verging on random

Time for a new economics

May 30, 2011 on 11:11 pm | In Uncategorized | 1 Comment

Whenever I say to my partner “Can I ask you a question?”, his answer is “OK but no math”. His struggle to comprehend the significance of numbers is a running joke between us (although in truth he exaggerates it), linked to his inability to grasp a budget as either an abstract concept or a practical domestic tool.

Economists in developed countries suffer from the opposite affliction: an incapacity to comprehend increases in material wellbeing that are not capable of being measured in dollar terms. Thus we have passages like the following from George Mason University economics professor Tyler Cowen in the New York Times:

Will the Internet usher in a new economic growth explosion? Quite possibly, but it hasn’t delivered very good macroeconomic performance over the last decade. Many of the Internet’s gains are fun — games, chat rooms, Twitter streams — rather than vast sources of revenue, and when there have been measurable monetary gains, they often have been concentrated among a small number of company founders, as with, say, Facebook. As for users, the Internet has benefited the well-educated and the curious to a disproportionate degree, but apparently not enough to bolster median income.

Cowen’s unstated but obvious premise is that if something is not bought and sold and thus adding to GDP, it has no economic benefit. This is the artificial distinction which for centuries has regarded paid employment as a hugely important component of the economy but discounted domestic labour because it does not attract a wage. This was fine as long as economics was simply the study of social activities that could be measured in money, because it was a limited and specialised discipline akin to biology or psychology. It defined its own scope and core assumptions.

Those days have long since gone and economics is now politics; the two concepts are indistinguishable. The main purpose of politics in developed countries – the main purpose of  life, in the view of a good chunk of the population – is economic growth. That is the benchmark by which any initiative or policy is evaluated: the extent to which it will facilitate or impede the relentless growth of GDP.

Cowen’s piece illustrates why this is now such a short-sighted and limiting perspective. It is simply ludicrous to suggest that activities that are ‘fun’ have no economic value. What he means is that they have no economic value unless they are bought and sold in a market, which says nothing about the wellbeing of our societies. It does, however, say a lot about the blinkered approach of conventional economics – and thus of mainstream politics.

I’m sure Cowen would happily concede that book publishers, and newspaper magnates, and TV studios, and film makers, and all the other manufacturers and distributors of 20th century ‘fun’, are engaged in economic activity no different from firms making cars or F18 bombers or building airports. What pisses him off, and what pisses capitalists generally off, is that all these fun things are now available virtually for free. But while that might reduce the level of economic activity as measured by conventional dollar metrics, it is actually increasing the supply of many items useful to and valued by ordinary people at a rate unprecedented in history.

Examples:

• I spent a lifetime collecting books, with a library of thousands of paper volumes costing tens of thousands of dollars. I recently added downloaded 1,000 or so books in the space of a couple of hours … virtually for free. I doubt that I will ever buy another book as long as I live, and I will only buy a newspaper every fortnight or so because it’s the cheapest way to get liner for the dog’s crate. The staggering volume of absurdly cheap or free reading material available on the internet means I now have a bigger library than even the richest person alive could have dreamed of owning even 20 years ago. Yet as far as economists are concerned, my change in buying habits has meant a reduction in economic activity. If everyone followed my example, they would tell us solemnly, GDP would decline by 1.3% or whatever figure their models came up with. This would therefore be a Bad Thing, even though the practical outcome was that most people were immeasurably better off.
• A similar story can be told about music and videos. My Android phones can download more mp3s in a few hours than I can listen to in a year. My partner has something like 2,000 songs on his cell phone; god knows when he thinks he will ever play them. Neither of us has paid one cent(avo) for any of them – a terrible crash in economic activity compared to the money I spent on music for most of my life, but an enormous benefit for actual people as opposed to that abstraction ‘GDP’.
• Despite the increasingly shrill complaints of academics, more and more university students are simply refusing to buy textbooks. They know there are more learning resources available online for nothing than they could possibly absorb in one semester and very sensibly see no point in paying for something they can get for nothing. The more far-sighted academics are adopting an “if you can’t beat them join them” approach and re-designing course delivery so it is based on internet resources (including full-on lecture series posted by prestigious institutions such as MIT), all of which is free. Another victory for actual people who can get things without having to pay for them, another blow to ‘the economy’.

The problem – to the extent there is one – lies not in the huge productivity increases that information and communication technology has generated around the world; it rests in the perception that the only worthwhile human activity is that which can be traded or at least measured in terms of money. ICT means that perception is now fundamentally flawed, despite the best efforts of people like Rupert Murdoch to stuff the genie back in the bottle and transform everyone back into paying customers. It’s far too late for that. Indeed one has only to look at the swelling flood of free applications being generated for the Android operating system to realise we are in a new era: one where vast amounts of use value for billions of people will be generated by people with little effort and for no reward. It’s the digital equivalent of the miracle of the loaves and the fishes. When it costs nothing to distribute a file to everyone in the world, what sane social arrangement will for long insist that people pay for it?

It’s an exciting time, and it is improving the lives of the global population in all kinds of ways that we are only just beginning to be aware of, let alone understand. For an economist to observe that ‘the Internet has benefited the well-educated and the curious to a disproportionate degree’ is the hallmark of an incurious and therefore uninformed mind. He ought to visit the Philippines some time to see how the internet has benefited millions of poor people who haven’t even finished high school. And to remark complacently that because it hasn’t generated ‘vast sources of revenue’ the internet ‘hasn’t delivered very good macroeconomic performance over the last decade’ is to demonstrate that macroeconomic performance is not an especially relevant measure of material wellbeing. It’s a very old-fashioned mindset that still equates value with ‘making things’.

Economics (and accounting, at the level of the firm – how can any conventional accounting measures accommodate the value of Facebook or Google for example? $5 or 10 billion for ‘goodwill’? ) has struggled more and more to retain intellectual integrity in recent decades. This would not be a matter of concern if economics was only an academic discipline; after all philosophy (once so closely allied to economics) is also in apparent terminal decline but that is only a worry for those of us who indulge in philosophy. Economics on the other hand is the contemporary secular religion, complete with an elaborate panoply of priests and rituals and sects and sacred texts.

It’s time community leaders – including but not limited to politicians – showed some courage and began to articulate more forcefully the argument that economics takes a somewhat obsessive and seriously misconceived view of what matters in society and how to evaluate it. While it has many valuable insights to offer, economics should not have any more prominent role in determining public policy than any other discipline concerned to study and evaluate ways of fostering the greatest good for the greatest number in our increasingly crowded and stressed world. While unfortunately they don’t have any monasteries we can confiscate, we should at last put economists back into the spartan university offices where they belong and start subjecting the economic pundits of this world to the derision they so often deserve.