We are constantly told that inequality is soaring these days, that the rich are just sucking up all of that new economic growth out there. This is absolutely untrue. We’re actually caught up in something Hal Varian of Google has said: GDP doesn’t deal well with free services and stuff. Another way of making much the same case is that Facebook is worth very much more to all of us out here than it is to Mark Zuckerberg — but we’re only measuring the bit that he’s got, not the larger slice of pie that we all have.
Recent research has shown that we’d have to pay people $1,000 a year to get them to give up Facebook. This was real research — people really did have to give up, and they really were paid. The results here weren’t out of line with other studies either. Various people have tried to measure the annual values of things we get for free like search engines, email, and so on. They have actual and real value, obviously, even if we’re not paying for them directly.
Our problem comes in how we measure the economy. In GDP, we only measure those things which have an actual cash price attached to them. This removes all subjectivity from our measurement, something which is most useful. We also need a reasonable rule of thumb. The actual value people gain from whatever is higher than what they must pay for it. This should be obvious: If we didn’t think we were getting more value than we paid for something, we wouldn’t pay. Our best guess is that this consumer surplus, what we gain over what we pay for, is about the same as GDP.
That’s great. Except what happens when we’ve got something which doesn’t obey that rule of thumb? In the case of Google’s search engine, like Facebook itself, we’re not paying directly for them. They’re supported by advertising, and the number which turns up in GDP is the advertising revenue the companies gain. For Facebook, that might be in the $40 to $80 per user per year, that sort of range. But now we have proof that the value received by the user is about $1,000 a year. That’s not a 50/50 split between recorded GDP and the consumer surplus now, is it?
We are thus undervaluing how rich we are as consumers for that Hal Varian reason — GDP doesn’t deal well with free things. But if we consumers are richer than the standard measurements make us out to be, then it’s not true that all the economic growth is going to the rich, is it? We’re getting a lot of it; it’s just that we’re not counting what we’re getting.
Imagine, just for a moment, that Zuckerberg’s got $100 billion (let’s not quibble about the actual number) and we’ve all got what we had before Facebook. Inequality has increased. Now think again, Zuckerberg’s still got the $100 billion, but the 2 billion of us out here who use Facebook have something that’s worth $1,000 a year to us, each. And that’s a capital value of what, $20,000 each, perhaps? It’s not obvious at that point that inequality has increased, and even if it has, we’re coming out of it richer ourselves.
Zuckerberg’s got $100 billion, and we, in aggregate, have trillions of dollars in new wealth from the same process. Even if we do think that inequality is a bad idea, and that it has also risen, a process which gives all of us trillions in value isn’t to be entirely rejected, is it? It’s most certainly not true in those circumstances that all the growth has gone to the rich.
The truth here is that the more we study the recent economy, the more we find that the general story we’re being told about it isn’t true. Our problems are really about how we’ve been measuring the recent economy than anything else. All of which suggests that perhaps we’d better try doing the measuring better instead of perhaps destroying the capitalist and market system which is so increasing our wealth.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
