What would consumers be willing to take as compensation for doing without a given free service? To answer such questions, Erik Brynjolfsson of MIT and Erwin Diewert of the Vancouver School of Economics conduct experiments in which participants are asked whether they would give up a service in exchange for a low-probability chance of winning some modest amount of money.
In the case of Facebook, Brynjolfsson and his colleagues conclude that the value of the service – based on an estimated “marginal willingness to go without” – is three times the company’s advertising revenue. Obviously, such estimates are preliminary. Abstaining from a service for a month in exchange for something similar to a lottery ticket offers a reasonable approximation of value only under very strong assumptions. In the meantime, academics and government statistical agencies will continue working on methods to improve existing measures.
In any case, it is still unclear whether the value of new technologies is being undercounted more than it was in the late 1990s, when a commission I led estimated that quality improvements and new-product biases accounted for about three-quarters of one percentage point (of a total of 1.1%) per year in overstated cost-of-living increases.
Of course, one hopes that the optimists are correct. But if productivity gains are and will remain meager, as the pessimists warn, economic policymakers at the national and international levels should act accordingly. Achieving faster long-run growth must be the top priority.
Michael J. Boskin is professor of economics at Stanford University and Senior Fellow at the Hoover Institution. He was chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a congressional advisory body that highlighted errors in official U.S. inflation estimates.