Free stuff, enjoyment, and productivity

The Wall Street Journal ran an article yesterday about how economists in Silicon Valley, including and especially Hal Varian, Google's Chief Economist, believe that standard measures of productivity don't adequately account for the improvements to our lives that technology has ushered in.  How much easier it is to search for things, get directions, to do any number of other things that the web and smartphones other technologies have let us do.

There is some merit to their arguments, though they are awfully reminiscent of how neo-Austrian and other economists argue that products are so much better (dishwashers and cars break down less often, etc.) that we should adjust how we measure inflation, and thereby reduce the annual increases to government benefits such as Social Security, which will therefore make it easier to balance the budget.

In essence, the argument is:  if a unit of production or productivity (the ability to find a movie, cool milk, or drive a mile) is cheaper over time, people need less money to maintain their standard of living.

This flies in the face of all the research that indicates that people's perception of their economic well-being hinges less on their absolute ability to do live in a certain way than in how they compare to their neighbors.  I think, in a sense, that people feel well off if they feel that they are in a position to influence the arc of their life: that there is hope that they and their children can do and get better.

I had lunch with a guy who spends a lot of time in China a couple of days back, and I asked him if he would rather be poor in the US (where they objectively might have higher income and be able to buy more stuff) vs. rural China, and he said probably the latter.  China, messed up as it is, perceives itself to be moving forward, whereas we don't.

The other big issue with the Silicon Valley argument that the internet makes us better off because it gives us more information and more choices about a variety of things is that, as behavioral economics has taught us, more choices is not necessarily better than fewer ones.  More choices complicates decision-making, on average.  That's why there is consensus that the right number of investment options in a 401k is 10 or 12 max, because otherwise people sit around second-guessing themselves.

Oh yeah, one other thing.  If we are all sitting around looking at the internet researching and choosing and shopping, it decreases local interdependency.  People are less inclined to walk next door and ask a neighbor's opinion, and thereby get into a conversation about a thousand other things and get to knoiw one another better.  Facebook etc. facilitate complex peer-based decision-making, but in a virtual, rather than a physical model. Jane Jacobs thought that Le Corbusier and Robert Moses were the death of the neighborhood and the city, but maybe it's the internet.