The great stagnation? Or: why internet productivity gains have been demonetized

Most of the economic growth during the Internet era has been largely unmonetized, i.e. external to the measurable market. This is most obvious for completely free services like Craig’s List, Wikipedia, many blogs, open source software, and many other services based on content input by users. But ad-funded Internet services also usually create a much greater value than is captured by the advertising revenues. These include search, social networking, many online games, broadcast messaging, and many other services. Only a small fraction of the Internet’s overall value has been monetized. In other words, the vast majority of the Internet’s value is what economists call an externality.

Excerpted from Nick Szabo‘s take on the Crisis of Value hypothesis:

“The costs of manufacturing goods whose costs primarily reflect manufacturing rather than raw materials has fallen substantially over the least twenty years, at about the same rate as in prior decades. Of course, most of these gains have been in the developing and BRICs countries, for a variety of reasons, such as the higher costs of regulation in the developed world and the greater access to cheaper labor elsewhere, but those of us in the U.S., Europe and Japan still benefit via cheap imports that allow us to save more of our money for other things. But perhaps even more importantly, outside of traditional education and mass media we have seen a knowledge and entertainment sharing revolution of unprecedented value. I argue that what looks like a Great Stagnation in the traditional market economy is to a significant extent a product of a vast growth in economic value that has occurred on the Internet and largely outside of the traditional market economy, and a corresponding cannibalization of and brain drain from traditional market businesses.

Most of the economic growth during the Internet era has been largely unmonetized, i.e. external to the measurable market. This is most obvious for completely free services like Craig’s List, Wikipedia, many blogs, open source software, and many other services based on content input by users. But ad-funded Internet services also usually create a much greater value than is captured by the advertising revenues. These include search, social networking, many online games, broadcast messaging, and many other services. Only a small fraction of the Internet’s overall value has been monetized. In other words, the vast majority of the Internet’s value is what economists call an externality: it is external to the measurable prices of the market. Of course, since this value is unmeasured, this thesis is extremely hard to prove or disprove, and can hardly be called scientific; mainly it just strikes me as subjectively obvious. “Social science” can’t explain most things about society and this is one of them.

What’s worse for the traditional market (as opposed to this recent tsunami of unmonetized voluntary information exchange), this tidal wave of value has greatly reduced the revenues of certain industries. The direct connection the Internet provides between authors and the readers put out of business many bookstores. Online classifieds and free news sources have cannibalized newspapers and magazines. Wikipedia is destroying demand for the traditional encyclopedia. Free and cut-price music has caused a substantial decline in music industry revenues. So the overall effect is a great increase in value combined with a perhaps small, but I’d guess significant reduction in what GDP growth would have been without the Internet.

What are some of the practical consequences? Twenty years ago most smart people did not have an encyclopedia in the home or at the office. Now the vast majority in the developed and even hundreds of millions in the BRICs countries do, and many even have it in the car or on the train. Twenty years ago it was very inconvenient and cost money to place a tiny classified ad that could only be seen in the local newspaper; now it is very easy and free to place an ad of proper length that can be seen all over the world. Search engines combined with mass voluntary and generally free submission of content to the Internet has increased the potential knowledge we have ready access to thousands-fold. Social networking allows us to easily reconnect with old friends we’d long lost contact with. Each of us has access to much larger libraries of music and written works. We have access to a vast “long tail” of specialized content that the traditional mass media never provided us. The barriers to a smart person with worthwhile thoughts getting fellow humans to attend to those thoughts are far lower than what they were twenty years ago. And almost none of this can be measured in market prices, so almost none of it shows up in the economic figures on which economists focus.

Cowen suggests that external gains of similar magnitude occurred in prior productivity revolutions, but I’m skeptical of this claim. A physical widget can be far more completely monetized than a piece of information, because it is excludable: if you don’t pay, you don’t get the widget. As opposed to information that computers readily copy. (The most underappreciated function of computers is that they are far better copy machines than the paper copiers). It’s true that competition drove down prices. But the result was still largely monetized as greater value caused increased demand, whereas growth in the use of search engines, Twitter, Wikipedia, Facebook etc. largely just requires adding a few more computers that now cost far less than the value they convey. (Yes, I’m well aware of scaling issues in software engineering, but they typically don’t require much more than a handful of smart computer scientists to solve). Due to Moore’s Law the computers that drive the Internet have radically increased in functionality per dollar since the dawn of the Internet. Twitter’s total capital equipment purchases, R&D, and user acquisition expenditures are less than fifty cents per registered user and these capital investment costs per user continue to drop at a ferocious rate for Internet businesses and non-profits.

