The traditional gauge of economic success is profit, but over time we’ll find that such statistics as measures of GDP tell us less and less about broader efforts to improve human well-being. Much of the Web’s value is experienced at the personal level and does not show up in productivity numbers. Buying $2 worth of bananas boosts GDP; having $20 worth of fun on the Web does not. And this effect is a big one. Each day more enjoyment, more social connection, and, indeed, more contemplation are produced on the Web than had been imagined even 10 years ago. But how do we measure those things?
This is not necessarily new. Having $20 worth of fun by reading a library book, or running down a hill, or visiting the Tate Gallery, doesn’t boost GDP much either. So I guess my question for Tyler is this: are you saying that the web has increased the amount of fun that people can have without spending money, or at least has increased the nation’s aggregate fun-to-spending ratio? Are you saying that the correlation between aggregate fun and GDP used to be stronger than it is now, thanks to the advent of the web? And if so, are you implying that policymakers should be concentrating on new aggregates, such as some kind of Gross National Happiness measure, since GDP is proving an increasingly bad proxy for such things?
. . . now we have millions of people using internet applications that were often developed on a voluntary basis and which are provided without charge to share content which was also developed on a voluntary basis and is provided without charge, and which is, in many cases, taking market share from established, for-profit institutions. There’s nothing wrong with that—it’s progress—but it does suggest that economic data misses some important things. This may be especially problematic where productivity increases are concerned. If freeware boosts the productivity of free content providers allowing consumers to more effectively utilise their favourite free web applications, what are the effects on employment and productivity?
This is an even more fundamental problem than what Felix presents. Forget all of the free stuff that people can enjoy, GDP is simply not welfare, even for market based goods. Pardon me while I go through some transparent example, I think will be worth it.
Suppose I have an economy with two sectors that each use half of the workforce. One sector produces fish and the other produces beaded jewelry. (An economists mind always goes to desert islands when constructing these examples.) Both fish and necklaces cost $1 and the economy produce 1000 of each per year. The two sectors are equal in size and equal in their contribution to GDP.
Does that mean that they each make people equally well off? Do necklaces add as much to quality of life as food? Probably not. More likely the supply and demand graphs for each sector look like this.
GDP is the same
Welfare or the total benefit to society each market is quite different.
A steeper demand curve or a shallower supply curve can produce huge welfare gains at relatively small GDP gains. Indeed, some of the goods like running down a hill or reading new material posted to the web have a supply curve so shallow that they are provided at nearly zero cost. This is why they show up with such a disparity between GDP and welfare. This isn’t limited to free goods, however, my classic example is water. How much better is your life because of clean water vs. how much of your income do you devote to water cleansing.