Incentives matter. This is a fundamental tenet of economics: People respond to their incentives. If something in a market seems to be going wrong, it’s because the incentives have gotten screwed up.
Looking at the market for education, it’s hard not to think that there’s something wrong with the incentives. Tuition keeps going up and so does debt. The percentage of people who are not paying off that debt — either because they are in default, deferment, or an income-based repayment program — is staggering. Naturally, a lot of folks would like to get the government in there to start tweaking those incentives until the market stops being so crazy.
One issue involves the incentives that schools have to ensure that their graduates get value out of their degrees. At the moment, a school can enroll you in practically any program, and the government will lend you money for tuition and living expenses, whether or not that degree is likely to produce the means to repay the loan. Since schools are often in a better position to know the economic value of their degrees than naive potential students, that twists the incentives. Eventually, the student will pay, either with money or trashed credit. If the loan defaults, taxpayers will pay too. The school has the most information about the transaction and yet it has the least at stake. No wonder we have such high tuition, so many dubious degree programs and such a troubling rate of default.
Megan McArdle, “Don’t Make Colleges Pay for Student-Loan Defaults”, Bloomberg View, 2016-09-07.
July 17, 2018
QotD: The incentive problem for universities
July 16, 2018
QotD: The Great Enrichment
Look at the astonishing improvements in China since 1978 and in India since 1991. Between them, the countries are home to about four out of every 10 humans. Even in the United States, real wages have continued to grow — if slowly — in recent decades, contrary to what you might have heard. Donald Boudreaux, an economist at George Mason University, and others who have looked beyond the superficial have shown that real wages are continuing to rise, thanks largely to major improvements in the quality of goods and services, and to nonwage benefits. Real purchasing power is double what it was in the fondly remembered 1950s — when many American children went to bed hungry.
What, then, caused this Great Enrichment?
Not exploitation of the poor, not investment, not existing institutions, but a mere idea, which the philosopher and economist Adam Smith called “the liberal plan of equality, liberty and justice.” In a word, it was liberalism, in the free-market European sense. Give masses of ordinary people equality before the law and equality of social dignity, and leave them alone, and it turns out that they become extraordinarily creative and energetic.
The liberal idea was spawned by some happy accidents in northwestern Europe from 1517 to 1789 — namely, the four R’s: the Reformation, the Dutch Revolt, the revolutions of England and France, and the proliferation of reading. The four R’s liberated ordinary people, among them the venturing bourgeoisie. The Bourgeois Deal is, briefly, this: In the first act, let me try this or that improvement. I’ll keep the profit, thank you very much, though in the second act those pesky competitors will erode it by entering and disrupting (as Uber has done to the taxi industry). By the third act, after my betterments have spread, they will make you rich.
And they did.
Dierdre N. McCloskey, “The Formula for a Richer World? Equality, Liberty, Justice”, New York Times, 2016-09-02.
July 14, 2018
Hernando de Soto Knows How To Make the Third World Richer than the First
ReasonTV
Published on 13 Jul 2018The Peruvian economist says blockchain technologies and social media will transform the planet by securing property rights.
—————-In the spring of 1989, Chinese students occupied Tiananmen Square, erected a replica of the Statue of Liberty, and called for democracy and individual rights. By the fall, people living in East Germany took hammers and chisels to the Berlin Wall, unleashing a wave of revolutions that ultimately led to the collapse of the Soviet Union. It was an auspicious year for human freedom.
Nineteen eighty-nine was also the year that Peruvian economist Hernando de Soto published The Other Path: The Invisible Revolution in The Third World, which radically challenged conventional wisdom about the underlying cause of persistent poverty in the post-colonial landscape. Drawing on his extensive field work with the Peruvian-based think tank the Institute for Liberty and Democracy, de Soto argued that people were pushed into the black market and wider informal economy because governments refused to recognize, document, and promote legal ownership of land and other assets.
Without clear title and the right to transfer property, common farmers understandably refused to invest much in the land they tilled, and they couldn’t use it as collateral. This created what de Soto later called “citadels of dead capital” with value that could never be fully accessed.
No one, he argued, would plan for the future if everything they accumulated could just be taken away. As much an activist as an intellectual, De Soto has been called “the world’s most important living economist” by former President Bill Clinton. He is credited with changing policy in Peru and elsewhere by pushing governments to create property regimes that are public, transferable, and secure. His latest endeavor is a partnership with Overstock.com founder Patrick Byrne and others to use blockchain technology and social media to create totally public and perfectly transparent records of ownership.
