National income statistics measure what the producers get, which does not capture the entire value created. Estimation of consumers’ surplus remains elusive despite being very significant in value despite technological advances
It has become a cliché to say that change is the new normal. In the 1920s, Joseph Schumpeter had famously talked about ‘creative destruction’ being the distinctive feature of capitalism. Alvin Toffler had, in his book, The Future Shock, foreseen a spurt in technological advances and its impact on human behavior. It would be safe to say that even they would have found it hard to believe the disruption technology is causing these days. Established ways of the society are getting increasingly disrupted whether it is processes, behaviour or relationships between people. Nothing seems sacrosanct anymore.
This technological change apparently does not seem to be impacting income and productivity positively. Annual global growth rate has declined by more than a percentage over the last decade. Widespread gloom about the future prospects of the global economy continues. Even specific studies on productivity seem to reveal a very pessimistic picture. Research which was undertaken at the Economic Research Department of the Federal Reserve Bank of San Francisco shows productivity growth to be decelerating. How does one reconcile the contrasting picture of rapid, disruptive pace of technological change and apparent low growth in productivity?
Economists have been the butt of jokes for as long as one can remember. They never seem to agree on anything. It is said that if you meet two economists, you get three opinions. Not many people have faith in statistics on national income and inflation. Confronted with skyrocketing prices of onions, followed by a similar trajectory in other essential prices, it is natural for people to disbelieve statistics showing that inflation has moderated.
National income statistics are based on the attributes of the old economy, having been designed for times when physical products and manufacturing were predominant. Even in those times, there were anomalies in the methodology. For instance, national income comprises only those products whose value can be measured and which are traded for such value. Thus, the work done by a housewife is ignored, leading well-known economist John Hick to quip that you could actually reduce national income by marrying your maid servant!
Goods and services are distinguished by economists on the basis of two attributes like being ‘rival and excludible’. A rival product is one whose consumption by one consumer prevents simultaneous consumption by others. Technically, a product is considered non-rival if, for any level of production, the cost of providing it to an additional customer is zero.
A product is excludable if the supplier of that product can prevent people who do not pay, from consuming it. These attributes enable producers to charge a fair price for rival and excludible goods.
Many of the services today are neither rival nor excludible. Their distribution is easy and the use spreads to large numbers quite rapidly. Witness how easy and rapid was the spread of mobiles, internet, Facebook, Twitter and WhatsApp. However, producers find it difficult to monetize this distribution and most of these services are either free or priced low. While these services add tremendous value and in general, make the economy more productive, economic statistics are not geared towards incorporating such value addition. It is a challenge for economists to devise ways to incorporate such services in their income and productivity calculations.
Increasing importance of services in the economy presents challenges for statisticians since services are difficult to define, measure and value. Nature of costing is also very different. Physical products usually have a high marginal cost (high raw material and labour inputs) while services especially new age services, are characterised by large fixed cost in terms of development, technology and operations. But, the marginal cost of providing the service to an additional customer is extremely low. Microsoft spent a huge amount in developing the Windows package. Its cost in providing Windows to an additional customer is negligible. Mobile telecom companies such as Bharati Airtel had to invest heavily in technology, spectrum purchase, operations and customer acquisition. Having done so, the cost of providing services to an additional customer is miniscule.
Competition and cost structure ensures that pricing of such services is based on marginal cost, which does not capture value addition or customer satisfaction in the real sense. This has implications for estimation of increase in productivity. Many customers would be willing to pay much higher price for such services since they derive substantially higher satisfaction. In economic terms, we can say that consumer surplus is a significant proportion of the total value created. National income statistics measure what the producers get, which does not capture the entire value created. Estimation of consumers’ surplus remains elusive despite being very significant in value.
Let us consider the telecommunication sector in India. At the time of economic liberalization in 1991, the price of one call was Rs1.25, which inflation adjusted in today’s value is approximately Rs7.45. The utility or the value created by a telephone call has obviously not reduced. However, since the price of a call has come down, owing to technological developments and competitive pressures, the GDP calculation now is done at lower prices prevailing currently, distorting the estimation.
This is however nothing new and estimation of gains due to productivity have always been a problem. When the computer age dawned and improved efficiency significantly, the statistics failed to show any increase in productivity, prompting Noble laureate Robert Solow to quip that the computer age was “everywhere but in the productivity statistics.”
The western world has largely succeeded in satisfying day-to-day basic needs of its people. But, the needs and wants have continued to expand even if the struggle for survival is over. In some sense, these needs and wants are what Maslow has termed higher order needs. Such needs provide satisfaction in different ways and capturing the value of such satisfaction necessitates a quantum jump in the ability of statisticians and the way they capture such value propositions.
(Sunil Mahajan, a financial consultant and teacher, has over three decades experience in the corporate sector, consultancy and academics.)