We should all embrace the digital economy
It will seem a little odd to claim a mobile app to aid you in finding parking as a symbol of the new wealth flooding humanity. But as a symbol -- the actual application may or may not work, who knows -- it is indeed apt as an example of how the digital revolution is making us all so, so much wealthier. In technical terms, it’s an increase in the Solow Residual, which is boring jargon which needs to be explained.
What’s happening here is that some clever -- or perhaps hopeful -- people have decided to implement an idea that I’ve seen in Britain over the past couple of years. Called “Yes Parking,” it’s a mobile app that allows you to look for available parking in Dhaka. Rather, more importantly, it allows you to offer up for rent any space that you might have. There have been similar implementations around commuter railways stations in England.
Okay, fine, we all wish them the best and so on. But at the deeper economic level, this is a good example of how certain parts of that digital economy are making us all so much richer. That sharing economy thing -- Uber, Airbnb, and so on.
There are three basic ways that we can become richer. Have more goods and services to enjoy, which is the usual definition of being richer. We can invest more capital in producing them. We can apply more labour to produce them, or we can become more efficient at that production. It is that third which is the real determinant of living standards in the future -- how much more efficient are we becoming.
In more detail, we call that increasing efficiency increased productivity. Whatever scarce resources we’re using as inputs are creating more output, they are being used more productivity. And it’s advancing technology which increases that productivity. This is a somewhat circular definition, true, for anything which increases productivity is regarded as a technology. So, a supermarket is a more advanced technology than a market stall, precisely because it is more efficient. It’ll use less labour for a given amount of sales, for example.
We can talk about the productivity of near anything. Today, the little layer of gold on the connectors of electronic boards is about one-hundredth of the thickness it was 30 years ago. We’ve increased our productivity of gold use, we can make more electronic boards out of an ounce. We can and do talk about the productivity of capital and so too of labour. If we want to talk about them all, all inputs, then we talk of “total factor productivity” or TFP.
The Solow Residual is a residual because we don’t -- and can't really -- go and measure it directly. What we do is look at the output, see that more capital is being added, more labour, and account for those.
Increasing that Solow Residual is seen as crucial to increasing living standards. In the currently rich countries, living standards rose by about eight times during the 20th century. Near all of that came from those increases in TFP, in technology increasing productivity.
So, to our parking app or being able to rent out the apartment for a night or two. Or become a taxi using our own car for some hours a week. What we’ve got is that same amount of capital we had before. The parking space, the car, the room in the flat, these all existed anyway. We may or may not be adding, as with driving, a bit of labour. But what these new platforms allow us to do is make use of those already extant economic assets.
That is, we’re gaining output without having to use more capital or labour. We’re becoming more efficient, we are raising productivity. We’re actually in the nirvana dreamed of by economists where we get richer just by being cleverer about how we do things.
Yes, of course, a parking app in Dhaka is trivial in the global scale of things. But it’s excellent as an example of the manner in which the digital platforms are making us richer. At the moment some extant parking spaces go unfilled because the search costs to find them are too high. So too finding someone who wants to rent your driveway is difficult and expensive. Make that dual-sided search cheap and convenient, and more economic activity will take place. We’re richer, without having had to build more parking spaces.
This is also true, at that larger scale, of all of those varied platforms.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.