What is the economic value of the internet?

There is a new and very interesting study out from McKinsey on this topic.  If you get past the press release, however, and give it a closer read it is consistent with stagnation hypotheses, contrary to some claims.  The study shows a few things:

1. Most of the economic benefits of the internet are in fact captured in current economic statistics, which I’ve already argued do not look so fabulous.  The point is not to blame the internet, as without it things would have been worse.  The point is that the internet gains, in absolute terms, haven’t been large enough to produce a rosy picture overall.

2. The direct and indirect economic effects of the internet account for 3.8% of U.S. gdp, as currently measured (p.15).  That’s less than many people think and that value is already incorporated in the current gdp measure.  The good news — and it is good news — is that there is lots of room for future growth from internet impact.  We’ve yet to really organize our economy around the internet, as we someday will, and then the gains will be enormous.  In the meantime we are waiting.

3. What about the unpriced consumer surplus gains from the internet?  The study considers that too:

In general, this surplus is generated from the exceptional value users place on Internet services such as e-mail, social networks, search facilities, and online reservation services, among many others. This value far outweighs the costs, both actual costs such as access and subscription fees and annoyances such as spam, excessive advertising, and the need to disclose personal data for some services. In the United States, for example, research conducted with the Interactive Advertising Board found that consumers placed a value of almost €61 billion on the services they got from the Internet, while they would pay about €15 billion to get rid of the annoyances, suggesting a net consumer surplus of about €46 billion.

A nice gain, but in an economy with a $14 trillion gdp it’s not that big a deal.  It’s also less than the previous Goolsbee and Klenow estimate of about two percent of gdp, for the consumer surplus from internet use.  That is not nearly enough to refute the view that median income growth is much slower in recent times, and that’s without adjusting for the problematic status of expenditures on health care and K-12 education.  Arnold Kling and Bryan Caplan stress this point — the unpriced benefits of internet use — but I don’t see them offering a better number than this rather paltry calculation, now confirmed as low, at least relative to the claims of internet boosters, by two differing sources.

In fairness, I should note that I cannot trace the study cited above.  It may be wrong.  The Goolsbee and Klenow paper may be wrong, and it is somewhat out of date, from 2006.  I think a consumer surplus estimate of three or four percent is entirely plausible for 2011.  We’re still left with relative stagnation.  After all, penicillin had some consumer surplus too.


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