ECONOMIC CONTRIBUTION OF THE INTERNET

Whiskey & Gunpowder
by Jeffrey Tucker
March 23, 2012
Auburn, Alabama, U.S.A.



Can We Quantify the Economic Contribution of the Internet?


How much does the Internet contribute to our economic life? A lot, yes. But what if we tried to put a number on it?

We love numbers, right? We imagine that we can slice and dice the world and look at everything on a spreadsheet, click a button and make it a pie chart and click another button and put the results in colorful bars.

That works for a single sector of the economy, like butter or shoes. We can add that up and compare it with other sectors. But what about technology? The truly life-transforming technologies benefit everyone and everything simply because most everyone uses them and everything is connected in a gigantic and cooperative globe of productivity.

Still, that's not enough for some people. So this headline was probably inevitable: "Internet Accounts for 4.7% of U.S. Economy." Now, that sounds scientific, precise, contained, empirical. CNN ran this as a report on a new study by the Boston Consulting Group. The study then compares the Internet economy with other sectors and finds it already bigger than education, construction and agriculture.

Impressive, but the methodology is all wrong. In fact, a hint is provided in this laughable sentence that is part of the report on the study: "By way of comparison, the federal government, contributed $625 billion, or 4.3%, to the nation's output." In other words, the study narrowly concluded that the thing that makes life grand contributes slightly more than the thing that makes life hell.

In what sense has the federal government contributed anything to the nation's output? The last I checked, the federal government sucked $2.5 trillion out of the private sector last year, and that doesn't include the gigantic regulatory state that thwarts progress at every turn. This is sheer wealth destruction, which we can know for sure because the money is taken by force, meaning that the people who once owned that money would rather have done something else with it besides cough it up to the public sector.

Of course, the method of calculation rests fundamentally on the idea of the gross domestic product, which attempts to quantify economic production. The problem is that it doesn't quantify economic destruction, much less any of the unseen dimensions of wealth. If an earthquake hits Los Angeles and the city is rebuilt, the rebuilding counts as productivity and the GDP goes up. Reflect on this fact and then comprehend how it is that government's activities are recorded as productivity.

But let's return to this idea that you can segregate a sector called "the Internet" and account for its productivity. Nothing in business today takes place without the use of digits. Financial transactions are processed through the Internet. No inventory is ordered without it. Accounting takes place with software distributed through the Internet. All of human life is progressively passing through digital gates.

That the Internet has vastly increased productivity is the understatement of the century. The Internet has given birth to products and services that had never before existed -- search engines, online advertising, video games, Web-based music services, online garage sales, global video communications. Moreover, the main beneficiaries have been old-line industries that seem to have nothing to do with the Internet.

The most difficult-to-quantity aspect of digital media has been its contribution to the sharing of ideas and communication throughout the world. This has permitted sharing and learning as never before, and this might be the single most productive activity in which a person can participate. The acquisition of information is the precondition for all investing, entrepreneurship, rational consumption, division of labor and trade.

Step back and consider what a revolution this truly is. From the beginning of history until the 19th century, information could travel only as fast as we could run, walk or sail. There were also smoke signals, carrier pigeons, putting notes in bottles, waving lanterns in windows and the like. Finally, in the 1830s -- extremely late in a vast and grueling history in which humanity languished in poverty and sickness without knowledge broader than the immediate surroundings -- we saw the beginnings of modern communication with the glorious invention of the telegraph.

Here we had, for the first time, the emergence of geographically noncontiguous communication. People could find out more about what was going on in the world beyond their immediate vicinity, and that has had amazing implications for everyone engaged in the grand project of uplifting humanity. What could people then share? Cures, technologies, resource availability, experiences and information of all sorts.

This is also the period when we saw the first signs of the modern world as we know it, with a rising global population, extended lives, lower infant mortality and the creation and rapid increase of the middle class. Communication is what signaled people about new possibilities. From there, we saw huge advances in metallurgy, medicine, sanitation and industry. Then followed expansions of income; the division of labor; transportation via railroads; and, eventually, more of the thing that really matters: ever-better ways to share information and learn from others through telephones, radios and televisions.