Reason‘s Nick Gillespie caught up with de Soto in Washington, D.C. in June, where he received the Competitive Enterprise Institute’s Julian L. Simon Memorial Award, named for the late free-market economist who believed that “mankind is the ultimate resource.”
Trump’s tariffs are working
Tim Worstall explains that the recent US price hikes in washing machines is exactly what the Trump administration wanted:
The part of import tariffs that all too many fail to understand is that it is consumers being “protected” by them who actually pay them. That is, import tariffs on foreign goods entering the United States are paid by those inside the United States. Or, as we can also put it, Trump’s tariffs are making Americans poorer. This isn’t a known to be desired effect of economic policy.
However, it’s important to note that the real burden doesn’t come from the rise in price of the imports. It’s what the domestic producers do to us all in the absence of that foreign competition which is important:
The clear and obvious effect of import tariffs – Credit, BLS, via Mark Perry and AEI, by permission
If you’re unfortunate enough to be shopping for a new washing machine, you can thank the Trump tariffs on imported washing machines, washing machine parts, steel and aluminum for the largest three-month price increase — 16.4% from February to May this year — in the 40-year history of the BLS series for Major Appliances: Laundry Equipment that started in January 1978 (see chart above). In the May CPI report (see Table 2), the one-month increase in the CPI for Laundry Equipment of 7.4% in May followed a 9.6% increase in April, and in both months was the largest monthly price increase of any of the 300 individual CPI categories or sub-categories. For the month of May, the 7.4% increase in the washing machine series was twice the increase of the next highest increase of 3.7% for educational books and supplies (mostly college textbooks).
What’s worse than this price rise is that this is planned. This is the desired outcome from the people who imposed these taxes.
July 12, 2018
“And that is how the Flat Century dies. Upstairs, downstairs isn’t just our past, it’s our future”
ESR looks in his crystal ball and finds a much less egalitarian future lurking just ahead of us:
I think we all better hope we get germ-line genetic engineering and really effective nootropics real soon now. Because I think I have seen what the future looks like without these technologies, and it sucks.
A hundred years ago, 1918, marked the approximate end of the period when even middle-class families in the U.S. and Great Britain routinely had servants. During the inter-war years availability of domestic servants became an acute problem further and further up the SES scale, nearly highlighted by the National Council on Household Employment’s 1928 report on the problem. The institution of the servant class was in collapse; would-be masters were priced out of the market by rising wages for factory jobs and wider working opportunities for women (notably as typists).
But there was a supply-side factor as well; potential hires were unwilling to be servants and have masters – increasingly reluctant to be in service even when such jobs were still the best return they could get on their labor. The economic collapse of personal service coincided with an increasing rejection of the social stratification that had gone with it. Society as a whole became flatter and much more meritocratic.
There are unwelcome but powerful reasons to expect that this trend has already begun to reverse.
[…]
But now it’s 2018. Poverty cultures are reaching down to unprecedented levels of self-degradation; indicators of this are out-of-wedlock births, rates of drug abuse, and levels of interpersonal violence and suicide. Even as American society as a whole is getting steadily richer, more peaceful and less crime-ridden, its lowest SES tiers are going to hell in a handbasket. And not just the usual urban minority suspects, either, but poor whites as well; this is the burden of books like Charles Murray’s Coming Apart. J. D. Vance’s Hillbilly Elegy, and the opioid-abuse statistics.
It’s hard not to look at this and not see the prophecies of The Bell Curve, a quarter century ago, coming hideously true. We have assorted ourselves into increasing cognitive inequality by class. and the poor are paying an ever heavier price for this. Furthermore, the natural outcome of the process is average IQ and other class differentiating abilities abilities are on their way to becoming genetically locked in.
The last jaw of the trap is the implosion of jobs for unskilled and semi-skilled labor. Retail, a traditional entry ramp into the workforce, has been badly hit by e-commerce, and that’s going to get worse. Fast-food chains are automating as fast as political morons pass “living wage” laws; that’s going to have an especially hard impact on minorities.
But we ain’t seen nothing yet; there’s a huge disruption coming when driverless cars and trucks wipe out an entire tier of the economy related to commercial transport. That’s 1 in 15 workers in the U.S., overwhelmingly from lower SES tiers. What are they going to do in the brave new world? What are their increasingly genetically disadvantaged children going to do?
