Erik Brynjolfsson is a professor of management at the MIT Sloan School of Management, the director of the MIT Center for Digital Business and a research associate at the National Bureau of Economic Research. Along with coauthor Adam Saunders, Brynjolfsson recently published Wired for Innovation: How Information Technology Is Reshaping the Economy with MIT Press. He took the time to speak with us about the ways in which looking at GDP can give a misleading impression of an economy’s health.
According to GDP statistics, the information sector has about the same share of the economy as it did 25 years ago despite the influx of new technologies. Why doesn’t this translate into increased revenue?
What’s happened is that we’re consuming more information than ever before, but the price for each bit of information is much less. So we end up spending no more than we did before.
You’ve discussed this trend in the recording industry. Do you see it happening elsewhere?
Absolutely. In fact, it’s most prominent in newspapers. These last few years, the revenues of newspapers have been hit hard. So have magazines and other print journalism. You can see this shift in advertising as well. People are using sources like Craigslist and eBay to post ads, and the revenues brought in that way are a fraction of what they’d be if people used newspapers.
As well, you see it in books, as there’s just beginning to be a shift to digital content through Kindle. The price to buy a book this way is about half of what it costs for print books. Of course, this shift is also allowing more obscure books to be published, allowing them to receive more attention.
You’ve talked about the fact that while GDP doesn’t increase in the information sector, consumer surplus does. How is that a boon to consumers?
Ultimately, what we care about is making consumers better off. The GDP is a rough guide to how the economy is doing. It’s historically what economists have looked at. But in looking at a surplus economy, there are lower and lower prices, which negatively affects GDP even though consumers are better off for it. So, GDP can be misleading. Take the music industry. It seems to be shrinking, but there’s not less music right now, there’s more of it for consumers, so looking at GDP can give you a misleading impression of what’s happening in terms of the industry’s ability to produce music.
How could a company use an idea like consumer surplus to its advantage?
Well, at the end of the day, what a company needs to do to succeed is make customers happy, and customer surplus is a good measure of that. If the consumer surplus is going up in an industry, then that could be a good sign for innovators in that industry, even if revenues aren’t increasing.
Policy-makers, when they’re looking at what’s happening in the economy, shouldn’t be misled thinking that a lot of information sectors aren’t growing. They are growing in terms of what consumers are getting and how they’re spending their time. So policy-makers should look at consumer surplus to get a fair look at what’s happening in the economy.
Because if you look at the way an average teenager spends his or her time these days -- on Facebook, YouTube, Wikipedia -- all of those services are free and contribute virtually nothing to GDP. But young people are the future in measuring consumers. From them, you could get the impression that the economy is tiny, but these activities are providing them leisure. It’s the way they enjoy themselves, and it’s just as valid as eating ice cream cones or riding bicycles -- things that are physical service and goods, which have higher prices and show up in GDP.
If you’re trying to understand how the economy is changing, GDP can be misleading. The revenue -- the top line -- could be a misleading indicator of the value a company is providing.
Here’s a concrete example. If you look at YouTube, it doesn’t contribute a lot of revenue, but it’s still very valuable. In 2006, it was purchased for $1.65 billion even though its revenues were only about $15 million. The revenues, in this case, were misleading in terms of measuring the amount of value the company creates.
For further information read “What the GDP Gets Wrong (Why Managers Should Care)” by Erik Brynjolfsson and Adam Saunders, which appeared in the Fall 2009 issue of MIT Sloan Management Review. The complete article is available at http://sloanreview.mit.edu/smr/.