Economics Doesn’t Know How to Measure the Digital World

Recently economists have been keen to comment on the grand scale of economic development in Asia, the crisis and stagnation in Europe, lack of changes in Poland, which has reportedly stopped halfway on its journey towards the West. And maybe all this is just pure fiction? And our „crisis” is just the „new normal”. The effect of the dawn of the digital world, which we can’t even measure.

Right after the Great Depression we realised that there were no measures to quantify the size of the crisis and economic growth. This is why Simon Kuznets, who subsequently received the Nobel Prize, proposed in 1934 to measure wealth with GDP (Gross Domestic Product). It didn’t transform the way XX century economists thought overnight. After the Bretton Woods conference GDP became an important tool for researchers. However, it took all the important institutions (such as the World Bank, OECD, IMF) much time, all the way to 1990, to consider this an important tool. Today these analyses can’t do without GDP. Governments, rating agencies, institutions observe GDP dynamics in each quarter. A British researcher, Angus Maddison, even quantified the data back to 1830. However, in the XXI century GDP is becoming an obstacle.

 It was Kuznets himself, the author of this measure, who warned against taking it as the measure of the wealth of nations.  Many people protested against glorifying the measure. Not because it doesn’t include the underground economy, happiness, environmental protection or health, as would be the argument of HDI partisans. The reason is different – GDP errs and distorts measurements of the digital economy.

There was a time when we had to pay for a phone call, be it through our mobile or fixed line.  Today when we use Skype rather than our phone and this doesn’t generate even a dollar’s worth of GDP growth.  But the value it has to me stays the same. Another example – rather than reaching out to acquaintances I instantly write to them on Facebook, regardless of where I am. Before letters or text messages had a cost for me. Thirty years ago when wanting to buy a book you had to leave home, get to the bookstore (pay for transport!), choose a book, buy it (from the cashier!) and return. Now everything is online. All you need is one click. This is quicker, cheaper and more effective. This is why we are richer as a society. We don’t have to pay for transport, spend our time getting there, but the cashier is out of work too – this person can work on something else. The digitisation of the world leads to profound changes in business. The press market has been dramatically shrinking. The music industry is stagnating, because it’s perhaps two or three times smaller than it used to be. The same phenomenon can be observed in the movie business. Some are free, some cost less than before. Simultaneously many projects aimed at making our lives easier are being created online. Work on them costs real money, they are worth huge money, but they often struggle to achieve profitability. For example Skype was bought in 2011 by Microsoft for a huge amount of 8.5 bln dollars. Microsoft is rich and can afford to pay such money even if Skype doesn’t generate any profit. There are many companies whose valuation is in the billions of dollars, and yet they struggle to turn a profit.

The possibility of endlessly duplicating goods with the use of computer files, bites, with no cost, and sending them all over the world thanks to the phenomenon of digitisation, is unprecedented. This leads to a dramatic fall of the multiplied goods in question. According to traditional economics, when shortages are alleviated, the price plummets. When shortage turns to abundance, according to the laws of economics, the price falls to zero. Thus many digital products and services are akin to oxygen, which is available to anyone.

 The fact that they’re free or semi-free doesn’t mean that they don’t have any value. Simply put the GDP measure doesn’t include this value. The process of digitisation isn’t making us richer according to GDP – it makes us poorer following its logic. It creates value which doesn’t show up in statistics.  Meanwhile, we are richer than ever before. We just simply don’t see this happen. If no one is astounded by the fact that if we don’t know something, we search for that on Google and not in the library as before, shouldn’t we re-think the received wisdom that economic growth has ground to a halt in recent years? And how can we measure it in an alternative way, which can include the statistical gap present in GDP, which has a bias against measuring online activity?

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