I can’t help but wonder in reading Robert Samuelson’s lament for the small returns to consumers from investments in information technology:
In a recent essay, economic historian John Komlos of the University of Munich argues that the economic value of new technologies has declined over time. A century or so ago, “the incandescent bulb replaced the kerosene lamp, and the value added [to national income] as well as to welfare in terms of reliability, convenience, health and safety [was] humongous,†he writes.
Similar transformations stemmed from many 19th- and 20th-century technologies: steel-making, the telephone, automobiles, airplanes, antibiotics, and radio and television.
The same is not true of much information technology, Komlos argues. Consider Facebook. “While social networking facilitated by Facebook is a popular feature of the Internet, basically it merely replaces older ways of socializing without adding much to our feeling of well-being,†he writes. “It monetized activities that were for the most part left previously outside of the market’s purview.â€
why he’s selected information technology as his whipping boy? I agree with the general proposition: consumers aren’t realizing the surplus from technological innovation the way they did a century ago. Producers are. The entire question might be summed up as where are our flying cars? Or, alternatively, the future ain’t what it used to be.
However, the real place to look isn’t at information technology but at healthcare. It would take some convincing before I believed that the aggregate amount (in real dollars) that the federal government has spent on information technology research over the last 50 years amounts to what it pays to support the NIH each year ($26 billion). The Internet itself was invented on a government investment of less than $1 million. And I suspect that if you took the aggregate public and private amount that’s been spent on information technology research over the last forty years it’s dwarfed by what is spent on healthcare every single year. Are we that much healthier than we were in 1970? Life expectancy has only gone up by about 10% over the period and I’d attribute a lot of that to the reduction in smoking which is not healthcare. Said another way the return on investment in information technology has been pretty darned good while the ROI on healthcare is extremely small.
So, where are our flying cars? We’ve decided to spend the money on a few extra days or weeks of vegetative life for the elderly instead (that’s where a good chunk of the healthcare dough is spent—the last weeks of life).
However, the explanation I’d provide fits information technology and healthcare equally well. What we’re seeing is exactly what you’d expect when the government protects and subsidizes providers and relies on the providers to look out for the interests of consumers from the goodness of their hearts, for ethical reasons, and so on. Producers capture most of the surplus.
“I agree with the general proposition: consumers aren’t realizing the surplus from technological innovation the way they did a century ago. Producers are.”
Do you have a citation for that? I have one that comes to the exact opposite conclusion. (Michael Pakko; “Labors Share” National Economic Trends; FRB St Louis 2004).
Maybe the better conclusion is that government isn’t a very good venture capitalist, except as measured by CCROI. Campaign contributions return on investment.
It’s the premise of Mr. Samuelson’s column and I’m echoing it not re-reporting it. Note that I’m distinguishing between producers and consumers not producers and employees. Employees are subsumed into producers.
It would seem to me that the conclusion is pretty obvious: corporate revenues are rising, corporate profits are soaring, wages are flat, and prices aren’t falling. Where’s the surplus going? IMO it can only be going to corporate profits.
I doubt Samuelson knows of the study I refer too, and he probably wouldnt care. He wanted to make a point and ginned up an argument.
The study collapses wages and prices together as it also does people, as wage earners and consumers. Wages are a small portion, so that doesn’t go anywhere. In addition, the proportion of benefit enjoyed by people as consumers/wage earners is remarkably stable for the 55 years studied, so recent or temporary prevailing corporate profitability isn’t really an indicator. That stability shouldn’t be surprising given the relative level of competition in capital markets and corporate operation. Only things like Solyndra or myriad other blatantly subsidized ventures either are awarded outsized benefit………or are so ill conceived they simply flop.
Perhaps the most telling indicator that Samuelson is just grousing is the use of information technology and Facebook as an example. That’s just shooting a fish in a barrel. The fact of the matter is that information technology has transformed commerce like nothing I’ve ever seen. You don’t even need to quantifying it to understand that the cost and benefit to consumers of information from Googling, Amazon etc simply dwarfs anything we have seen in many, many years.