Here’s where we jump into science fiction, because the only answer I can see is: become servants. And that is how the Flat Century dies. Upstairs, downstairs isn’t just our past, it’s our future. Because in a world where production of goods and routinized service is increasingly dominated by robots and AI, the social role of servant as a person who takes orders will increasingly be the only thing that an unskilled person has left to offer above the economic level of digging ditches or picking fruit.
Infrastructure has costs as well as benefits
Tim Worstall makes a sensible point that applies (to a greater or lesser extent) to most of these “we’re dropping down the league tables in telecommunications” stories:
The Daily Mail is reacting with horror to the thought that the UK has slipped down the broadband tables. We’re only 35th in the world for average speed now! The correct answer to which is that yes, of course the UK’s broad band speeds are slow, we’re a developed and rich country. Which doesn’t mean that yes we’ll have the latest in shiny infrastructure. Rather, it means that we put in infrastructure some time ago and thus have the infrastructure from some time ago. You know, having infrastructure being one of the things which makes you a rich and developed nation?
Britain has slipped four places in the world broadband speed league, leaving its network lagging well behind the likes of Latvia, Lithuania, Hungary and Romania.
The UK is the sixth largest economy in the world but has dropped to 35th in the rankings after being overtaken by France and even Madagascar, according to the latest analysis.
As other countries rush to install fibre-optic cable networks which are capable of providing superfast download speeds, much of Britain continues to rely on old copper telephone wires to connect homes to the web.
Well, yes, the point being that we had a copper based network which went to pretty much everywhere. Thus we’ve not rushed to put in the fibreoptic because we’ve actually not needed it. Hey, sure, maybe it would be nice. Maybe it’s something we will install everywhere in the future. But we’ve not done it as yet because there’s not been a pressing case for that investment.
You see, our forebears already invested in the copper for us.
As a general rule of thumb, the earlier you invested in your telecommunications network, the slower it will be compared to current technology. At some point, it becomes economical to replace the installed network, but as long as the existing infrastructure is providing a profit, there isn’t the sense of urgency that most of these “the sky is falling” articles imply.
July 11, 2018
QotD: Measuring consumer surplus
Consumer surplus is one of those things which is really, really, difficult to measure. This paper is one of the few that’s able to give us a hard number. But what it is is, really, “how much I would have been willing to pay but didn’t have to?” Say that we’re out and you’re thirsty and I’m not very. You suggest we have a Coke. You’re really interested in this, you’d pay $2 for one, I’m, well, meh, I’d only pay $1 for one. Obviously, the Coke seller (no, not the coke one, that’s different) doesn’t know this so he charges us the same price – $1 each. I’ve gained no consumer surplus I paid a buck for something I value at a buck, you gain $1 of surplus because you would have paid $2 but only paid that buck.
In one manner the consumer surplus is a result of mass manufacturing and marketing. We’re pumping out millions of whatever it is, we’ve got to have a “market price” and some people will value it, whatever it is, at more than that. That greater valuation is that consumer surplus. Without a producer knowing what your individual demand curve is they cannot charge you the full value you ascribe to it.
Of course, they try as hard as they can to do so. This is what brands and product differentiation are all about. VW and car brands for example – there’re SUV models built on roughly the same platform in the Skoda, VW, Audi and Bentley ranges. Oh yes, they’re different cars alright. But perhaps not $300,000 different, which is the price gap between the top and bottom there. Some of this (but please note, only some of this) is because there are people who will pay a fortune to swank around in a Bentley and there are many more who will not, thinking a Skoda is just fine (I do a little work for the company and the new Skoda SUV is indeed very fine but then I would say that, wouldn’t I?). That’s product differentiation.
Another example is what used to happen in old fashioned English pubs – in the public bar and the saloon. The latter had carpets and comfy chairs, the former very definitely not. Beer was 10% more expensive if you wanted the comfy chair experience – very simple and remarkably successful product differentiation. Being able to charge different prices to different groups for much the same thing. Or as it often used to work out, different prices to the same person on different occasions. Dates were in the saloon bar….
Tim Worstall, “Freakonomics’ Steven Levitt On How Inefficient Uber Really Is”, Forbes, 2016-09-20.
July 7, 2018
The bad economics of rooftop solar installations
Norman Rogers points out where the numbers don’t add up for many jurisdictions’ domestic solar power schemes:
Photovoltaic panels on a roof, 28 April, 2015.
Photo by Antonio Chaves, via Wikimedia Commons.
