Jan 7, 2013

How the internet killed GDP as a reliable economic barometer

The shift from newspapers and physical retailers to the internet has dragged down GDP -- but that isn't a bad thing in itself. It's the economic measure that may now be wrong.

Adam Schwab — Business director and commentator

Adam Schwab

Business director and commentator

If you're an economist you probably shouldn't like the internet -- it's turned the notion of GDP into a fool's errand. But it hasn't stopped banks, governments and the media from slavishly using GDP as their economic indicator of choice. Recessions are defined by GDP (a recession being two consecutive quarters of GDP negative growth); Central Banks, the unelected bastion of economic fortitude, closely monitor GDP and inflation when it determines the price of money. In reality, as a key indicator -- especially of living standards -- GDP data tells us little of what we really want to know. And if GDP was misleading before, it's been rendered almost irrelevant by the internet. Consider the effect on media, specifically newspapers -- an outlet for advertisers to reach an audience, traditionally through classified ads. In order to reach the largest possible audience, newspapers combined classified advertisements (their actual business) with the provision of news (which was an ancillary service intended only to assist with the furtherance of their actual business, which was selling advertising). It worked well for about 150 years. And the effect on GDP was significant. For a start, newspapers needed to hire journalists to write the news, plus editors and designers, photographers, typesetters (to ensure the ads appear as they should), with layers of management and finance and marketing teams. Plus the staff employed in the physical production of papers, newsagents, delivery boys and girls, etc. Along the entire chain GDP was being "created" by newspapers -- and built into the price paid by advertisers and readers -- and in the significant investment needed for offices and printing presses. The internet changed all that. In hindsight, all that GDP wasn't especially efficient, as investment essentially creating a way for advertisers and their customers to connect (the side effect of providing news and greasing the wheels of democracy was merely a bonus). The internet connected classified advertisers with people looking to buy things, for a fraction of the investment. In Australia, Seek took a stranglehold on employment advertisements, Carsales took over vehicles while (itself partially owned by a newspaper company) dominated the market for property advertisements. While few would criticise their contribution to the economy, in pure GDP terms those three companies contribute far less than old fashioned newspapers. Seek (which has a market value which is more than double that of Fairfax), Carsales and achieve all the benefits of a newspaper business but without most of the costs and investment. To place an advertisement online all an advertiser needs is a website, some support staff and advertising to tell people the website exists. No need to invest $500 million in a printing plant (which would lead to a significant boost to GDP), no need to pay for journalists, editors and copywriters. The internet turned an inefficient model for connecting advertisers and customers into an efficient one -- and in doing so, reduced GDP. The same thing is happening in retail (although to a lesser extent). Successful online retailers like Catch of the Day or Kogan operate with far less staff and, more importantly, far less investment than traditional "bricks and mortar" retailers like Harvey Norman or Myer. Kogan is arguably the most pure retailer, acting in effect as a translator of sorts between overseas-based manufacturers and customers. No need to spend hundreds of millions of dollars building and fitting out (and owning) a stores. Kogan turns every computer or mobile phone into a shopfront. That's bad news for GDP. Few would dispute the tectonic changes the internet has caused in media and retail. In both sectors, the internet has reduced inefficiencies and removed much of the need for capital and labour, allowing costs to be brought down for consumers. This of course causes GDP to be less than it otherwise would have been (consumption and investment make up most of it). Like newspapers or rent-geared retailers, has GDP's time come as a key indicator? Surely economists need to consider a new metric to determine success or failure. If the last decade has shown us anything, sometimes, lower GDP may actually be a good thing.

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7 thoughts on “How the internet killed GDP as a reliable economic barometer

  1. Some Dude

    I never comment… but are you for real? At the very worst, aren’t we just in the middle of a structural shift slash adjustment phase… GDP growth is relative from one year to the next, is it not?

    Therefore, once the shift to more efficient business practices (i.e. widespread and wholesale adoption of the internet as a channel) is nearing, GDP may make ‘more sense’.

  2. Chris Sanderson

    Yes, well GDP is on its way out anyway as an appropriate way to measure the prosperity of a nation. As we approach low growth economies we need better measurements, which include the quality of life. Try ‘Prosperity without Growth’ by Tim Jackson.

  3. Geoff Dunstan

    Adam is absolutely right in challenging GDP as a SOLE indicator of economic health/progress. In this aspect he is not alone. New media, changed product profiles, the growing “velocity” of the economic components lead to almost double counting in some areas – and who knows the true value of the now major “Services ” sector ?

    In this context, Steve Keen’s work on “A Theory of Wealth” is worth a read.

  4. nullifidian

    Surely GDP has long been a poor indicator of economic well being; I remember Robert Kennedy’s eloquent demolition of the measure almost 50 years ago. The mystery is why many economists and and technocrats have clung to it for so long. Any measure that includes consumption, unproductive activity and repatriation of profits offshore but excludes unpaid work should not be used to determine policy. One can understand why the banks and financial advisors cling to the concept, as their primary role is to promote debt. However, in these times of overpopulation, global warming and habitat destruction, any adherance to GDP as a indicator of anything useful is positively harmful.

  5. David Hand

    GDP is an inexact measurement as pointed out by a couple of other commenters. An area missed from GDP is barter and another is subsistance production. If I buy oranges from the supermarket, my consumption counts but if I have an orange tree in my back garden and eat them, it doesn’t.

    However within its limitations, GDP is useful to a degree. One weakness with quality of life measurements is that they can become excuses for failure to deliver what most people want – a better life for their children. Many important things such as health and education services must be paid for and a growing economy increases our ability to deliver them.

    But Adam is way off track with the notion of the internet killing GDP as a measurement. He is merely describing the revolution that the internet represents as a massively more productive and efficient way to communicate information.

    Physical newspapers contribute to GDP in the same way pick and shovel gangs did on the railways. Resources that used to be spent on paper will be diverted to other goods and services. This has been going on since James Watt invented the steam engine, triggering the industrial revolution.

  6. cpobke

    what David said. This article is a bit of a shocker. short comings of GDP are widely known. Nevertheless, it remains a useful indicator.
    Adam has got to the point of a hypothesis here (that internet has caused a decline in measured GDP), but offers no evidence in support of it, or in rebuttle to the vast body of evidence that suggest the complete opposite of his hypothesis.

  7. Dogs breakfast

    I wouldn’t be so hard on Adam here. Although the analogy is not just for the internet, the fact that efficiencies generally result in reductions in GDP are valid. The internet will in time do this to a much greater measure, and in that sense the point is made.

    On the other hand, GDP is a debacle and should be dropped altogether as a measure of anything. If you are going to use it then GDP per head of population would be the relevant measure, not this ridiculous use of an overall figure (which plays into the hands of the ‘over-populate or perish’ mantras)

    Of course, the argument has been made many times over. An absence of war and blowing things up will show up over time as a reduction in GDP.

    A great measure, of what exactly. D’oh!

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