How much is the Internet worth to the average American?

An individual’s well-being is a hard concept to pin down, never mind to measure. Economists have long modeled how economic agents maximize their utility given their limited resources. Unfortunately, they have yet to develop a way to measure these so called “utils” in the real world. Instead, economists focus on measuring income, wealth, and consumption as indirect measures of utility as well as well-being. But there are increasing concerns that information technology renders these well-worn statistics, particularly income, an incomplete measure of well-being.

Before diving into that discussion, a quick definition. In many parts of these conversations, the term consumer surplus gets thrown around. Consumer surplus is, in short, the benefit a consumer gets from a good or service relative to the price he or she paid for the good. If I buy a coffee for $3, for example, but I personally value that cup of coffee at $5, then I got $2 of consumer surplus out of the coffee.

Consumer surplus is relevant for this conversation because it doesn’t get captured in broad measures of economic activity such as gross domestic product or personal income. In a piece at Wonkblog, Matt O’Brien argues that the large consumer surplus generated by new technology, specially the Internet, means that official income figures understate the improvement in living standards for many Americans. The widely cited household income figures are not perfect measures of living standards for many reasons, but O’Brien hones in on the seeming inability of statisticians to capture the improvement in electronics and software into price indices and therefore income statistics.

O’Brien offers a hypothetical deal: how much more income would you need to compensate for going back to the level of technology of the 1980s. This prompted Dean Baker of the Center for Economic and Policy Research to take issue with O’Brien’s hypothetical deal. An individual living in an Internet-saturated time would find it difficult to really calculate how much technology is worth given that they’ve built habits around these goods and services. The hypothetical person in 1980 would probably eventually adapt to the technology of the day, so a person living in 2015 would probably overestimate their consumer surplus.

But let’s take O’Brien’s proposal as a call to figure out the consumer surplus that new technology delivers up to us every day. Economist Noah Smith points to research by economists Austan Goolsbee of the University of Chicago and Peter Klenow of Stanford University that tried to calculate the consumer surplus from the Internet. In 2006, the two co-authors found it was 2 percent of annual income which, as Smith points out, is probably the lower limit for this estimate since many more people use the Internet today than nine years ago. Equitable Growth’s own Brad DeLong shows that doubling the amount of utility we get out of each hour spent on audio-visual technology would lead to our estimates of annual productivity growth since 1995 to double. Perhaps this gap might explain some of the stagnation in consumption productivity.

Tyler Cowen of George Mason University argues that many of these analyses and their conclusions are overblown. He says that the value of the Internet gets captured in income statistics, but in an indirect way. To get access to it, a consumer has to buy a computer or a smart phone and then subscribe to an Internet provider. And many of the social media services that consumers want to access make their revenue through advertising, so increased demand for, say, Facebook would show up in more ad purchases by companies. Cowen also is skeptical that the consumer surplus generated by Internet services is much higher than other services or goods in the rest of the economy.

So picking out an exact dollar amount for O’Brien’s hypothetical seems difficult at this time. Perhaps some clever statistician will work out a way to capture the benefits. But this issue is another reminder that pointing to one specific statistic as the measure of well-being or economic progress is a risky proposition.

June 18, 2015


Economic Wellbeing

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