Tuesday, March 05, 2019 1:00 am
IT as part of GDP
Assessing the value of free technology
In 2017, information technology was 5.4 percent of the U.S. economy. Back in 1987, it was 4.6 percent. If that small change strikes you as strange, you're not alone. Since 1987, we have invented the web browser (Mosaic in 1990), wireless communication (Wi-Fi in 1991), good search engines (Google in 1998) and the smartphone (iPhone in 2007). Apparently none of that has added very much to the most common way to measure national income.
The problem is that national income, formally gross domestic product, only measures when things are bought and sold as a final product. When I use Gmail for free, my using it doesn't count as a contribution to the GDP.
Google makes money on Gmail by selling advertisements, which do show up as GDP. That is where the 5.4 percent comes from. That advertising money, however, probably doesn't really capture the total value of my email.
That is how Google makes money, but I probably value the email more than Google is able to make on it.
This problem appears to be common throughout the tech industry.
Much IT is cheap or free to copy. Digital music is the classic example. Because computer files can be copied for free, music companies have had a very hard time charging much for music as the industry converted from CDs to MP3 files to streaming.
Music lovers still listen to music at least as much as before.
Measured by GDP, however, it has shrunk.
Some industries changed even more dramatically. I grew up with a World Book Encyclopedia set in my house. I certainly don't own a set now.
Wikipedia has largely replaced home encyclopedias. Wikipedia is a non-profit. It doesn't even sell advertisements.
It survives on donations, which absolutely do not contribute much to GDP. In this area, economic activity has gone to nearly zero, even though people are probably better off.
Something is clearly wrong with using GDP as the only measure for some of these areas.
I found a study by three economists that tried to tackle this problem.
They posed a series of questions to people with the goal of estimating the value, in dollar terms, of various tech services.
Basically, they asked people questions such as: Which would you prefer, to lose $20 or go without Facebook for a month?
They made an effort to prove to the people that they had ways to enforce the Facebook ban by monitoring their account.
They then varied the dollar amount to various people. This initial survey involved about 3,000 people.
On average, they estimated people value Facebook at $40 for a month.
Somewhat comically, they repeated the process without the strong threat of enforcement and got a significantly lower amount, about $9 for a month.
They admit this result implies some significant uncertainty in their results.
The economists expanded their study then to cover a whole year and other tech services.
A year of streaming music is worth, on average, $300.
Mapping services for a year? $3,600.
Search engines? $18,000.
The economists also analyzed the answers based on a person's age and income. Apparently the 35-44 age group values online maps the most. Online purchases are valued most by the 55-64 age group. Video streaming is valued most by the youngest age group.
Note that all of these services are free. Their contribution to GDP is only through advertisements. I'm not sure I would fully agree with those numbers, but I'm also not sure I would really want to go a year without using a search engine.
Christer Watson, of Fort Wayne, is a professor of physics at Manchester University. Opinions expressed are his own. He wrote this column for The Journal Gazette, where his columns normally appear the first and third Tuesday of each month.