Disruptive technologies can reduce GDP, but improve our lives

Mar 9, 2018

Credit Dr. Chris Erickson

Commentary: GDP is a widely followed measure of social welfare. Yet disruptive technologies that upend older industries can reduce GDP yet improve welfare.

Take for example, the introduction of cell phones. A cell phone substitute for traditional land lines, audio players, cameras, computers, navigation systems, and watches. Cell phones even come with free apps that let you do other things.

So, it’s not surprising that cell phones have replaced landlines. Between 1988 and 2015, land lines fell from 1.7 to 0.3% of personal consumption expenditure. At the same time, cell phones expenditure grew to be only 0.15% of personal consumption expenditure. This means that the substitution of cell for landlines caused a drop or slowdown in measured GDP.

Likewise, the widespread adoption of the cell phones has disrupted the camera industry. Global camera production dropped from 120 million units in 2007 units to 40 million in 2014. This decline translates into a reduction in GDP.

Let me make clear what I am saying. Cell phones, these wonderful devices that clearly improved our lives, have decreased GDP compared to what it would have been had Cell phones not been introduced. If we were still using landlines and cameras, GDP would be higher.

To make the same point in a different way, consider the price of an iPhone. One study found that an iPhone 5 were one to have been manufactured in 1991, would have cost more than $3.5 million to build. When introduced in 2012, the iPhone 5 cost $650. That is a 99.98% decline in manufacturing cost over 21 years.

It’s not just cell phones. Amazon has disrupted retailing, famously starting with books but moving on to other products. Education is also being disrupted. I hear everyday on the way to work ads for Arizona State University online.

Then there are the intangible products that contribute much to our lives but aren’t counted in GDP. Free things like web searches, apps supported by ads, and government services that are now provided online.

The last twenty years has been a wrought by disruptive technologies that have slowed GDP growth, but have improved people’s lives. People can see this in their own incomes. Median family income, adjusted for inflation, reached $59,039 in 2016, exceeding the previous high set in 1999 by $400. That’s right, between 1999 and 2016, family incomes increased by $400.

Does anyone really think that families are only $400 better off 2016 compared to 1999? Cell phones, Amazon, online education, and we are only better off by the equivalent of an airline ticket between Las Cruces and San Diego. Really?

Of course, we are better off than that. It is the disruptive nature of the new technologies have reduced measured income, but have improved lives far beyond their market value, that have resulted in this seeming paradox.

But this focus on GDP can go to far. GDP is far from a perfect measure of economic wellbeing. Environmental degradation is a major issue, yet is unaddressed by GDP. Inequality and fairness are also not addressed by GDP measures.

Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He has a Ph.D. from the brick-and-mortar version of Arizona State University. The opinion expressed may not be shared by the regents and administration of NMSU. Chris can be reached at