Dodgy statistics here, very dodgy

The internet is worth £100bn to the UK economy, more than 7% of national income, according to a report out today.

If it were an industry in its own right, the internet would be more than twice as large as the UK hotel and restaurant market and nearly as big as the financial services sector, which accounted for 9% of GDP in 2009, the study says.

Yes, how lovely!

You can see them salivating, can\’t you. We can go kill the bankers as the internet is just as important!

Sadly, this simply isn\’t so. At least half of that \”value of the internet\” is stuff that happens to be done using the internet. You know, like shopping. Other people covering the same report have noted that a goodly chunk of that 9% also turns up in the transport sector of the GDP caluclations (delivery of stuff bought on the internet you see) and also in retail (selling stuff, see?).

What they\’ve done to get to their GDP number is take the value added of everything that is connected with the internet: rather than the value added by the use of the internet.

A very different thing: if we calculated the GDP of the financial sector this way then we\’d be up at about, well, 100% of GDP probably, for just about every market transation (wihch is what GDP measures) uses the financial sector at some point, even if only as a method of payment.

We can also argue the other way as well. The consumer surplus from the internet is hugely, vastly, greater than the GDP measurement. Google, for example, is measured in GDP by the profit it makes plus the wages it pays. But the value to all of us of using Google is vastly greater than this: which is why we use it of course.

It\’s not quite right, as the calculation derives from what portion of value created the entrepreneurs (as opposed to the financiers, we\’re talking about Schumpeterian profits, not the general level of returns to capital) manage to hang onto but a rough rule of thumb would be that 95% or more of the value goes to the consumers, only 3-5% to the producers.

But then if we do argue that way then we\’ve got to accept that this is also true of the financial system. The value to us of the existence of such a system is hugely, vastly, greater than whatever the bankers manage to skim off the cashflows.

Two more things. The first is this endless questioning of \”where\’s the growth going to come from?\”

No, I\’m not going to make a prediction about it, just note that a good bet would be that sector which has grown from 0% to near 10% (by these figures!) of GDP over a decade.

The second is that we\’ve a reasonable candidate here for what Arnold Kling calls the \”recalculation\” theory of recessions.

Yes, for the sake of argument, we\’ll accept the Keynesian view, maybe the Austrian too, of the business cycle, recessions, money supply, animal spirits and all the rest. In fact, we\’re entirely happy with absolutely any school of thought on cyclical recessions and aggregate demand.

However, we also want to try and point to the dislocations caused by large changes in the underlying structure of the economy. There are indeed those who point to the 20s and 30s as having been caused by the, looking back now, huge changes in the underlying economy. The combination of the mechanisation of agriculture, mass manufacturing (the production line especially) and electricity meant a huge shift in labour. From doughboys down on the farm to, a generation later, the agricultural workforce being visible only through a telescope. Everyone was now working in the factories.

And of course no one really knew how to manage this, no one knew really what was happening or what to do next: thus a lot of stuttering as this \”recalculation\” went on.

It\’s certainly possible to argue that this internet thing is a technology change of comparable magnitude.

No, I don\’t say this is true: only that it\’s a possible explanation of what went/is going on. We\’ll leave the other recessions to the vaguaries of the business cycle which the macroeconomists can argue over.

And if it is true, then aggregate demand really isn\’t the problem at all. Indeed, reflation of the economy on the old technological basis perpetuates the problems of restructuring for the new. And yes, there are people who argue that that is what went wrong in the 30s.

None of which really helps us all that much right now of course. But it is worth noting that the 30s (in the US at least) saw the greatest increase in productivity of any decade yet measured. Yet it wasn\’t until the late 40s, early 50s, that this surge in productivity started to feed through into living standards.