One of the most telling debates of the twentieth century was the socialist calculation controversy. The question, broadly speaking, was whether the government could figure out how to set prices for goods without the market. Frederich von Hayek told socialists that such a feat was impossible, because the market provided information that no centralized authority could replicate. The fall of the Soviet Union provided a real world confirmation of Hayek’s academic insight.
Nevertheless, today much of our debate about growth and inequality still depends on our confidence in government calculations. In a very interesting article in the Wall Street Journal, Hal Varian, the chief economist of Google, claimed that productivity and economic growth were severely understated, because government statistics are not capturing many of gains in the information economy. One problem is that government only measures something as part of GNP when people pay for it. But much of what Silicon Valley produces is free or nearly so. Google’s search engine puts the information of the world at our fingertips. Yet this value is not fully captured.
Government measurements of productivity and growth were designed for the industrial age, not the information age, where the dematerialization of the world created by information technology helps create more and more free goods.