What's Twitter's real value ? Don't ask an economist

Graph And Coins

A national economy is an unimaginably complex system.

And yet we compress all its complexity into a single measure, and then focus obsessively on that. If you want a metaphor for this, think of King Kong spending most of his time staring at a pinhead, worrying about whether it is moving or not. That pinhead is GDP or, to give it its full moniker, gross domestic product.

It's defined as "the sum of all goods and services produced in a country over time, without double counting products used in other output. It is a comprehensive measure, covering the production of consumer goods and services, even government services, and investment goods." From the movement of this single number over time we get an idea of whether the economy is contracting or expanding, which is why governments all over the world at the moment, and especially in the UK, devote every waking hour to monitoring it. If it's up by 0.3%, then it's trebles all round in Whitehall; if down by 0.3%, then Cameron and Osborne start thinking of life after government.

That this is absurd goes without saying. In fact, it's been absurd ever since GDP was invented in 1934 by the economist Simon Kuznets. The measure has been subjected to ridicule and criticism for as long as I can remember. If a parent chooses to stay home to look after his or her children, then the "work" involved (producing stable and happy children?) doesn't get counted in the GDP. But if the same parent employs a nanny, then it does. People have pointed out that increasing GDP may simply be an indicator of how quickly we are boosting global warming rather than increasing social welfare: a gas-guzzling, high-emission SUV contributes the same amount to GDP as much as a thousand bicycles. And so on.

Deciding that the health of a nation's economy can be measured by a single number is as daft as thinking that a single measure of "intelligence" (the IQ) can sum up an individual's capability and potential. As Howard Gardner pointed out many years ago, there are many different kinds of intelligence, and each person occupies a different point in that multi-dimensional space. Similarly, the health of an economy needs to be measured along several axes. But we seem to be stuck with GDP because that's the only thing economists know how to calibrate.

To the measure's age-old contradictions, the internet has now added a really puzzling one. The world of traditional "production", in which industries and businesses produced goods and services and in the process created value that could be measured and included in GDP, has been augmented by a parallel universe in which there is a great deal of activity, most of which is invisible to the bean-counters who compute GDP.

Take Twitter. It has more than 230m active users, 100m of whom use the service daily to send 500m tweets. Since Twitter was founded, these users have dispatched more than 300 billion tweets. And in exchange for this wonderful service they have paid Twitter precisely £0.00.

Now you may balk at the idea of tweets being "product", but they are what has turned Twitter into a company apparently worth $24bn. So there's economic value there, somewhere.

"But," as the New Yorker columnist James Surowiecki writes, "as far as GDP is concerned, they barely exist. The Massachusetts Institute of Technology economist Erik Brynjolfsson points out that, according to government statistics, the 'information sector' of the [US] economy – which includes publishing, software, data services and telecom – has barely grown since the late 80s, even though we've seen an explosion in the amount of information and data that individuals and businesses consume".

One way of thinking about this comes from recognising that attention has become the really scarce resource in a world of information overload. Using the insight that even when people do not pay cash they must still pay "attention", Professor Brynjolfsson and his MIT colleagues have computed an estimate of annual change in the value of online applications that have very low or zero prices. The idea is to measure how much time we spend online (on the assumption that time is money) and then convert that into dollars. They concluded that over the period 2002-2011 the increase in consumer surplus created by free internet services was more than $30bn per year in the US alone, which amounts to about 0.23% of average annual GDP. Given the scale of people's engagement with the internet, this seems low to me. But it's a start. And – who knows? – when we eventually find a way of measuring the value of online activity, we might find that the economy has been growing nicely after all.

Powered by Guardian.co.ukThis article was written by John Naughton, for The Observer on Sunday 24th November 2013 00.06 Europe/London

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