On the Pace of Growth: I Think the Very Smart Joe Stiglitz Gets One Wrong: Thursday Focus: March 20, 2014

There are, I believe, eight requirements for the competitive marketplace–the System of Natural Liberty of Adam Smith–to do its job as our collective societal calculating mechanism for managing our enormous and finely-graded social division of labor:

1. Exclusion–commodities must be such (or be made such via th legal order) that you can charge a price for them…
2. Rivalry–commodities must be such that one person’s using it imposes a cost on others, and so it makes sense for you to charge a price for them…
3. Information–if one person knows more about the true properties of what is being bought or sold, things will go badly wrong: markets in commodities subject to adverse selection and moral hazard do not work well…
4. Competition–markets with only one or a very few effective buyers or sellers cannot work well…
5. Equilibrium–people cannot go away disappointed by their inability to find a counterparty at the prevailing price or surprised at what the prevailing price turns out to be…
6. Restriction–the benefits and costs must fall upon the buyer and seller, rather than ramify via externalities and have large effects on other…
7. Calculation–people must not make large and systematic mistakes about what their interests are…
8. Distribution–the people who have the money, and thus the power to command the division of labor, must be those who in our estimation deserve to do so either because of their need or for other reasons…

When I look at where our economic growth is coming from, it is coming from activities in which it is increasingly the case that the market economy is likely to do a worse and worse job because of (1) and (2): I see more and more information goods that are largely non-rival and difficult to exclude–and so when firms do make profits by selling them they sell them at too small a scale, and when firms find themselves relying on selling ancillary advertising services they find themselves producing at too small a scale.

Thus my view is that we are not devoting nearly enough of our societal division of labor to our high-tech industries, and the GDP-growth numbers that these sectors produce greatly understates their likely contribution to our collective Benthamite utility.

Joe Stiglitz views it differently:

Joseph Stiglitz: Technology and Living Standards: “There is enormous enthusiasm for the type of technological innovation symbolized by Silicon Valley….

But… it is difficult to detect the benefits of this innovation in GDP statistics…. Recall how… the financial sector prided itself on its innovativeness…. But… most of this innovation involved devising better ways of scamming others… It did not lead to an increase in living standards (except for the bankers), and it eventually led to the crisis from which we are only now recovering….

In a simpler world, where innovation simply meant lowering the cost of production of, say, an automobile, it was easy to assess an innovation’s value…. One cannot avoid the uneasy feeling that, when all is said and done, the contribution of recent technological innovations to long-term growth in living standards may be substantially less than the enthusiasts claim…. Yes, being better connected with each other, through Facebook or Twitter, is valuable. But how can we compare these innovations with those like the laser, the transistor, the Turing machine, and the mapping of the human genome, each of which has led to a flood of transformative products?