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Measuring Growth

Posted By Russ Roberts On January 25, 2013 @ 8:21 am In Growth,Standard of Living | Comments Disabled

My recent conversation with Kevin Kelly [1] has got me thinking about the challenge of measuring growth.

We might think of three paths to growth or three ways that the world gets better:

Some things we already consume get cheaper–that frees up resources to have more of something else. So the price of storing data falls. People who want to store data are better off. These are standard productivity improvements that lower the real price of a product. We are pretty good at quantifying these kinds of changes for our standard of living.

New products come along that let us do something we already enjoy but now we can enjoy it in a better way. Color TV replaces black and white TV. Or cell phones get smaller. This is tougher. The BLS tries to measure these changes when it calculates the CPI. I think they do OK. Not great. Maybe not even good.

New products come along that let us do something we couldn’t do before. For this I’ll pick Skyping with your kid while he’s in Europe. You could argue this is like flying to Europe and seeing your kid but just a lot cheaper. But that isn’t quite right. It’s not as good as being in Europe. But it’s a lot easier–it’s cheaper in ways that are far beyond money. The BLS has no chance of measuring these kinds of changes, especially when they involve very little or no expenditure by the consumer.

(This last category is another reason why it is very hard to measure recent changes in median income as I have pointed out here [2] and Don and Mark Perry argue in their recent WSJ piece [3].)

What Robert Gordon and Tyler Cowen have been arguing is that a lot of the earliest innovations are much more transformative than more recent ones. Indoor plumbing and the the invention of the car dwarf smart phones and Twitter. And for a while, cars got safer and more reliable. But we’ve exhausted a lot of those improvements. More drink-holders aren’t quite the same as better brakes. Gordon also argues that we’ve exhausted most of the benefits of the computer/internet revolution. The recent improvements just don’t make that much of a difference.

Kevin Kelly pushes back. The value of the recent improvements are hard to measure. There are a lot of them in that third category. They tend not to get monetized. And he argues we’ve just scratched the surface of what networked computers will allow us to do.

I’m not sure if Kelly is right. But I don’t think Gordon and Cowen are right either. Gordon, for example [4], picks 2002 as a breakpoint–he asks how much recent innovation since 2002 is truly valuable:

A thought experiment helps to illustrate the fundamental importance of the inventions of IR (Industrial Revolution) #2 compared to the subset of IR #3 inventions that have occurred since 2002. You are required to make a choice between option A and option B. With option A you are allowed to keep 2002 electronic technology, including your Windows 98 laptop accessing Amazon, and you can keep running water and indoor toilets; but you can’t use anything invented since 2002.

Option B is that you get everything invented in the past decade right up to Facebook, Twitter, and the iPad, but you have to give up running water and indoor toilets. You have to haul the water into your dwelling and carry out the waste. Even at 3am on a rainy night, your only toilet option is a wet and perhaps muddy walk to the outhouse. Which option do you choose?

I have posed this imaginary choice to several audiences in speeches, and the usual reaction is a guffaw, a chuckle, because the preference for Option A is so obvious. The audience realizes that it has been trapped into recognition that just one of the many late 19th century inventions is more important than the portable electronic devices of the past decade on which they have become so dependent.

If you had a choice between an iPad or indoor plumbing it seems like an easy choice. Of course, a lot of it is what you’re used to. As I point out in The Price of Everything [5], people in 1750 weren’t miserable because they didn’t have flush toilets. I’m sure they achieved real happiness even though they had to use outhouses or chamber pots. You get used to the world you live in. But if you gave someone in 1750 a choice between indoor plumbing and an iPad that had 2012 information on it, I don’t think they’d guffaw. I think they’d take the iPad over that lovely Kohler porcelain. (Kelly suggests [6] they’re making that choice even today.) But even so, I don’t think that the latest iPad is what makes the post-2002 world worth embracing.

And I think using 2002 or just thinking about recent data on growth tends to confuse us about the effects of recent policy failures with real stagnation. For example, the Japanese economy has been relatively stagnant for a decade or more. That’s not because they (or their trading partners) haven’t come up with new products or improvements. Their political/economic system is the problem and they’re not quite sure how to fix it because they’re not quite sure what the problem is. We have the same problem in the US. Our economy has struggled since the end of 2007. Is that because we have too many houses? Insufficient aggregate demand? Bad monetary policy? An increasingly generous safety net? Too much inequality? I think some of these issues are irrelevant but I’m not exactly sure which ones. But it’s not stagnation in innovation that’s causing our slowdown.

And sure, indoor plumbing is lovely. I’m a big fan. But it doesn’t explain growth. It’s a one-time improvement (albeit a large one). After that, toilets became more stylish and comfortable, maybe. But it’s like anything else.

The Kelly point that I think is key is the power of networked computers that we call the internet. Is it really just a lot of people watching cat videos and interacting on Facebook and Twitter instead of calling or writing? Is that all it is? We know it’s not.

When I was a kid, my Dad liked the poetry of Charles Causley. He liked it so much, he tracked down Causley’s address and wrote him a fan letter. Causley wrote back! He talked about how much he appreciated hearing from a reader and how rare it was. My Dad framed the letter and put it up in the den.

I don’t know how many fan letters Causley received. Probably not very many. How many readers did he have? How many bothered to write? How many wanted to write but didn’t know where to find an address? I love that the internet lets me reach the readers of Cafe Hayek and the listeners to EconTalk. And you get to comment and write back in a way Charles Causley’s readers couldn’t. I can’t imagine a reasonable way to put a monetary value on that. Or on the ability to discover a new poet (google him) without having to go to the bookstore where you won’t find his books anyway. But Amazon has them.

How about poor people around the world without access to education taking a course on Python [7] from a first-rate computer science professor? How about their ability to interact with other students? The biggest gains from this nascent movement accrue to foreigners. But Americans will benefit also from their knowledge as well as the potential improvements coming to our own education system.

How do you value the contribution of Wikipedia to general education for people without access to libraries?

How do you value the crowd-sourcing way that Google lets me solve problems? You have a household problem? You don’t have to ask your handiest friend. You just google it and there’s a video showing you how to fix it?

Then there’s the delight–all the glorious things we share with each other that amuse us, delight us, and inspire us. Yes, some are cat videos. But they amuse. Other things we share educate us, touch us, move us.

The bottom line is that I think Kelly is right that the internet revolution has just begun. Sharing ideas with billions is a big deal. We’re just learning how to do it well. And the parts we already do well are hard to measure and quantify creating the impression they are unimportant when I suspect they are very important. My biggest worry about the future isn’t economic stagnation–it’s political stagnation–our seeming inability to deal with budget constraints and demographic realities.

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URL to article: http://cafehayek.com/2013/01/measuring-growth.html

URLs in this post:

[1] My recent conversation with Kevin Kelly: http://www.econtalk.org/archives/2013/01/kelly_on_the_fu.html

[2] here: http://cafehayek.com/2011/10/the-great-stagnation.html

[3] in their recent WSJ piece: http://cafehayek.com/2013/01/americas-middle-class-still-doing-well.html

[4] Gordon, for example: http://faculty-web.at.northwestern.edu/economics/gordon/Is%20US%20Economic%20Growth%20Over.pdf

[5] The Price of Everything: http://www.amazon.com/Price-Everything-Parable-Possibility-Prosperity/dp/0691143358/invisiblehear-20

[6] Kelly suggests: http://www.kk.org/thetechnium/archives/2013/01/the_post-produc.php

[7] taking a course on Python: https://www.udacity.com/course/cs101

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