What is the difference between economic and non-economic activity?

My answer on Quora:

Sometimes it is easy to distinguish economic from non-economic activity, like buying a T-shirt vs. swimming in a lake. Other times, it is not so clear. For example, is the activity of Quora users considered economic? Users exchange a lot of information free of charge, and Quora is a very valuable company.

This question is of increasing relevance as free online services disrupt the traditional approach in recognizing the economic value of different activities.

Non-Market Services

First, let’s set a baseline for what economic activity is. We can generally define economic activity as transactions between two or more parties that involve the exchange of assets and liabilities. Note that some transactions between two parties can be one-way transactions, such as when one country provides development aid to another country, or when a bank forgives a borrowers debt.

But what about transactions that occur outside of the market economy? For non-market services like public services or volunteer and non-profit organizations that provide free educational or care-taking services to communities, the answer is not always clear. Because their activity has no observed market value, their economic value is dubiously estimated by the amount they spend.

In the case of a public school, its economic size in the national accounts is the amount of money it spends on teachers, supplies, etc. If a school spends more, its output goes up, but what if it spends more on things that do not improve student learning, which is the real output of a school? Economists try to estimate the true value of school by estimating the human capital generated by the school (using lifetime earnings, for example), though this is a tall task.

There is also the case of informal care-giving. Family caregivers play a crucial role in the health and well-being of a population, which has great economic impact but is officially not recognized as an economic activity. Some estimates value informal care-giving in the U.S. at around $500 billion.

Information and Free Online Services

Also outside of the market economy are free online services, like Quora. It doesn’t cost me anything to become a user and consume knowledge transferred from other people around the world via their brilliant answers. I also don’t receive any income when I create my own – albeit much less valuable – content on Quora. No money exchanges hands. The same can be said for Wikipedia, Google, Facebook, Yahoo!, Snapchat, Instagram, Twitter, etc.

Yet these are the most valuable companies in the world. Quora’s market value is estimated to be near $2 billion. As of September 6, 2017, the top 5 publicly traded companies in the world by market capitalization are all tech companies (Apple, Alphabet, Microsoft, Facebook, and Amazon.com), and two of them (Alphabet and Facebook) do not sell anything (for the most part) except advertising space.

Sure, these companies do have staff and operations and headquarters and operating costs, but those pale in comparison to their perceived economic value (as indicated by their market capitalization).

Do the activities of these companies count as economic value? Here lies a big distinction in economics, and that is the distinction between welfare and output. Many argue that great companies like Facebook may add great welfare to consumers, but do not contribute to economic output because their services are outside of the market economy.

This is calling for major changes to what we recognize as “output” in national economic accounts. The concept of GDP was created in the 20th century to keep up with the change in economic activity underway in that era – namely, the rise of manufacturing and industry. As services began to dominate, new creative ways were developed to measure the economic value of marketable services. Now, as non-market services are beginning to dominate, another round of fresh thinking is needed.

Here is a great, short, very readable essay by two leading thinkers in this space, Erik Brynjolffson and Andrew McAfee: Beyond GDP: How Our Current Metrics Mismeasure the Digital Economy.

A different source that sticks to the belief that these online, non-market services are only welfare enhancing and do not contribute to economic output, is a very short and well written book by Tyler Cowen called The Great Stagnation. Here is a review by The Economist.

 

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One comment

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