The point of my post is that IMO Mr. Samuelson is shooting at the wrong target. The ROI is great for IT and, as your example of Amazon indicates, consumers are capturing a good proportion of the surplus.
There are many better examples of black holes for investment than IT. The leader of the pack has got to be healthcare.
Where is our cure for cancer? Where are my cybernetic implants and engineered bacteria that don’t create plaque? If there’s an area that’s overhyped and under-delivered, it’s medical research.
Healthcare is a tough one. How do you measure ROI? I addition, and for example, cancer may not have been cured but for some forms life expectancy has increased dramatically. On the other hand, for two situations with which I’m very familiar the cutting edge work is happening at Duke and Vanderbilt. I have no idea how NIH performs.
IIRC mortality from cancer is down 8% over the period of 40 years. And that includes smoking reduction, improvements in the environment, and so on. That’s a pretty small return from the trillions we’ve invested in healthcare.
Milton Friedman’s assessment of healthcare (and education) was that each additional dollar spent on healthcare actually caused fewer total outputs to be produced (however outputs were measured).
For what it’s worth, from 1980 to 2000, the death rate from coronary heart disease was cut in half. A study found that about half of that was from improvements in health care and the other half from changes in risk factors (diet, exercise, smoking, blood pressure, which were offset by increase BMI and diabetes). Smoking was attributed 12% of the overall reduction.
http://www.nejm.org/doi/full/10.1056/NEJMsa053935
This came up on another blog discussion about cholesterol, and I never could find an ungated version.
The old methods of production or products are destroyed, and they are replaced by more efficient methods of productions or better products. If there is any surplus from this, there is no guarantee that it will be used wisely. Eventually, a free-market will work out the best use of any surplus, but there is no free-market in the US.
Facebook, Twitter, and other social media exist because there is a demand. I may not like them, but that is too bad. A lot of people feel that they are obtaining a value from them. If they feel that they are paying too high a value, they can quit.
Lifestyle improvement would be a better measurement. You all can guess why.
I would like to know what he thinks the alternatives are. What products would the Facebook and Twitter workers be producing instead, and where would they be producing it.
Is he suggesting that Americans do not have enough stuff or that they need better stuff? Does he want Apple to release iPhone versions faster? Does he want bigger SUV’s with better gas milage?
I have a feeling that he is whining just to whine.
Health care is hard to measure, especially if all you do is look at mortality. In 1970 not many people got cataract operations. You mostly just lost your vision. If you did have a cataract operation you had to stay in hospital lying flat for a week. Forget retina surgery since it didn’t really exist yet. After a gallbladder operation you stayed in hospital for a week or more. 3 months before you returned to work. Now home same day and back to work in a few days. Bad knees? You stopped working. Now, you get them replaced. Breast cancer? get em both chopped off. Now, we take out just the mass and recovery is months faster, and less disfiguring. Remember the Kennedy baby died of prematurity, at 34 weeks. That is almost unheard of now.
I ave no idea how to value these, but I do know that most people, when asked, would rather have today’s care at today’s prices rather than 1970’s. Can’t say if that is really an informed decision.
Steve
That was a concise rundown on medical advancements, Steve. It reminded me a friend who recently had a detached retina. With a laser procedure he was back to work within a day. It’s all pretty amazing!
As I’ve written at length on before, there are several ways of determining value. One way is willingness to pay, i.e. a purely market-based system. We’ve already made the decision we’re not going to do that.
If we’re going to adopt the position that even the smallest incremental improvement is desireable, I see no alternative for persisting in that other than a fully socialized system in which physicians and other producers are paid salaries determined by the government, pharmaceutical companies are paid for their products according to a government-established schedule, and so on. You’ve either got to impose controls on the supply or on the demand or both. That’s not politics or even economics. It’s physics.
“You’ve either got to impose controls on the supply or on the demand or both. That’s not politics or even economics. It’s physics.”
With this in mind here are two articles questioning which way our health care costs will go.
The first deals with the unknowns relevant to health care costs in the near future, as the law matures fully into it’s implementation. The second, voices concerns about the actual viability of some of the touted insurer’s low premiums, and how high they might go when increased volume of people and necessity of care collide.