A modest proposal:
We’ve all heard about “shop local” and “get your food from local farmers, not distant corporate farms.” Lots of people have apple trees in their backyards. Often they can’t begin to eat or give away all the apples. In the meantime, big supermarkets sell corporate apples for one dollar a pound and up. I propose that people with backyard apples be able to take them to the supermarket and sell them to the supermarket for the same price at which the supermarket is selling apples. Furthermore, they should be able to take them at any time and receive payment. If the store gets too many local apples, it can reduce its purchase of corporate apples.
My apple proposal may seem ill advised, but that is exactly how rooftop solar power works. The homeowner gets to displace power from the power company, and if the homeowner has more power than he needs, the power company is obligated to purchase it, often for the same retail price at which it sells electricity. That policy is called net metering. In order to accommodate the homeowner’s electric power, the utility has to throttle down some other power plant that produces power at a lower wholesale price.
The exact arrangements for accepting rooftop solar vary by jurisdiction. In some places, net metering is restricted in one way or another.
A large-scale natural gas-generating plant can supply electricity for around 6 cents per kilowatt-hour. Rooftop solar electricity costs, without subsidies, around 30 cents per kilowatt-hour, or five times as much. Average retail rates for electricity in most places are between 8 cents and 16 cents per kilowatt-hour. Yet, paradoxically, the homeowner can often reduce this electric bill by installing rooftop solar.
It is actually worse than forcing the power company to take 30-cent electricity that it could get from a natural gas plant for 6 cents. When the company throttles down a natural gas plant to make room for rooftop electricity, it is not saving six cents, because it already has paid for the gas plant. All it saves is the marginal fuel that is saved when the plant is throttled down to make room for the rooftop electricity. The saving in fuel is about 2 cents per kilowatt-hour. So 30-cent electricity displaces grid electricity and saves two cents.
Zimbabwe and Hyperinflation: Who Wants to Be a Trillionaire?
Marginal Revolution University
Published on 3 Jan 2017How would you like to pay $417.00 per sheet of toilet paper?
Sound crazy? It’s not as crazy as you may think. Here’s a story of how this happened in Zimbabwe.
Around 2000, Robert Mugabe, the President of Zimbabwe, was in need of cash to bribe his enemies and reward his allies. He had to be clever in his approach, given that Zimbabwe’s economy was doing lousy and his people were starving. Sow what did he do? He tapped the country’s printing presses and printed more money.
Clever, right?
Not so fast. The increase in money supply didn’t equate to an increase in productivity in the Zimbabwean economy, and there was little new investment to create new goods. So, in effect, you had more money chasing the same goods. In other words, you needed more dollars to buy the same stuff as before. Prices began to rise — drastically.
As prices rose, the government printed more money to buy the same goods as before. And the cycle continued. In fact, it got so out of hand that by 2006, prices were rising by over 1,000% per year!
Zimbabweans became millionaires, but a million dollars may have only been enough to buy you one chicken during the hyperinflation crisis.
It all came crashing down in 2008 when — given that the Zimbabwean dollar basically ceased to exist — Mugabe was forced to legalize transactions in foreign currencies.
Hyperinflation isn’t unique to Zimbabwe. It has occurred in other countries such as Yugoslavia, China, and Germany throughout history. In future videos, we’ll take a closer look at inflation and what causes it.
July 4, 2018
QotD: “The world is rich and will become still richer. Quit worrying”
Not all of us are rich yet, of course. A billion or so people on the planet drag along on the equivalent of $3 a day or less. But as recently as 1800, almost everybody did.
The Great Enrichment began in 17th-century Holland. By the 18th century, it had moved to England, Scotland and the American colonies, and now it has spread to much of the rest of the world.
Economists and historians agree on its startling magnitude: By 2010, the average daily income in a wide range of countries, including Japan, the United States, Botswana and Brazil, had soared 1,000 to 3,000 percent over the levels of 1800. People moved from tents and mud huts to split-levels and city condominiums, from waterborne diseases to 80-year life spans, from ignorance to literacy.
You might think the rich have become richer and the poor even poorer. But by the standard of basic comfort in essentials, the poorest people on the planet have gained the most. In places like Ireland, Singapore, Finland and Italy, even people who are relatively poor have adequate food, education, lodging and medical care — none of which their ancestors had. Not remotely.
Inequality of financial wealth goes up and down, but over the long term it has been reduced. Financial inequality was greater in 1800 and 1900 than it is now, as even the French economist Thomas Piketty has acknowledged. By the more important standard of basic comfort in consumption, inequality within and between countries has fallen nearly continuously.
