GDP – Consumer Surpli

Consumer surplus is defined as the difference between the highest price a consumer would have been willing to pay and the price actually paid

It’s the unquantified value customers obtain from tangible stuff they buy – such benefits include taking less time or effort to do things, obtaining more fun and pleasure from life, having more social contacts with friends and family – all things people want, all demand growth areas, but all difficult if not impossible to measure

Nowadays, statistics on tangible outputs, GDP and national productivity levels seem to be flat-lining as we simply replace stuff, once worn out or used up, rather than add to it as in the past as more of our needs were met – and much of it, thanks to productivity improvement, would be available at lower unit prices (thus lowering GDP) if it did not incorporate significant quality and design improvements

For example:

  • In 1985, about 100,000 wealthy families were willing to pay over $1,000 for a set of the Encyclopedia Britannica – some would have paid more if they had to – others would have bought if the price had been a lot less
  • To calculate GDP, government statisticians looked at the market value of actual sales and multiplied the average price by the number of units sold – $100m say
  • Nowadays, Britannica sells about 50,000 online subscriptions at $75 each – a total of less than $4m
  • So the contribution to GDP from Britannica has dropped by 97%
  • But we are better off, not worse off
  • Thanks to the internet, Wikipedia and many other sources of specialised knowledge, the cost of such information consumption has fallen to near zero
  • We’re getting a lot more and paying a lot less

A similar story can be told for many other modern goods and services e.g. phones, GPS, voice recorders, digital watches, portable music players, video cameras

But economists and national statisticians can’t cope with this consumer surplus – they use measures better suited to the 20th century tangible world, not the new 21st century intangible world

As Matt Hancock, ex Bank of England economist and now UK Health Secretary, suggests, the growth of free apps is benefiting consumers but potentially dampening economic figures: “I don’t think economics has caught up with the impact of zero marginal cost production (digital copies) or products that are free”

Indeed, we believe consumer surpli may well represent a vast black hole in the GDP universe and may well explain much if not all of the so-called ‘productivity puzzle’ currently afflicting most developed nations

As Milton Friedman once famously claimed: “There is no such thing as a free lunch” – consumers always pay, somehow – they have to offer something of value in return for any freebie they get – and freebie services have proliferated over the last decade

Freebie services are used to trap people into revealing private data about themselves and their buying interests, preferences and search criteria – data which is then sold on to a wide variety of suppliers enabling them to focus their marketing and selling efforts on people most likely to buy from them, thus maximising their ‘hit rates’ – so the more attractive a freebie service can be, the more people will sign on to it and divulge their data, making the service even more valuable

Freebie services are thus carrots, modern ‘hidden persuaders’, clever marketing ploys predominantly peddled by IT entrepreneurs – during the past decade alone we’ve enjoyed an increasing variety of them via the iPhone, Uber,  Airbnb and Amazon plus Google, Facebook, Twitter and WhatsApp – and the value of those services to their customers, if counted somehow, would surely have increased national GDP and so productivity levels well beyond those officially announced – perhaps even making up the claimed big differences (18% in the UK) between actual current GDP levels and trend levels

No wonder Professor Hal Varian, chief economist at Google says: “GDP has a very hard time with free”

And Professor Erik Brynjolfsson agrees: “They (freebies) add a lot of consumer welfare but do not show up in GDP”

To underline his view, Erik determined the value offered by many digital services which go unrecorded by GDP:

  • He paid people to stop using freebie services and worked out a ‘reservation price’ for each one – an estimate of hidden GDP
  • He found the average user:
    • Would drop Twitter for nothing
    • Valued Facebook at £85 a month
    • Wanted £470 per month to give up WhatsApp, commenting “I run my life around it – I wouldn’t be able to go to any parties on Saturdays – I wouldn’t be able to contact my babysitter”
  • He concluded that: “Some of these services have become almost indispensable”

Clearly, the actual value of this consumer surplus varies per person as each of us usually has a different maximum we will pay for anything – hence it is nigh impossible to measure it for any nation as a whole

That said, some expert has already claimed that Whatsapp alone would add 3.74% to the Dutch GDP if 10 million of the country’s 17 million people used it (n.b. another statistic that gains credibility because nobody can disprove it)

Conclusions::

  • GDP only records transactions at market prices – it’s completely silent on what we might be getting free
  • Volume of sales may have peaked but value of benefits is forever rising
  • G7 economies are currently undergoing radical changes through digitisation but economists and their performance measures are not keeping pace – they focus on tangibles that dominated growth over the last century but this new century is increasingly concerned with intangibles
  • Some new measures are needed for national productivity, prosperity and well-being

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