Can We Quantify the Economic Contribution of the Internet?

How much does the Internet contribute to our economic life? A lot, yes. But what if we tried to put a number on it?

We love numbers, right? We imagine that we can slice and dice the world and look at everything on a spreadsheet, click a button and make it a pie chart and click another button and put the results in colorful bars.

That works for a single sector of the economy, like butter or shoes. We can add that up and compare it with other sectors. But what about technology? The truly life-transforming technologies benefit everyone and everything simply because most everyone uses them and everything is connected in a gigantic and cooperative globe of productivity.

Still, that’s not enough for some people. So this headline was probably inevitable: “Internet Accounts for 4.7% of U.S. Economy.” Now, that sounds scientific, precise, contained, empirical. CNN ran this as a report on a new study by the Boston Consulting Group. The study then compares the Internet economy with other sectors and finds it already bigger than education, construction and agriculture.

Impressive, but the methodology is all wrong. In fact, a hint is provided in this laughable sentence that is part of the report on the study: “By way of comparison, the federal government, contributed $625 billion, or 4.3%, to the nation’s output.” In other words, the study narrowly concluded that the thing that makes life grand contributes slightly more than the thing that makes life hell.

In what sense has the federal government contributed anything to the nation’s output? The last I checked, the federal government sucked $2.5 trillion out of the private sector last year, and that doesn’t include the gigantic regulatory state that thwarts progress at every turn. This is sheer wealth destruction, which we can know for sure because the money is taken by force, meaning that the people who once owned that money would rather have done something else with it besides cough it up to the public sector.

Of course, the method of calculation rests fundamentally on the idea of the gross domestic product, which attempts to quantify economic production. The problem is that it doesn’t quantify economic destruction, much less any of the unseen dimensions of wealth. If an earthquake hits Los Angeles and the city is rebuilt, the rebuilding counts as productivity and the GDP goes up. Reflect on this fact and then comprehend how it is that government’s activities are recorded as productivity.

But let’s return to this idea that you can segregate a sector called “the Internet” and account for its productivity. Nothing in business today takes place without the use of digits. Financial transactions are processed through the Internet. No inventory is ordered without it. Accounting takes place with software distributed through the Internet. All of human life is progressively passing through digital gates.

That the Internet has vastly increased productivity is the understatement of the century. The Internet has given birth to products and services that had never before existed — search engines, online advertising, video games, Web-based music services, online garage sales, global video communications. Moreover, the main beneficiaries have been old-line industries that seem to have nothing to do with the Internet.

The most difficult-to-quantity aspect of digital media has been its contribution to the sharing of ideas and communication throughout the world. This has permitted sharing and learning as never before, and this might be the single most productive activity in which a person can participate. The acquisition of information is the precondition for all investing, entrepreneurship, rational consumption, division of labor and trade.

Step back and consider what a revolution this truly is. From the beginning of history until the 19th century, information could travel only as fast as we could run, walk or sail. There were also smoke signals, carrier pigeons, putting notes in bottles, waving lanterns in windows and the like. Finally, in the 1830s — extremely late in a vast and grueling history in which humanity languished in poverty and sickness without knowledge broader than the immediate surroundings — we saw the beginnings of modern communication with the glorious invention of the telegraph.

Here we had, for the first time, the emergence of geographically noncontiguous communication. People could find out more about what was going on in the world beyond their immediate vicinity, and that has had amazing implications for everyone engaged in the grand project of uplifting humanity. What could people then share? Cures, technologies, resource availability, experiences and information of all sorts.

This is also the period when we saw the first signs of the modern world as we know it, with a rising global population, extended lives, lower infant mortality and the creation and rapid increase of the middle class. Communication is what signaled people about new possibilities. From there, we saw huge advances in metallurgy, medicine, sanitation and industry. Then followed expansions of income; the division of labor; transportation via railroads; and, eventually, more of the thing that really matters: ever-better ways to share information and learn from others through telephones, radios and televisions.

But then 1995 represented the gigantic turning point in history. This was the year when the Web browser became widely available and the Internet opened for commercial purposes. It’s remarkable to think that this was only 17 years ago. Unimaginable progress has taken place since then, with whole worlds being created by the day, all through the wondrous, spontaneous order of global human interaction in an atmosphere of relative laissez-faire. This was the beginning of what is called the digital age, the period of global enlightenment in which we find ourselves today.

And what gave it to us? What made it possible? This much we know for sure: The government did not make this possible. The forces of the marketplace caused it to come into being. It was the creation of human hands through the forces of cooperation, competition and emulation.

This alone refutes the common lie that the free market is all about private gain, the enrichment of the few. All these technologies and changes have liberated billions of people around the world. We are all being showered with blessings every hour of the day. Yes, some people have gotten rich — and good for them! — but all the private gain in the world pales in comparison with what digital commerce has done for the common good.

Yes, of course, we take it all for granted. In one sense, it has all happened too fast for us to truly come to terms with this new world. There is also this strange penchant human beings have for absorbing and processing the new and wonderful and then asking just as quickly, “What’s next?”

No amount of empirical work can possibly encapsulate the contribution of the Internet to our lives today. No supercomputer could add it all up, account for every benefit, every increase in efficiency, every new thing learned that has been turned to a force for good. Still, people will try. You will know about their claims thanks only to the glorious technology that has finally achieved that hope for which humankind has struggled mightily since the dawn of time.


Jeffrey Tucker

The Daily Reckoning