Tuesday, November 9, 2010

Consumer surplus in the digital economy

This blog post by Matthew Yglesias has an interesting perspective on the economic impact of producing information goods.

"The gap between what a given sector contributes to measured GDP and what it contributes to human well-being has always been with us. But the ways in which digital technology makes the non-commercial production and dissemination of information goods viable opens up vast new horizons of consumer welfare. Whether or not someone would 'enjoy' manufacturing automobiles in his spare time as a hobby and distributing them to hundreds of thousands of people for free, it’s not possible to do. The marginal cost of building a car is pretty high, distributing cars is difficult, and the start-up costs of building a car factory are enormous."

Is this reasoning entirely true?


  1. I absolutely agree. I was just thinking about this, in fact.

    Nearly all of the content I consume online has a price of zero. How do you multiply the quantity of content (whatever that even means--bits? words? hours of video or audio?) by the price, when the price is zero? This must be massively underrepresented in GDP, right?

  2. After writing that comment it occurred to me that I had missed the point. What Yglesias was getting at was the fact that well-being is improved because we are now able to produce things we enjoy producing at a low cost, not just consume them.

    I have to think this is true. How many people who have given up on a career in writing have loved the ability to at least put their stories out in public?

  3. There are so many ways to dissect this issue/discussion it makes the head spin... but let me put my neck out there and and try one :)

    As it has been said, "There's no such thing as a free lunch" (apologies for bring out that tired old horse). There is consumption going here, just not the way we are used to seeing it. We typically see consumption translated into a universal unit (dollar); but in this case it's not.

    The consumer bought a device, paid for a connection, and invested time. We have no way of knowing if the value derived from consuming a particular information product (or entertainment product) in this environment exceeds appropriately allocated costs. In aggregate maybe the total value derived exceeds the costs – but Yglesias’s argument doesn’t get us there.

    The latent car producing hobbyist would produce cars if the value derived from doing so exceed the costs, but the latent hobbyist code cutter (or videographer, or writer, etc) faces the same hurdle. Production costs for these other goods have obviously decreased, but like the consumption side – can we say that the producer derives value over and above what is consumed in production? What about the countless people who write a blog that no one reads? In aggregate maybe the total value derived doesn't exceed the costs of production – but Yglesias’s argument doesn't get us there.

    I’m all for the argument that (in the aggregate) huge surpluses are being created – but modeling & proving this is much more complex than it may initially seem.

  4. The first sentence, the gap between GDP and real contribution. I would say false. GDP will always attempt to measure all perceived value when transactions costs allow.

    Second, the effect of the information tech. Digital systems lower part of the transaction cost, the search part. They have greatly complicated the second part, the delivery.

    The "vast new horizons" represent the information shock suddenly telling us more about where goods are distributed. The 'horizon' part is how do we get goods from where they are to where we want them, a band new transportation problem.

    Actually we all design automobiles on the web, that is how we get the EV. Probably half the design of the Volt was a collaboration, on the web, between customers, managers, government, consumers, influence groups and engineers. I can, right now, order all the parts I need, online, for a simple home built EV. Ironically, that is the problem, that is why we are in a depression, my ability to do just that has overwhelmed transportation.

  5. If you think of the iPhone in terms of the graphs presented, I don't think it's demand curve would be very steep. iPhones are pretty expensive and definitely not a necessity for people like food/fish. Because of this, there are a lot of free apps for iPhones. And it contributes to Apple's botttomline because all the apps increase the utility of the phone. So the benefits are limited to those who can afford the phone and the company, I don't think that the impact is as widespread as implied in this article. But that may just be that iPhones is a bad example. A better one would be Wikipedia and other completely free open source technology which really increase consumer welfare.

  6. How does the economy, not in theory, but in practice, tell us when production has outran consumption? What should happen to balance, and what does, actually, happen?