…The closest the economics profession has to a measure of technological progress is an indicator called total factor productivity, or TFP. It’s a bit of an odd concept: It measures the productivity gains left over after accounting for the growth of the workforce and capital investments. When TFP is rising, it means the same number of people, working with the same amount of land and machinery, are able to make more than they were before. It’s our best attempt to measure the hard-to-define bundle of innovations and improvements that keep living standards rising. It means we’re figuring out how to, in Steve Jobs’s famous formulation, work smarter. If TFP goes flat, then so do living standards. And TFP has gone flat — or at least flatter — in recent decades….
What Thiel can’t quite understand is why his fellow founders and venture capitalists can’t see what he sees, why they’re so damn optimistic and self-satisfied amidst an obvious, rolling disaster for human betterment…. Thiel’s peers in Silicon Valley have a different, simpler explanation. To many of them, the numbers are simply wrong…. Hal Varian, the chief economist at Google, is… a skeptic. ‘The question is whether [productivity] is measuring the wrong things,’ he told me. Bill Gates agrees. During our conversation, he rattled off a few of the ways our lives have been improved in recent years — digital photos, easier hotel booking, cheap GPS, nearly costless communication with friends. ‘The way the productivity figures are done isn’t very good at capturing those quality of service–type improvements,’ he said.
There’s much to be said for this argument. Measures of productivity are based on the sum total of goods and services the economy produces for sale. But many digital-era products are given away for free, and so never have an opportunity to show themselves in GDP statistics. Take Google Maps. I have a crap sense of direction, so it’s no exaggeration to say Google Maps has changed my life. I would pay hundreds of dollars a year for the product. In practice, I pay nothing. In terms of its direct contribution to GDP, Google Maps boosts Google’s advertising business by feeding my data back to the company so they can target ads more effectively, and it probably boosts the amount of money I fork over to Verizon for my data plan. But that’s not worth hundreds of dollars to Google, or to the economy as a whole. The result is that GDP data might undercount the value of Google Maps in a way it didn’t undercount the value of, say, Garmin GPS devices. This, Varian argues, is a systemic problem with the way we measure GDP….
The gap between what I pay for Google Maps and the value I get from it is called ‘consumer surplus,’ and it’s Silicon Valley’s best defense against the grim story told by the productivity statistics. The argument is that we’ve broken our country’s productivity statistics because so many of our great new technologies are free or nearly free to the consumer. When Henry Ford began pumping out cars, people bought his cars, and so their value showed up in GDP. Depending on the day you check, the stock market routinely certifies Google — excuse me, Alphabet — as the world’s most valuable company, but few of us ever cut Larry Page or Sergei Brin a check…. The other problem the productivity skeptics bring up are so-called ‘step changes’ — new goods that represent such a massive change in human welfare that trying to account for them by measuring prices and inflation seems borderline ridiculous. The economist Diane Coyle puts this well. In 1836, she notes, Nathan Mayer Rothschild died from an abscessed tooth. ‘What might the richest man in the world at the time have paid for an antibiotic, if only they had been invented?’ Surely more than the actual cost of an antibiotic….
‘Yes, productivity numbers do miss innovation gains and quality improvements,’ sighs John Fernald, an economist at the San Francisco Federal Reserve Bank who has studied productivity statistics extensively. ‘But they’ve always been missing that.’… Consider Google Maps again. It’s true that using the app is free. But the productivity gains it enables should show in other parts of the economy. If we are getting places faster and more reliably, that should allow us to make more things, have more meetings, make more connections, create more value….
Perhaps the best way to value the digital age’s advances is by trying to put a price on the time we spend using things like Facebook. Syverson used extremely generous assumptions about the value of our time, and took as a given that we would use online services even if we had to pay for them. Even then, he found the consumer surplus only fills a third of the productivity gap…. A March paper from David Byrne, John Fernald, and Marshall Reinsdorf… comes to similar conclusions. ‘The major ‘cost’ to consumers of Facebook, Google, and the like is not the broadband access, the cell phone service, or the phone or computer; rather, it is the opportunity cost of time,’ they concluded. ‘But that time cost … is akin to the consumer surplus obtained from television (an old economy invention) or from playing soccer with one’s children.’…
There’s a simple explanation for the disconnect between how much it feels like technology has changed our lives and how absent it is from our economic data: It’s changing how we play and relax more than it’s changing how we work and produce. As my colleague Matthew Yglesias has written, ‘Digital technology has transformed a handful of industries in the media/entertainment space that occupy a mindshare that’s out of proportion to their overall economic importance. The robots aren’t taking our jobs; they’re taking our leisure’…
