What we pay isn't what we get

Sun, 09 Feb 2014

This was going to be a self-contained post, but as so often happens, my thoughts expanded to the extent that I’ve had to settle for just providing some introductory thoughts on two related topics that I’ll have to continue in future posts.

Over the past few months, I’ve read a few articles about problems with our use of GDP, or Gross Domestic Product, which I (very loosely) define as the amount of money spent on final goods and services produced in the country in the year.  There are lots of things wrong with it (many of which are documented on http://en.wikipedia.org/wiki/Gross_domestic_product), but my biggest concern is that the fundamental weight given to what is spent.

In other words, GDP measure what is paid, and ignores how much we value what we get, making it a questionable measure of anything that we should focus on, let alone strive to increase.  As prices for things go up, GDP rises, and as prices come down, GDP falls, neither of which says much about the economy’s performance or our well-being.  I'd rather see us maximising our well-being and perceived value than maximise the amount that is spent.

The difference between what we pay and how we value something (usually positive, otherwise we wouldn’t have chosen to pay it) is what economists call consumer surplus.  If it was small and constant, ignoring it wouldn’t be such a big deal, but I believe it is growing to be a very significant part of our economy.

The main reason for that is that more and more of the things we consume have minimal marginal cost.  High school economics tells us that these things should end up being free, or close to it (otherwise a competitor will undercut them).  Much of the internet falls into this category - for example Wikipedia, Facebook, Google, youtube contributors and many wonderful blogs and articles.  It also includes cultural and environmental assets - you can’t make an opera house, a public library or a national park not exist for those people that don’t pay for it, nor would you really want to.  (You can stop people using them, but I consider cultural and environmental assets to have significant value to people just by existing).

A second reason is due to inequality - the richer we are, the more (in dollar terms) we will value most things.  Yet there are great difficulties in pricing things on a differentiated basis, so the consumer surplus of the wealthy is increased.

So, the first topic that I want to think about over the coming weeks is how by focussing too much on what is spent, we’re ignoring the massive contribution to our wellbeing of things we don’t pay for, or at least, pay nowhere their full value.  I’d like to see society and our policies doing more to recognise and encourage these things that enrich our lives, rather than implying that what isn’t paid for doesn’t count.

Secondly, I worry that the difficulty in putting a price on these things may make them unsustainable, and hence disappear.  For example, I’m a huge fan of bookshops, and value their contribution to my life, but I buy all my books as ebooks, so I don’t give bookshops any revenue.  I’m not going to buy paper books I don’t want, but I’d feel sad if all the bookshops closed.

At the moment, I’m seeing some encouraging innovation.  One of the blogs that I read (http://dish.andrewsullivan.com) very successfully introduced a subscription model a year ago (though you can read a certain number of articles for free each month).  Interestingly, a large number of subscribers (including me) choose to pay more than the minimum subscription fee of $1.99 a month, showing willingness to reduce their consumer surplus to ensure the blog is sustainable.

But I worry that this innovation isn’t going to be enough to sustain so much valuable work in society, and economic pressures will steer people away from this activity to less valuable work that is easier to be paid for.  This is a challenge that we need to think about, so I’ll be writing about it in future weeks.  If anyone has any good reading / listening recommendations on this topic, I’d certainly be grateful.