We've Never Had It So Good

Author:Mr Ian Stewart

It's not hard to think of ways in which technology has changed society over the last couple of decades. Innovations such as on-line shopping, Smartphones and tablets have fundamentally altered our everyday lives.

Yet such technologies appear to have done little to raise productivity growth and GDP growth. This is in marked contrast to previous waves of technology, such as the application of steam power and electrical power, which lifted recorded rates of GDP growth.

Growth rates are, of course, a product of numerous factors, of which technology is but one. But it is striking that growth in the richest nations of the world, those where new technology takes root first, has slowed in the last 25 years.

This gap between apparently transformational technologies and uninspiring growth rates is not new. In 1987 the US economist and Nobel laureate, Robert Solow, famously observed that, "You can see the computer age everywhere but in the productivity statistics".

One explanation is that the data are right and that today's technologies have indeed failed to raise growth rates. This case is made by another US Nobel Laureate, Robert Gordon. He argues that past innovations, such as indoor plumbing, antibiotics and the internal combustion engine, transformed society and human welfare. By comparison the likes of apps, tablets and 4G are, to Gordon, small beer. 

A more optimistic interpretation is that today's technologies are raising welfare, but in ways that are poorly measured by the conventional yardsticks of productivity and GDP.

GDP is based on measuring monetary transactions. This helps capture the benefits of purchases of goods and services. But many of today's technologies are, in part or in full, free, paid for through advertising or by patient shareholders or created by other users. GDP struggles to incorporate the value to consumers of products such as Google or Wikipedia.

Consumers have always sought out products or services which give them the maximum benefit, or utility, for the minimum cost. The gap between the benefit we derive and the price we pay is known as the consumer surplus. And every rational consumer wants to maximise it.

But the measurement problem has become more acute as the information revolution creates more free or nearly free services. The effect on GDP of buying such services is zero or small, but the effect on the consumer surplus, and welfare, is far greater. New technology means that the gap between measured GDP and...

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