But then 1995 represented the gigantic turning point in history. This was the year when the Web browser became widely available and the Internet opened for commercial purposes. It's remarkable to think that this was only 17 years ago. Unimaginable progress has taken place since then, with whole worlds being created by the day, all through the wondrous, spontaneous order of global human interaction in an atmosphere of relative laissez-faire. This was the beginning of what is called the digital age, the period of global enlightenment in which we find ourselves today.

And what gave it to us? What made it possible? This much we know for sure: The government did not make this possible. The forces of the marketplace caused it to come into being. It was the creation of human hands through the forces of cooperation, competition and emulation.

This alone refutes the common lie that the free market is all about private gain, the enrichment of the few. All these technologies and changes have liberated billions of people around the world. We are all being showered with blessings every hour of the day. Yes, some people have gotten rich -- and good for them! -- but all the private gain in the world pales in comparison with what digital commerce has done for the common good.

Yes, of course, we take it all for granted. In one sense, it has all happened too fast for us to truly come to terms with this new world. There is also this strange penchant human beings have for absorbing and processing the new and wonderful and then asking just as quickly, "What's next?"

No amount of empirical work can possibly encapsulate the contribution of the Internet to our lives today. No supercomputer could add it all up, account for every benefit, every increase in efficiency, every new thing learned that has been turned to a force for good. Still, people will try. You will know about their claims thanks only to the glorious technology that has finally achieved that hope for which humankind has struggled mightily since the dawn of time.


Regards,

Jeffrey Tucker
Executive editor, Laissez Faire Books

GAP BETWEEN RICH AND POOR IN AMERICA

The following blog post is a response from my friend Don to a mutual acquaintance, concerning the gap between the rich and poor in America, originally dated Tuesday, March 20, 2012. -- Craig



GAP BETWEEN RICH AND POOR IN AMERICA

by Don Kirkland


I agree that the increasing gap between the rich and the poor is an undesirable characteristic of the current economy. The question is how to best mitigate the problem. Your answer is increased government involvement. My observation is that government creates the gaps by rewarding some and punishing others based on political power rather than normal market forces. Remember: Free medical is welfare for health professionals, free legal is welfare for lawyers, free financial backing for investment houses is welfare for Wall Street bankers, food stamps and Agricultural subsidies are welfare for Agribusinesses, excessive defense spending is welfare for the military industrial complex and rent subsidies are welfare for landlords. Anything that is free is wasted. Government-provided services may be free to the recipient but they are not free to the overall economy, in fact they are 2 to 3 times more expensive than the same services provided by the free market.

My guess is that 2 to 5 percent of the people are truly needy and deserve help. The proper way to provide that help is charity. When you create a government-funded entitlement you simultaneously create a distortion to the market that drives prices up, and rewards the politically connected at the expense of everyone else.

The well regarded findings of Reagan's Grace Commission was that LBJ's Great Society / War on Poverty programs spent over 1 million dollars for every person below the poverty line between 1964 and 1984. However, in 1984 the poverty rate was exactly the same as it was in 1964. This result is typical of wasteful government programs that suck wealth out of the system for the benefit of the politically connected and punish the rest of us including the poor. They actually institutionalize poverty and turn it into a viable life style. In America now you can actually be poor for a living.

The only thing that Governments do better than the free market is make war. That is the reason that powerful governments go to war so often.

Average American liberals have good hearts and want to do the right things for the right reasons. They just have no idea of how an economy actually works. Their policies are the classic example of why: "The road to hell is paved with good intentions." The one historical fact that is undisputable in my lifetime is that the more government tries to solve our problems the more difficult they become.

I am NOT advocating for the Crony Capitalism of most of the Republicans, which is almost as destructive as the Socialism of the Democrats. The current political debate in this country is a false dichotomy between two wrong answers. The only free market advocate in the race is Ron Paul and he has inadequate financial backing because the political elite in both parties (that are robbing us blind) would lose money and influence if he was elected. The average Republican Washington insider is much more afraid of Ron Paul than Obama. They know they can deal with Obama and both walk away with a political win at the expense of the average tax/debt payer.


Cheers,
Don