Dierdre N. McCloskey, “The Formula for a Richer World? Equality, Liberty, Justice”, New York Times, 2016-09-02.
July 3, 2018
QotD: The fatal conceit
… each of these questions, like the larger point made here, applies not only to proposals for complete, economy-wide central planning of the sort that was fashionable during the mid-20th century. These questions apply to any proposal for government direction of economic affairs, however ‘partial’ it might be (or seem to be).
We can all agree, for example, that economic equality is fine thing – but do we count only monetary income as relevant for assessing equality, or do we count monetary income plus monetary wealth? What about the value of voluntarily chosen leisure: does it count? if not, why not? if so, how is it weighed against monetary income or wealth? And even if we all agree upon just what sources of utility do and don’t count as relevant for assessing economic equality, and agree also on the weights of the various sources of utility for making this assessment, how is the goal of economic equality itself to be traded off against competing goals – such as economic growth, or environmental sustainability (however that might be defined!)?
The previous paragraph gives only one small example of a huge problem that confronts those who believe that entrusting the state with the power to engineer economic outcomes is really just a matter of science, of empirically discovering the allegedly objective costs and benefits of various economic arrangements and then choosing that particular arrangement that best satisfies society’s object preferences.
The very notion that there is an objective ‘best’ arrangement of economic affairs that can be discovered independently of actual market processes and then imposed by the state to improve everyone’s, or most everyone’s, well-being is, truly, a fatal conceit.
Don Boudreaux, “Quotation of the Day…”, Café Hayek, 2016-09-03.
July 2, 2018
QotD: Perverse incentives, death penalty edition
People cheered when, in the 1990s, Speaker of the House Newt Gingrich advocated mandatory executions for drug dealers. But economists wondered why Gingrich wanted to decrease the penalty for murder. How does the death penalty for drug dealers decrease the penalty for murder? Think about it this way: Suppose that Gingrich’s bill becomes law and the police bust into an apartment where three drug dealers have hidden their stash. What happens? The drug dealers know that if they give up, they will be put to death. So why not try to kill the police? If the dealers are lucky, they get away. If the dealers are unlucky, they are no worse off than if they didn’t fight because when drug dealing is a capital offense, drug dealers face no additional penalty for murder.
Tyler Cowen and Alex Tabarrok, Modern Principles: Microeconomics (3rd Edition), 2015.
July 1, 2018
Mapping medieval trade routes
Open Culture linked to a fascinating new map by a Swedish grad student, showing trade routes during the Medieval period:
A small portion of Martin Jan Månsson’s trade map of the Middle Ages.
“I think trade routes and topography explains world history in the most concise way,” Månsson explains in the very small print at the map’s lower right corner. “By simply studying the map, one can understand why some areas were especially important–and remained successful even up to modern times.”
The map covers 200 years, spanning both the 11th and 12th centuries, and “depicts the main trading arteries of the high Middle Ages, just after the decline of the Vikings and before the rise of the Mongols, the Hansa and well before the Portuguese rounded the Cape of Good Hope.”
It also shows the complex routes already available to Africa and Asia, and the areas where Muslim and Christian traders would meet. The open-to-trade Song Dynasty ruled China, and the competitive kingdoms in the Indonesia region provided both Muslims and Europeans with spice.
Looking like a railway map, Månsson’s work shows how interconnected we really were back in the Middle Ages, from Greenland in the west to Kikai and Kagoshima in the East, from Arkhangelsk in the frozen north to Sofala in modern-day Mozambique.
The full-sized, high-resolution map can be downloaded here.
Update: Tim Worstall was kind enough to link to this post and uses Månsson’s map to help explain the gravity model of trade:
A standard observation is that places which are closer together trade with each other more than places which are further apart. Add to that the thought that larger economies will trade more with other larger economies – well, you know, more economic activity means more economic activity – and you get the gravity model of trade. So, therefore Britain’s trade future lies with those places nearby, in the EU, than with places further away like the Commonwealth or the US.
This is, sadly, actually the level of debate over Brexit at times. We should trade with France because it’s 26 miles away, so there. The point being that while the gravity model is true – among the best empirically supported of all economic observations – that’s not actually what it says. Rather, that those places which are closer by trade distance trade more with each other. Trade distance being a more complex point than mere geographical location.
[…]
The point here being that by showing the trade routes it is showing us this trade, or perhaps economic, distance which is what the gravity model is about. Valencia and Palma were very much closer – and trade very much more – than Valencia and Toledo, despite roughly equal distances crowfly wise.
