Hal Varian writing at the IMF:
Intelligent Technology: A computer now sits in the middle of virtually every economic transaction in the developed world. Computing technology is rapidly penetrating the developing world as well, driven by the rapid spread of mobile phones. Soon the entire planet will be connected, and most economic transactions worldwide will be computer mediated.
Data systems that were once put in place to help with accounting, inventory control, and billing now have other important uses that can improve our daily life while boosting the global economy.
Computer mediation can impact economic activity through five important channels.
Data collection and analysis: ...
Personalization and customization: ...
Experimentation and continuous improvement: ...
Contractual innovation: ...
Coordination and communication: ...
Putting it all together
Today’s mobile phones are many times more powerful and much less expensive than those that powered Apollo 11, the 1969 manned expedition to the moon. These mobile phone components have become “commoditized.” Screens, processors, sensors, GPS chips, networking chips, and memory chips cost almost nothing these days. You can buy a reasonable smartphone now for $50, and prices continue to fall. Smartphones are becoming commonplace even in very poor regions.
The availability of those cheap components has enabled innovators to combine and recombine these components to create new devices—fitness monitors, virtual reality headsets, inexpensive vehicular monitoring systems, and so on. The Raspberry Pi is a $35 computer designed at Cambridge University that uses mobile phone parts with a circuit board the size of a pack of playing cards. It is far more powerful than the Unix workstations of just 15 years ago.
The same forces of standardization, modularization, and low prices are driving progress in software. The hardware created using mobile phone parts often uses open-source software for its operating system. At the same time, the desktop motherboards from the personal computer era have now become components in vast data centers, also running open-source software. The mobile devices can hand off relatively complex tasks such as image recognition, voice recognition, and automated translation to the data centers on an as-needed basis. The availability of cheap hardware, free software, and inexpensive access to data services has dramatically cut entry barriers for software development, leading to millions of mobile phone applications becoming available at nominal cost.
The productivity puzzle
I have painted an optimistic picture of how technology will impact the global economy. But how will this technological progress show up in conventional economic statistics? Here the picture is somewhat mixed. Take GDP, for example. This is usually defined as the market value of all final goods and services produced in a given country in a particular time period. The catch is “market value”—if a good isn’t bought and sold, it generally doesn’t show up in GDP.
This has many implications. Household production, ad-supported content, transaction costs, quality changes, free services, and open-source software are dark matter as far as GDP is concerned, since technological progress in these areas does not show up directly in GDP. Take, for example, ad-supported content, which is widely used to support provision of online media. In the U.S. Bureau of Economic Analysis National Economic Accounts, advertising is treated as a marketing expense—an intermediate product—so it isn’t counted as part of GDP. A content provider that switches from a pay-per-view business model to an ad-supported model reduces GDP.
One example of technology making a big difference to productivity is photography. Back in 2000, about 80 billion photos were taken worldwide—a good estimate since only three companies produced film then. In 2015, it appears that more than 1.5 trillion photos were taken worldwide, roughly 20 times as many. At the same time the volume exploded, the cost of photos fell from about 50 cents each for film and developing to essentially zero.
So over 15 years the price fell to zero and output went up 20 times. Surely that is a huge increase in productivity. Unfortunately, most of this productivity increase doesn’t show up in GDP, since the measured figures depend on the sales of film, cameras, and developing services, which are only a small part of photography these days.
In fact, when digital cameras were incorporated into smartphones, GDP decreased, camera sales fell, and smartphone prices continued to decline. Ideally, quality adjustments would be used to measure the additional capabilities of mobile phones. But figuring out the best way to do this and actually incorporating these changes into national income accounts is a challenge.
Even if we could accurately measure the number of photos now taken, most are produced at home and distributed to friends and family at zero cost; they are not bought and sold and don’t show up in GDP. Nevertheless, those family photos are hugely valuable to the people who take them.
The same thing happened with global positioning systems (GPS). In the late 1990s, the trucking industry adopted expensive GPS and vehicular monitoring systems and saw significant increases in productivity as a result. In the past 10 years, consumers have adopted GPS for home use. The price of the systems has fallen to zero, since they are now bundled with smartphones, and hundreds of millions of people use such systems on a daily basis. But as with cameras, the integration of GPS with smartphones has likely reduced GDP, since sales of stand-alone GPS systems have fallen.
As in the case of cameras, this measurement problem could be solved by implementing a quality adjustment for smartphones. But it is tricky to know exactly how to do this, and statistical agencies want a system that will stand the test of time. Even after the quality adjustment problem is worked out, the fact that most photos are not exchanged for cash will remain—that isn’t a part of GDP, and technological improvements in that area are just not measured by conventional statistics.
Will the promise of technology be realized?
When the entire planet is indeed connected, everyone in the world will, in principle, have access to virtually all human knowledge. The barriers to full access are not technological but legal and economic. Assuming that these issues can be resolved, we can expect to see a dramatic increase in human prosperity.
But will these admittedly utopian hopes be realized? I believe that technology is generally a force for good—but there is a dark side to the force (see “The Dark Side of Technology,” in this issue of F&D). Improvements in coordination technology may help productive enterprises but at the same time improve the efficiency of terrorist organizations. The cost of communication may drop to zero, but people will still disagree, sometimes violently. In the long run, though, if technology enables broad improvement in human welfare, people might devote more time to enlarging the pie and less to squabbling over the size of the pieces.