The economists who are doing their job badly

A couple of recent articles I have come across challenge the authority of economists, one by the great Joel Mokyr, called “What today’s economic gloomsayers are missing”, and another by Mike Masnik, entitled “Economists don’t understand the information age, so their claims about today’s economy are a joke”. Both pieces argue that as mainstream economists know nothing about how to calculate the value generated by the knowledge economy, we should take what they say with a pinch of salt.

The arguments echo many of Erik Brynjolfsson’s comments about the productivity paradox, inspired by Robert Solow’s 1987 quip in a column in The New York Times:

“You can see the computer age everywhere but in the productivity statistics.”

Obviously, technology has created huge productivity improvements. The problem was that poor old Robert Solow was unable to measure them using conventional methods: on the one hand, there were improvements in non-traditional sources of value generation such as improvements in quality, customer service, productive flexibility, etc, that traditional metrics were unable to measure. On the other hand, there was a redistribution of wealth that taken in aggregate compensated winners with losers and hid the effects. In the third place, there were time lags due to the process of technological adoption and the factors required to make use of the technology. And fourthly, there were problems derived from managing technology, which when carried out by untrained managers, or by those who were against its use, prevented immediate value creation from it.

The productivity paradox was eventually overcome by time: today it would be impossible to understand the economy without the contribution made by information technology. That said, as Mokyr’s article shows, many economists are still doing their jobs badly because they are not able to understand the information economy. So what is it they are missing?

On the one hand there is the problem of measuring: the use of a deficient metric such as GDP, which doesn’t include the value generated by products that are free to users, and that in productivity statistics appear to lack any value. Much of what is created by the information economy is simply ignored by GDP, and are not registered, leading us to make comparisons and assessments about economic growth or decline that quite simply make no sense. On the one hand, the fact that technology tends to mean cheaper and better quality goods: a computer that is twice as powerful for half the price appears in the statistics as having an economic value that is half, rather than four times greater, which is the value it really provides.

Mokyr’s example is particularly illustrative: if the technological advances that allow us to work from home or to travel in driverless cars were able to reduce by half the time that we spend travelling, that factor would only appear indirectly in productivity statistics or GDP, even though the contribution to the economy, to our happiness, and to productivity would be tremendous, and thus making technology our greatest hope, not our greatest enemy.

While economists make no real effort to understand the differentials of the information economy and the ways that it provides value, they will simply be doing their job badly, and in all probability providing arguments to support the wrong decisions.

(En español, aquí)