The brain drain from traditional industries can be seen in, for example, the great increase in the proportion of books on computer programming, HTML, and the like on bookstore shelves to traditional engineering and technical disciplines from mechanical engineering to plumbing. It is not so blatant in the relative growth of computer science and electrical engineering relative to other engineering disciplines, but that’s just the tip of the iceberg and vast numbers of non-computer scientists, including many with engineering degrees or technical training in other areas, have ended up as computer programmers.

Fortunately, the Internet is giving a vast new generation of smart people access to knowledge who never had it before. The number of smart people who can learn an engineering discipline has probably increased by nearly a factor of ten over the last twenty years (again largely in the BRICs and developing world of course). The number who can actually get a degree of course has not — which gives rise to a great economic challenge — what are good ways for this vast new population of educated smart people to prove their intelligence and knowledge when traditional education with its degrees of varying prestige is essentially a zero-sum status game that excludes them? How do we get them in regular social contact with more traditionally credentialed smart people? The Internet may solve much of the problem of finding fellow smart people who share our interests and skills, but we still emotionally bond with people over dinner not over Facebook.

As for the great stagnation in real wages in particular, the biggest reason is probably the extraordinarily rapid pace at which the BRICs and developing world has become educated and accessible to the developed world since the Cold War. In other words, outsourcing has in a temporary post-Cold-War spree outraced the ability of most of us in the developed world to retrain to the more advanced industries. The most unappreciated reason, and the biggest reason retraining for newer industries has been so difficult, is that unmonetized value provides no paying jobs, but may destroy such jobs when it causes the decline of some traditionally monetized industries. On the Internet the developed world is providing vast value to the BRICs and developing world, but that value is largely unmonetized and thus produces relatively few jobs in the developed world. The focus of the developed world on largely unmonetized, though extremely valuable, activities has been a significant cause of wage stagnation in the developed world and of skill and thus wage increases in the developing world. Whereas before they were buying our movies, music, books, and news services, increasingly they are just getting our free stuff on the Internet. The most important new industry of the last twenty years has been mostly unmonetized and thus hasn’t provide very many jobs to retrain for, relative to the value it has produced.

And of course there are the challenges of the traditional industries that gave us the industrial revolution and 20th century economic growth in the first place. Starting with the most basic and essential: agriculture, extraction, and mass manufacturing. By no means should these be taken for granted; they are the edifice on which all the remainder rests. Gains in agriculture and extraction may be diminishing as the easy pickings (given sufficiently industrial technology and a sufficiently elaborated division of labor) of providing scarce nutrients and killing pests in agriculture and the geologically concentrated ores are becoming history. Can the great knowledge gains from the Internet be fed back to improve the productivities of our most basic industries, especially in the face of Malthusian depletion of the low hanging fruit of soil productivity and geological wealth? That remains to be seen, but despite all the market troubles and run-up in commodity prices, which have far more to do with financial policies than with the real costs of extracting commodities, I remain optimistic. We still have very large and untapped physical frontiers.”

What prompted Nick Szabo’s comments above is the new e-book by Tyler Cowen, The Great Stagnation, which David Brooks in his NYT column calls the ‘most debated nonfiction book this year’.

In this editorial he has written:

“Cowen’s data on these slowdowns are compelling and have withstood the scrutiny of the online reviewers. He argues that our society, for the moment, has hit a technological plateau.

But his evidence can also be used to tell a related story. It could be that the nature of technological change isn’t causing the slowdown but a shift in values. It could be that in an industrial economy people develop a materialist mind-set and believe that improving their income is the same thing as improving their quality of life. But in an affluent information-driven world, people embrace the postmaterialist mind-set. They realize they can improve their quality of life without actually producing more wealth. “

More Information:

Our readers may recall that this issue has received consistent attention on this blog:

* Eric Reasons: Value is not Capital

* Immaterial Value and Scarcity in Digital Capitalism: how semiotic transactions develop values independently of physical assets

* The great internet/p2p deflation

* The crisis of value is for real: Return on assets has declined by 75% since 1965

* The End of Economic Growth

* Douglas Rushkoff: How the Internet killed California’s economy

Find more items by searching here

Concrete examples and cases:

* The crisis of value in stock photography ; eBooks and the crisis of value in the publishing industry

3 Comments The great stagnation? Or: why internet productivity gains have been demonetized

  1. Pingback: Harold Jarche » Weekly mind-stretching

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