Could History Be About To Rhyme?
Venture capitalist and author Bill Davidow argues that today our techniques for measuring economic performance are obsolete, and thus lead us to reach improper conclusions about the state of the economy. Many economists, policy-makers and politicians, he says, are still using 20th-century methods to analyze our 21st-century economy, in which two worlds co-exist:
“The physical economy is anemic, struggling, biased toward inflation and shrinking in many developed countries….We use dollars to measure most of the activity. If more dollars are spent or earned, we conclude that the economy is growing.
“The virtual economy is robust, biased toward deflation, and growing at staggering rates, everywhere. A lot of the services provided to us in the virtual economy are free. If we paid dollars for those services, they would be counted as part of the GDP and would add to economic growth. But we don’t, so they are not counted,” according Davidow’s July 2014 essay, “The Invisible Economy.”
In his analysis, all the “free” services we get on the Internet are actually paid for, not with money that can be counted, but with our privacy and attention. Services like searches on Google, the listing of residential rentals on Airbnb, free email, information storage on Dropbox, phone calls on Skype, hotel and restaurant reviews on TripAdvisor or Yelp, free text messages on WhatsApp, or free music cost zero in money terms, so they are not counted in the GDP. But in fact, they are worth billions.
If advertisers paid us directly to invade our privacy and capture our attention, and we then turned around and spent the money to purchase the services mentioned above, the government would count what they pay us as part of our income and the sale of their services as part of the GDP. There are no accurate numbers, but a partial idea of the value of those services could be derived from the money advertisers spend on digital ads—a projected $114 billion in 2014.
Davidow is not the only one to warn that we are increasingly trying to steer our economies with faulty compasses. British economist Diane Coyle similarly argues that the universally used GDP is no longer a good enough measure of economic performance:
“It is a measure designed for the 20th-century economy of physical mass production, not for the modern economy of rapid innovation and intangible, increasingly digital services,” according to Coyle’s book, GDP: A Brief But Affectionate History.
A recent report from Morgan Stanley also reminds us that many of the tools that are supposed to tell economists when growth is about to roll over or accelerate were developed when the economy looked a lot different than it does today:
“Fifty years ago, the U.S. and global economy was largely driven by manufacturing and industrial activity. Today, we are much more of a services- and consumer-driven economy, not just in the U.S., but all over the world. To be specific, the developed world is 70 percent consumption and services-oriented….Many of the established economic tools don’t capture this part of the economy properly and over-discount the signals coming from the old economy,” as stated in "A Tale of Two Economies" (Morgan Stanley, October 2015).
Finally, as predicted by Schumpeter’s “creative destruction” concept, the virtual economy not only adds yet-uncounted growth to the real economy, but it also destroys many counted components of the old economy. Edward Jung, former chief architect at Microsoft and now chief technology officer at Intellectual Ventures, explains:
“While GDP measures the market value of all goods and services produced within a country, many stars of the digital age (think Wikipedia, Facebook, Twitter, Mozilla, Netscape, and so on) produce no goods and provide free services. These same star players also tend to undercut the productivity of traditional businesses. Free navigation apps have shrunk sales for Garmin, the GPS pioneer that was once one of the fastest-growing companies in the United States. Skype is killing the international phone call ‘one minute at a time,’” according to "Misleading Indicators," (Project Syndicate, March 2015).