Growth

The Free Web Has Economists Puzzled


Since completing a master’s degree in electrical engineering in 2009, Ti Zhao, a self-described education junkie, has continued to take classes. The price for the last eight: $0. “It’s hard for me to imagine ever paying for a class again,” says Zhao, who’s taken free courses from online education services EdX and Coursera. Before, the San Francisco resident spent about $500 per class at a local university’s continuing education program.

For economists, Zhao’s embrace of the Internet’s free cornucopia poses two questions: Does the use of free Web-based goods and services constitute an economic transaction, just as a store owner and a shopper exchange goods for money? If so, how can economists capture these transactions in their calculations of gross domestic product, and should they? GDP is the value of all the goods and services produced in a country. If no money is exchanged when a student takes a free online course, it’s hard to value the service rendered.

Erik Brynjolfsson, a professor at the Massachusetts Institute of Technology, says GDP underestimates the “very promising” progress made by the U.S. on the Web. “We’re going to have to reinvent the way we measure economic growth,” says Brynjolfsson, director of MIT’s Sloan School of Management Center for Digital Business. “The reality is GDP, the amount we spend, is not equal to what we get.”

Brynjolfsson and MIT postdoctoral associate JooHee Oh have derived the value consumers assign to the Internet by gauging how much time they spend on free websites. They figure that those virtual goods added $34 billion to consumers’ welfare each year from 2002 to 2011. That comes to 0.26 percent of annual GDP. People pay for those sites with time they could be using to make money or consume something else.

IAB Europe, a Brussels-based promoter of digital marketing, and consultant McKinsey surveyed Internet users in Europe and the U.S. to estimate the value placed on Web-based services. They concluded that in 2010 Americans put a value of €32 billion ($42.9 billion) on those services above and beyond what they paid for fee-charging digital media. In a Boston Consulting Group survey, about 7 percent of U.S. respondents said they would forgo showering for a year to maintain Internet access, 21 percent said they would give up sex, and 73 percent said they’d sacrifice alcohol.

Official data keepers remain orthodox. “We’re economists. We don’t believe there’s such a thing as a free lunch,” says Steve Landefeld, director of the Bureau of Economic Analysis, the U.S. Department of Commerce agency that calculates GDP. He says the BEA already measures the Web’s value by including in GDP data the ad revenue generated by these no-cost sites and the sale of information on consumers’ browsing habits.

“We’re making progress, but we’re a long way from having a number that can compete with GDP,” says Peter Klenow, an economist at Stanford University and an expert on economic growth. He’s speaking of the holy grail for some economists: an all-encompassing measure of consumer welfare that includes the Web. “What we do when we get richer is not more quantity, it’s higher quality and more variety. We’re probably missing a big chunk of that.”

The bottom line: GDP may miss an additional $34 billion a year in free Web-based goods and services that U.S. consumers use.

Ito is a reporter for Bloomberg News in San Francisco.

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