for the value he’s added to our lives, isn’t he? Weird but true, he should be much richer.