THE PRODUCTIVITY OF THE INTERNET FROM THE PERSPECTIVE OF HOUSEHOLDS 1 Russel Cooper University of New South Wales UNSW, Canberra, PO Box 7916, Canberra BC ACT Australia XIV EWEPA Conference Helsinki, Finland, June, 2015 Proposition: In an integrated view of what an ‘economy’ is all about, the entire business sector should really be seen as simply an intermediary in the provision of well-being to consumers

Agenda  1.Measuring the Internet Economy  2.Thought Provokers  3.Explanations  4.Modelling Issues  5.Key Findings  6.Conclusion 2

Measuring the Internet Economy 3 What are we looking for? Where are the clues?

A blueprint for measuring the Internet Economy  OECD (2013). Measuring the Internet economy: a contribution to the research agenda. OECD Digital Economy Papers, No. 226, OECD Publishing.  Approach 1: KLEMS  Approach 2: Growth Accounting  Approach 3: Consumer Surplus 4

OECD Approach 1 Value added approach 5 KLEMS Y = f ( K,L,E,M,S ) Instead, think of this as: X = f ( K,L,E,M,S ) NOT a production function The ‘input’ branch of a transformation function

OECD Approach 2 Growth 6 How does behaviour change with technology? Can technological change be predicted?

OECD Approach 3 Indirect 7 Can technical progress deliver a free lunch? Well-being Consumer surplus Willingness to pay

Agenda  1.Measuring the Internet Economy  2.Thought Provokers  3.Explanations  4.Modelling Issues  5.Key Findings  6.Conclusion 8

Thought provokers 9 What is ‘new’ about the ‘New Economy’? Where is the ‘new’ bit in our models? How can we possibly measure the value of something that is ‘free’?

Try this quick quiz 10 This is George Study the picture Quiz to follow Hint for the quiz to come: Y = C + I + G + X – M Old idea? …. Or still relevant?

Remarkable result Detailed Slides 11 Honestly, it was this big More than 10 times bigger than previously found

Median Results by Country 12 Table 6.1: Average Internet benefits by country FranceGermanyItalySpainUK 5 countries Combined Percentage of annual income in Annual benefit – Euros 12,92513,64912,88512,55515,36913,461

Comparison 13 The most widely quoted result to date 3 % Goolsbee A., Klenow, P.J. (2006). Valuing consumer products by the time spent using them: an application to the Internet. American Economic Review, Papers & Proceedings, 96(2),

Agenda  1.Measuring the Internet Economy  2.Thought Provokers  3.Explanations  4.Modelling Issues  5.Key Findings  6.Conclusion 14  3.Explanations

Explanations 15 There are some things our focus groups (traditional data providers) don’t seem to be able to tell us Some traditional economic concepts now seem to operate differently We need to rethink how to deal with time Who would believe an effect could be so strong? Remember George? Does he know something Ed doesn’t know? Three quiz questions Question 1 (very easy) What was George doing? Question 2 (moderate) What was George’s mood? Question 3 Was George producing or consuming?

Internet Usage as Investment 16 A mobile school Some traditional economic concepts now seem to operate differently

The hidden economy 17 How much are you seeing? An underlying layer of public capital – courtesy of a technological revolution There are some things our focus groups (traditional data providers) don’t seem to be able to tell us

Opportunity Cost 18 Who gets an extra hour’s pay for an extra hour’s work? The actual value of time is person specific but … The relative value of time is occupation specific We need to rethink how to deal with time

Networks 19 Anybody can benefit from a network But it’s tastier if it arrives gratis Networks are not new … … but what is new is the sheer size of network externalities created by modern ICT Yes, we even have networks in Australia Traditional analysis never told me that network effects could be so strong

Agenda  1.Measuring the Internet Economy  2.Thought Provokers  3.Explanations  4.Modelling Issues  5.Key Findings  6.Conclusion 20

Modelling Issues 21 The ‘consistent modelling’ triangle The data dilemma Estimation options What’s this? I never expected this Oh Nooo

The Consistent Modelling Triangle 22 The Objective (Indirect utility function ) The Evaluation (compensating variation) The Behaviour (estimating equation)

Data  Occupations 23  Internet activities  Demographics  Incomes The Data Dilemma A marriage of different kinds of data Something new – but can an expensive survey be justified? Something borrowed – but will someone else’s survey really do? Something blue – but can survey responses be trusted? Something old – official data may be accurate – but out of date

Econometric Issues 24 Fraction of time spent on an Internet activity Effective time = Demographics Occupation

Agenda  1.Measuring the Internet Economy  2.Thought Provokers  3.Explanations  4.Modelling Issues  5.Key Findings  6.Conclusion 25

Key Findings 26 A big effect… … and progressive

Results by income ranges 27 Income Range FranceGermanyItalySpainUKAll Euros p.a. < 18, ,001 – 27, ,001 – 36, ,001 – 54, ,001 – 72, > 72,

Results by age groups 28

Agenda  1.Measuring the Internet Economy  2.Thought Provokers  3.Explanations  4.Modelling Issues  5.Key Findings  6.Conclusion 29

Conclusion TP = Y/X 30 If I can achieve my objective at level ‘Y’ using resources ‘X’ my utility- consistent ‘true’ productivity must be TP = Y/X

The Internet Economy  A revolution  A hidden layer of capital  OECD ‘Approach 3’ should be oriented to measuring Y  OECD ‘Approach1’ (KLEMS) concerns not Y, but X  ‘True’ Productivity: TP = Y/X 31 X = f ( K,L,E,M,S )

Postscript  Where will it all end? 32 Contact details: Russel Cooper ‘Have model. Will travel.’ Might you have access to additional relevant data? Would you be interested in having YOUR data stretch the capabilities of this model?