Measuring the Digital Economy

When the UK still had an automobile industry, there was a standard joke about the manufacture of the Morris Mini Minor, the car Mr Bean drives. The bad news was that each car was sold at a loss. The good news was that sales were up. Today, that story usually refers to technology companies, as it did during the Internet start-up boom around 2000 before most of them crashed. Uber is a case in point. Its market capitalisation exceeded USD60 billion by 2015, overtaking Ford and General Motors and it still runs at a loss. Before it implodes like Morris, it needs to find a business model that works. But why so? Why not just get bought out? That’s how most technology start-ups end up. They usually have assets, consisting of (i) IPRs, (ii) data from customers, from trials of prototypes, etc., (iii) entrepreneurship, verging on clairvoyance in the case of some, such as Elon Musk.

Buying up start-ups is how conglomerates remain conglomerates. Yes, they may be more efficient than smaller companies, so that helps, but acquiring assets for which the trials and testing have already been accomplished, is low-risk, assuming they’ve done their due diligence. Whether by accumulation or by acquisition, large corporations have become larger, ironically over the period when neo-liberal policies were designed to increase competition and spread the wealth. In the 1980s in the US, the four largest players in any manufacturing sector controlled 38% of the market; three decades later they controlled 43%.[1] Being more efficient, the mega-corporations employ relatively fewer staff at higher levels of productivity, and enjoy higher returns on capital, the fruits of which go to shareholders. There has thus been, a very effective trickle-up process. Ironic that the American poor and low-paid voted for a darling of Wall Street, but irony, like Uber, is everywhere.

This raises an old debate that seems to be nowhere near resolution. As the economy turns digital, not to say robotic, how are the gains (and losses) to be measured in a way that can give policy makers (and voters) a good understanding of the mechanisms at work? How to account for the lack of growth in productivity and therefore in GDP when ICTs are pervasive, and increasingly invasive? A case in point is connected sex-toy maker We-Vibe which was fined over USD3 million in March 2017 for illegally collecting intimate personal data.[2] The motive for the illegal action was clearly commercial as data is value to someone. This provides a hint as to how the impact of ICTs can be valued. Search engines are nominally free of charge, yet they enormously enhance the productivity of those using search for professional reasons. As a consultant, I can find information and data in a matter of hours, or even minutes, that would previously involve months of searching, or would be simply unobtainable. The costs of search is covered by ad spending, and the benefits are paid in the consulting fees (I wish) or in the consumer surplus of value-added to the client. These are indirect ways to measure the contribution to GDP. Austan Goolsbee and Peter J. Klenow adopted a different approach when they posited “that higher wage internet subscribers should spend less time online (for non-work reasons) and the degree to which that is true identifies the elasticity of demand… we calculate that consumer surplus from the Internet may be around 2% of full-income, or several thousand dollars per user.” [3] This led them to believe standard measures of GPD could under-estimate by a whopping USD800 billion. Others dispute the figure.

What is GDP or Gross Domestic Product? It measures the annual value of all goods and services produced within a country, including the value of exports and excluding the value of imports. Because of the difficulty in measuring the contribution of ICT services to productivity, the measure of GDP is widely regarded as flawed, losing its purpose as a policy tool. But here there is a fork in the road, and the other direction leads to social criticism, that for example, chopping down a virgin forest to build a shopping mall adds to GDP, but planting trees on a voluntary basis does not, despite the social ‘good’ of the latter and the social ‘bad’ of the former. However, according to two statisticians at the OECD, this is all misconceived.“These criticisms in part reflect a misunderstanding of what GDP is (a measure of the income generated from production) and what it is not (a measure of well-being).”[4]

This is true, and false. It sounds like lawyers explaining the law is not about justice but about the rules of society, for good or bad. Again, true, but that is rarely hard-and fast. A judge who is ‘just’ will often criticise a law and even ‘interpret’ it in a way that seems more just – unless, perhaps, it is Judge Neil M. Gorsuch, a passionate “originalist” recently appointed to the US Supreme Court.[5] Were this never the case, changes in law would always require legislation, a lengthy and compromised process at the best of times. The same logic suggests that the purpose of measuring GDP cannot be so easily divorced from a concern for the ‘net’ welfare of society. If it is, then policies based upon it likewise become divorced from the ‘net’ welfare of society.[6] Many will conclude that this has been true for several decades. Long gone are the days when, as an undergraduate, I studied economics on the implicit understanding that it was a study of how to improve the lot of society through a better use of scare resources. Now students are taught it’s all about shareholder value, a Grossly Deficient Product if ever there was one.


[1] David Autor ‘The Fall of the Labor Share and the Rise of Superstar Firms’ 2 May 2017 MIT Working Paper

[2] The Guardian (2017) ‘Vibrator maker ordered to pay out C$4m for tracking users’ sexual activity‘

[3] NBRE (2006) Valuing consumer products by the time spent using them – an application to the Internet’ Austan Goolsbee and Peter J. Klenow, Working Paper 11995

[4] ‘Neila Ahamd and Neila Bachene (OECD) ‘Measuring the economy in the age of digitalisation’

[5] An “originalist” interprets the law strictly, notably the US Constitution, according to how its original drafters would have understood it at the time of drafting, irrespective of how circumstances may have changed. Revisions must therefore reply upon the constitutionality of any subsequent legislation. The right to carry arms in the US being a case in point.

[6] ‘Net’ because there are winners and losers as the composition of GDP changes, and ideally (rarely the real case) the losers can be compensated from the gains of the winners so none is worse off.

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