Where have you read this before:
The physical economy is anemic, struggling, biased toward inflation, and shrinking in many developed countries. Almost everything we do in the physical economy is paid for with money. We use dollars to measure most of the activity. If more dollars are spent or earned, we conclude that the economy is growing.
The virtual economy is robust, biased toward deflation, and growing at staggering rates, everywhere. A lot of the services provided to us in the virtual economy are free. If we paid dollars for those services, they would be counted as part of the GDP and would add to economic growth. But we don’t so they are not counted.
Using the virtual economy in place of the physical economy enables consumers to save lots of money. For example, consumers can substitute Google News for their newspaper. The cost of a USA Today subscription is $275. His earnings will look the same, but he has more money at his disposal and more or less the same consumption. Essentially, he is earning more, but neither his income nor GDP will show it.
Bill Davidow, in an article at The Atlantic, has touched one of the fundamental problems complicating our efforts to adapt to a post-Cold War world. Our metrics don’t work.
The vast, accelerating revolution in information technology has produced improvements in our lifestyles which, while impressive, are also radically deflationary. When millions of people shift to buying cheaper ebooks instead of traditional print books they create exciting new markets with new opportunities for authors to bypass literary gatekeepers and reach a new audience. They also create a giant hole in economic output by traditional measures.
As I’ve pointed out before, a new car bought this year typically costs slightly less in inflation-adjusted terms than it did thirty years ago. That vehicle has a slew of features from safety measures to a Bluetooth phone connection that didn’t even exist back then, but that lower price results in a drop in measured output. We can expect to see a similar dynamic in healthcare as higher rates of insurance coverage begin driving down medical costs. We are experiencing a revolution in the economic value available to everyone, sometimes free, that shows up in our economic metrics as declining output.
Economists have been mulling this problem for a while, but it will be tough to fix it. Economics as a discipline has biases built into its foundations that feed this distorted understanding of value. Until we devise an alternative, GDP will be yet another example of the ways that Economics is failing us.