Over-generous subsidies encourage fraud and waste
At Catallaxy Files, Rafe Champion continues discussing Matt Ridley’s book Climate Science: The Facts:
Ridley went on to criticise biodiesel programs and the promotion of diesel cars. Then he mentioned one of the most outlandish schemes – the clearing of forests on the west coast of the US to convert into wood pellets to burn in British furnaces instead of coal to generate electricity. The Daily Mail reported that this was one of the legacies of Energy Secretary Chris Huhne.
Mr Huhne, who served in the coalition government and was later jailed for perverting the course of justice, championed the energy source in office and is now European chairmen of Zilka Biomass, a US supplier of wood pellets.
Nice work if you can get it.
And then there are the household biomass furnaces in Britain, promoted by Huhne under the Renewable Heat Incentive (RHI) scheme whereby businesses and households pay for a renewable energy boiler upfront then receive payments for up to 20 years depending on the amount of heat they produce.
Some unscrupulous homeowners can double the amount they produce by using heat generated under the RHI to dry wood or other materials.
This can then be fed back into the boiler to burn it and generate even more heat – and money from the public purse.
The scheme was started in 2011 by Chris Huhne, then Liberal Democrat energy secretary, for businesses then extended to domestic customers three years later. Households and firms can apply for grants to switch from fossil fuel heating systems to renewable ones such as biomass boilers, which burn wood pellets, chips or logs.
As the scheme is open to applications until 2021, final payments to participants will run to at least 2041. By this time, the bill for taxpayers is expected to hit £23billion.
Closely related is the the Irish “Cash for Ash” scandal that paid more than the cost of the fuel. An orgy of corruption was sparked by renewables in Spain and there was the strange phenomenon of solar power generated in the dark because the Spanish subsidy was initially so generous is was worthwhile to shine diesel-powered lights on the panels overnight.
June 30, 2018
Enriching the public in ways that do not show up in the GDP calculations
Tim Worstall looks at the calls to regulate the big tech firms and points out that we already get a very good deal on “free stuff” that isn’t reflected in standard economic statistics:
It won’t have escaped your attention that rather large numbers of people are calling for the regulation of the tech companies. The Amazon, Google, Facebook (Apple and Microsoft often added, just because they’re large) nexus have lots of power over markets and thus therefore – well, therefore something. My own prejudice here is that certain people just cannot look at centres of power and or money without insisting that they, the complainers, should be the ones exercising that power and determining the disposition of that money. Thus much of the drive for “democratic” regulation of the economy more generally, the self proclaimed democrats being the ones who would end up with the power. The advantage of this analysis being that it does describe reality, the same people do end up making the same arguments about different companies over time. Mere prominence brings the demand for control.
The economist on this subject is Jean Tirole. His Nobel was for exploring this very subject, tech companies and the two sided market. Google, for example, sells the search engine to us and us to the advertisers. The tech here is different, obviously, but the underlying economics is the same as that of the free newspaper.
Tirole’s a new book out and there are a number of interesting points to be had from it:
Yes, on the whole consumers tend to get a good deal, because we use wonderful services — like Google’s search engine, Gmail, YouTube, and Waze — for free. To be certain, we are not paid for the valuable data we provide to the platforms, as for example Eric Posner and Glen Weyl remind us in their recent book Radical Markets. But on the whole, our living standards have substantially improved thanks to the digital revolution.
From which we can extract a few points. We’re richer, we really are. Substantially richer and yet in a manner that normal economic statistics entirely fail to capture. As Hal Varian has pointed out, GDP doesn’t deal well with free. Near all of those benefits of the digital revolution are coming to us for free and so aren’t recorded in that GDP. So, we’re richer yet the numbers say we’re not. In that is much of the explanation of slow economic growth these days, even of slow real wage growth. We’re just not counting what is happening to our living standards.
But we can and should go further than that. If the above is true then we’re very much less unequal than we’re recording. Stuff that’s free is, obviously enough, distributed rather more evenly among the population than extant monetary incomes. You, me and Bill Gates all have access to exactly the same amount of Facebook at the same price. We’re entirely equal in that sense. Bill’s actually poorer concerning search engines, stuck for emotional reasons with Bing as he is while we get to use Google or DuckDuckGo. Our standard measures of inequality are wrong both because of the undermeasurement of new wealth and also the extremely equitable pattern of the distribution of that new wealth.
