Readers already know we believe the wise men and women leading G7 and many other nations follow the wrong stars, not least because they’re the only ones available to them.
In our view, GDP, the official measure of national output, has serious measurement flaws
And national productivity is assumed to be GDP output divided by just labour numbers or hours, thus ignoring labour quality, capital, energy and information inputs – it’s thus just a partial measure of productivity at best – and there’s no official measures of the increasingly important ‘Quality of Life’ that most people experience.
And this performance measurement fog covers organisations too, whether at board, process or task level.
Whatever the sector, most organisations have more than enough financial measures but lack useful sets on customer outcomes, productivity and waste, corporate knowledge and employee motivation levels.
With that in mind, we chanced on the following podcast between Lareina Lee of McKinsey & Co and Professor Erik Brynjolfson of Stanford University whose views are always worth considering.
______________________________________________________________________________________
Lareina Yee: One of my earliest memories of studying economics is learning the concept of GDP, but you have a very different take on it. Can you tell us how we need to evolve our thinking?
Erik Brynjolfsson: First, let me praise GDP. It was one of the great inventions of the 20th century when Simon Kuznets and his team devised it in the 1930s. That said, great as it was for the 20th century, I don’t think it’s the best way to measure things in the 21st century.
We’ll want to keep GDP around for certain things. But we’re developing a new metric called GDP-B.
The “B” stands for benefits, which measures the value consumers derive from these goods and services, as opposed to what they cost. So while GDP measures all the things that are bought and sold in the economy, that means that if something has zero cost, with a few exceptions, it has zero weight in calculating GDP.
But this podcast is going to be free, right? The average American spends about nine hours a day looking at screens of various sizes. That means they’re mostly consuming digital information. And a lot of that digital information is just invisible in the GDP statistics.
The idea of GDP-B is looking at how much value you get from something even if it’s free.
So maybe you get $10, $20, or $50 a month of value from Wikipedia, and get some value from Google search, Google Maps, and all the other digital goods and services. If you add all that up nationwide, or globally, it amounts to trillions of dollars in value. And as that digital part of the economy grows, it’s going to be more important for us to measure where the value is coming from, not just what we’re paying.
Lareina Yee: So if I’m at a company and am about to launch a set of big bets on generative AI solutions and would like to incorporate the concept of GDP-B into my work, how would I start to think about that?
Erik Brynjolfsson: We typically do a massive number of online-choice experiments that involve offering people compensation to stop using a particular good or service.
So we might ask some people, “If I paid you $10, would you stop using Facebook for a month?”
Some people will say yes, and others no.
You then vary the amounts you offer by as little as $1 or as much as $100. And if you do this with enough people, you start getting a range of answers, and you start generating a demand curve where you’ll find that more people will say yes to the larger amounts and fewer people will say yes to smaller amounts.
That produces a downward-sloping demand curve, so you now have a sense of what the demand is for Facebook.
By doing this at scale with hundreds of thousands or millions of people, you start getting a sense of what parts of the company’s goods and services are actually being valued by the customers.