Missing Productivity and the Rise of Social Production


A couple of days ago, I was discussing Michael Mandel’s Fake Productivity Hypothesis. In response to this, Tyler Cowen countered with the No Profits Here Hypothesis holding that:

[T]here was some productivity growth but much of it fell outside of the usual cash and revenue-generating nexus. Maybe you will live until 83 rather than 81.5 and your pain reliever will work better. In the meantime you will read blogs and gaze upon beautiful people using your Facebook account. Those are gains to consumer surplus, but they don’t prop up the revenue-generating sectors of the economy as one might have expected.

Good examples of this would have to include Wikipedia (which is hugely useful but doesn’t make anyone any money at all), Craigslist (which has revolutionized the way people do a lot of things but has done far more to destroy other firms’ revenue sources than to make money for itself), and much open-source software (where the absence of copyright-enforced monopoly profits make the product more useful, but less lucrative, than closed-source products). John Quiggin has been pondering the rise of social production for a while and has the following bullet points on the implications:

  • If monetary returns are weakly, or even negatively correlated with the value of social production, there’s no reason to expect capital markets to do a good job in allocating resources to supporting innovation. (This point seems rather less controversial than when I made it in 2006.)

  • As a corollary, it seems unlikely that large inequalities in income are beneficial to anyone except the recipients of high incomes (this issue is being discussed, in a much more abstract setting, at Crooked Timber)
  • If improvements in welfare are increasingly independent of the market, it would make sense to shift resources out of market production, for example by reducing working hours. The financial crisis seems certain to produce at least a temporary drop in average hours, but the experience of the Depression and the Japanese slowdown of the 1990s suggest that the effect may be permanent.
  • Creativity, broadly defined, seems likely to become more important, while markets, particularly financial markets, become less so. Firms that want to survive and prosper will have to behave quite differently from the way the did in the past. Google is an obvious example of a firm that is trying to do this, if not always succeeding.

I see two clear areas where the rubber may hit the road on this. One is in terms of working hours. Consider this chart:


Clearly, we’re going to be able to produce more market-value of stuff than the barely-working Dutch are. At the same time, if you visit the Netherlands it’s not as if people are starving in the street. They have plenty of stuff. And, obviously, they have more free time. That can be nice in its own terms, or it might just mean more washing dishes by hand. But in the brave new digital world where it’s possible to engage in endeavors that are useful to other people on a pretty large scale on a hobbyist basis, it also means they have more time to do non-market work—write open source code, record an album and have people download it on BitTorrent, improve Wikipedia entries, etc. Obviously, you couldn’t base an entire economy on this kind of thing, since you can’t produce any tangible goods this way. But 1,357 hours per year isn’t nothing, it’s just a lot less than 1,824 hours per years. And these days, more-and-more of what people are interested in are non-tangible goods.

It’s a bit of a cliché in politics to talk about the need to move from an “industrial age economy” to an “information age economy” but there’s relatively little thought given to what this might actually entail. But it might entail a lot! Among other things, it might entail that certain economic metrics developed for the industrial age are less-relevant, and therefore that appropriate tradeoffs aren’t what they once were. A friend of mine just twittered:

tinyurl is down. these URL shorteners are a real problem: essential but not a viable business, it’s a surefire recipe for tons of lost data.

The real “problem,” though, is broader than TinyURL. And the solution may be hoping that people have free time and, if bored, will be inspired to do something useful. It’s the vision of Marx’s early thought, or Star Trek.

A potentially related issue has to do with broadband infrastructure. My understanding is that the internet is radically faster in some Asian countries, notably South Korea and Japan, than it is here in part because the state has intervened in a more heavy-handed way to ensure that this is the case. Clearly, though, South Korea and Japan are not crushing the United States economically. One potential explanation for this is that all this talk about the Internet is way off-base, and digital communication isn’t actually all that important to the modern economy. I don’t find that especially plausible. Another explanation is the Cowen/Quiggen explanation—the consumer surplus associated with digital communication is only very partially captured as profits. That will predict that absent heavy-handed government intervention, capital markets will underfund broadband infrastructure and you’ll have less of it than would be socially optimal. This is, I think, a fairly reasonable interpretation of the broadband gap.

All that’s very left-wing, but there are also less left-wing implications for fiscal stimulus and the like. Although in either case “be more like Western Europe” turns out to be the prescription.