One Lesson From the Crisis: It's Time to Create Your Own Economy

Why one lesson of this economic crisis may be that we have to change how we measure growth, production, and success.

In a typical day, I might write two tweets, peruse 15 blogs (Jason Kottke and Penelope Trunk are two must-reads), and watch James Brown dance on YouTube. If it's a really fun day, I'll read more blogs, scour the Web for movie reviews, browse eBay, Google myself, and spend more time on Twitter. None of this costs me a penny, and yet I am producing plenty — namely, my own interest and amusement.

More and more, "production" — that word my fellow economists have worked over for generations — has become interior to the human mind rather than set on a factory floor. A tweet may not look like much, but its value lies in the mental dimension. You use Twitter, Facebook, MySpace, and other Web services to construct a complex meld of stories, images, and feelings in your mind. No single bit seems weighty on its own, but the resulting blend is rich in joy, emotion, and suspense. This is a new form of drama, and it plays out inside us — with technological assistance — rather than on a public stage.

Online, you can literally create your own economy. By that, I mean you can build an ordered set of opportunities for prosperity and pleasure, analogous to a traditional economy but held in your head. There is no obvious monetary transaction, but you're using your limited resources to get a better deal — the very essence of economics. In fact, "economics" comes from oikonomia, the ancient Greek word for household management, and the modern practice of economics is returning to that idea.

The traditional gauge of economic success is profit, but over time we'll find that such statistics as measures of GDP tell us less and less about broader efforts to improve human well-being. Much of the Web's value is experienced at the personal level and does not show up in productivity numbers. Buying $2 worth of bananas boosts GDP; having $20 worth of fun on the Web does not. And this effect is a big one. Each day more enjoyment, more social connection, and, indeed, more contemplation are produced on the Web than had been imagined even 10 years ago. But how do we measure those things?

That question — and I don't yet have a full answer — reflects the state of flux we're in today. We're going through a lot of adjustments, and not just in real estate and finance. Free stuff on the Web has made this economic downturn more severe. For many of us, the Web really is more fun than a trip to the store, which makes it easier for us to cut our spending. Although the iPhone has been earning lots for Apple, our spending on high-tech goodies does not make up for falling demand elsewhere. A PC and broadband cost something, but for those millions who have paid up, further exploration is essentially free.

Nor do most Web activities generate jobs and revenue at the rate we saw with past technological marvels. When Ford was growing early in the 20th century, it created millions of jobs and helped to build Detroit into a top-tier city. Today, Facebook creates lots of voyeuristic pleasure, but much of the "work" is done by software and servers, and the firm hasn't transformed Palo Alto. Web 2.0 is not filling government coffers or supporting many families — and may be hurting some. (Just ask a newspaper reporter.) Everyone on the Web has heard of Twitter, but as of this spring, fewer than 50 people work there.

That all sounds scary, yet there is a bright side; I call it the "human capital dividend." The reallocation of consumer time into the "free sector" on the Web will liberate the efforts of many producers and intermediaries, just as the automobile's advent shifted workers out of making buggies for the horse. In fact, it's an economic miracle that Twitter can get by with no more than 50 employees. It's not quite a perpetual-motion machine, but if other parts of the economy were equally efficient, we'd all be swimming in free or near-free stuff.

A second part of the human capital dividend comes from our productivity as Web consumers. Billions of people are rapidly becoming more knowledgeable and better connected to one another. Self-education has never been more fun, and that is because we are in control of that process like never before.

It's a common complaint that the Web makes us more impatient, but most of us use it to track (or create) long-running stories and debates. I've been following the career of folk-rock star Roger McGuinn for more than 30 years, and now I use the Web for that. If anything, the essence of Web life is that we are impatient to discover the next installment in our planned programs of very patient long-term interest. That's a kind of impatience we can be proud of, just as a mother might be impatient to receive a call from her teenage daughter away at college. It's a sign of caring and commitment, not superficiality.

Someday we'll gain the tools to measure these new benefits. Twitter's value will lie not in its eventual market cap but in the human connections it creates. My Twitter feed is a virtual meeting room with economists, aid workers, entrepreneurs, housewives, celebrities, and plain old friends. The Web unites millions of diverse individuals, who interact and sometimes even meet up or marry. The world has a lot more of these connections, even if we've yet to see all of their implications — including the traditional financial ones of new businesses, employment, and revenue. And it may sound counterintuitive, but the more time you spend staring at your screen, the bigger that human capital dividend will be.

O Pioneers!

Tyler Cowen, an economics professor at George Mason University, is the author of the new book Create Your Own Economy.

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14 Comments

  • Chris Gagnon

    If I were hungry I'd take the $2 worth of bananas over having $20 worth of fun on the Web any day of the week.

  • Ebun Omoni

    ^ That RFK quote complements the article rather well despite being written over 40 years ago!

    As Cowen has articulately pointed out, the new web economy has fundamentally changed the way we derive utility. Happiness and spending have been decoupled; GNH and GDP are unproportional.

    If he were alive today, what would Robert F. Kennedy say about the new web world order?

  • Vanessa Blaylock

    "Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product, now, is over eight hundred billion dollars a year, but that GNP - if we should judge America by that - counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.

    Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity or our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. It can tell us everything about America except why we are proud that we are Americans."

    -Robert F. Kennedy
    -18 March 1968

  • I I

    Actually this issues you talk about are related to the concept of prosumer (consumer & producer). This coNcept implies that the economic invidividual breaks through the dichotomous usual conception of consumption vs investment (production). When consumption and investment happens at the same time there is a double reward in terms of utility, reason why productive systems (Wikipedia vs Encilopaedia Britannica, for instance) which internalize this economic feature have a comparative advantage over those who doesn´t. This feature is an esential characteristic of the new economic paradigm.
    This considerations allows to introduce consumption as another productive factor besides of labour and capital. This is what, in different ways, peer-to-peer processes, wikipedia, linux or google do.
    Since consumption becomes a productive factor the capital of the consumer also becomes a relevant issue (human capital).
    However at the theroretical level, breaking the dicotomy consumption-investment (=production) threatens the theoretical aparatus of economics (intertemporal changes over utility curves). This is way it is so interesting.

  • John Blossom

    Good article. I made parallel points on the Content Nation blog recently in a piece reflecting on Chris Anderson's new book "Free": http://bit.ly/qgoJK We tend to forget that most economies are in essence social economies. Manufacturing and mass media have distorted that reality for the better part of two centuries. Social media enables transactions that provide value at many levels that traditional sales and marketing do not necessarily deliver. As fewer people benefit in net terms from the mass marketing economy, this will become increasingly important. Social media enables massive amounts of personal-scale relationships and transactions instead of just a few relationships with massive entities, which changes the fundamental economic balance of transactions. The large entities, the organizations such as Google which facilitate those transactions, prosper when they enable as many social-level transactions as possible; mass marketing is part of their mix, but contextual ads enabled more social-level transactions on a global scale. This "hidden" global online economy may not show up in GDP accurately, but it's floating more and more people in an era in which mass marketing sucks value out of local economies.

  • Vítor Figueiró

    @AdamZak: I'd say you're missing a lot. If you can't appreciate the personal and social enrichment that the open and uncensored sharing mentioned in the article brings to your live enough to consider the cost of web access very low in comparison, then maybe you should save your money.

  • Kenan Branam

    Talking about un-measured and un-reported economies, see Riane Eisler’s book, The Real Wealth of Nations: Creating a Caring Economics, which proposes a new approach to economics that gives visibility and value to the most essential human work – the work of caring for people and nature. http://www.partnershipway.org/

  • Bert DuMars

    I enjoyed this article and love the quotes within it from Tyler Cowen. I believe the professor has hit on another interesting perspective related to the Social Web Ecosystem. Frictionless relationships, intellectual pursuits and free commerce are creating and driving a new economy that we can barely comprehend. The evolution of this economy and ecosystem continues to blindside us with its power and impact from driving Dell Computer or Zappos Shoe sales to fundamentally changing the communications of major political, societal and disaster events around the world - see Iran Election Demonstrations and the World Response through Twitter as but one example. Thank you for the post and I am personally Tweeting interesting quotes from it that I feel people should read and absorb.

  • Adam Zak

    In what manner do you obtain the funds with which to pay for your Web access so you can do all this fun stuff? Now perhaps you'll use the public library or some other publicly provided resource. Who pays for that? What am I missing here?

  • Crispin Garden-Webster

    Not at all related to the web (how could that be?)but in Bhutan (east of Nepal,for the geographically challenged)they measure Gross National Happiness as a serious economic indicator. GNH is based on the principle that communities develop best when the spiritual and economic development factors are in harmony. Its based on four pillars; sustainability,governance, maintenance of cultural values and protection of the environment. Measures of wellness in economics, environment, physical and mental, the workplace, society and politics make up the quantititive indicators.
    In 1776 the American Declaration of Independence argued for “certain inalienable Rights, that among these are Life, Liberty and the Pursuit of Happiness”. A global study in 2007 found that Bhutan ranked 8th out of 178 countries (the US was 23rd) in subjective well-being SWB, a metric that has been used by many psychologists since 1997. Bhutan is the only country in the top 20 "happiest" countries that has a very low GDP. In light of this article it would be interesting to correlate SWB with web penetration and participation.

  • Anastacio Bueno

    Thank you for this article. I have been telling people for at least a year about Twitter and the social media/communication revolution for an even longer time. If you have been listening to or watching the news since the Iranian election then you should understand the power and reach of Twitter and the Internet. I was both glad and concerned with Sec. of State Clinton and Sec. of Defense Robert Gates. Glad because they were smart enough to recognize the impact of social media/communications because of what was happening in Iran but concerned because of what they admitted. Mrs. Clinton said she had not heard of Twitter before and Mr. Gates said the Dept. of Defense had to brush up on this social media phenomenon for military intelligence purpose . What most people in business-especially top management-do not realize is that as you say new economies are being created all around us. New products and new services are created every day-look at Apple Apps. That producers are no longer in charge-the markets and customers are! As Clay Shirky said in his book “Here Comes Everybody” the tools for communicating between and among humans are now, for the first time in the history of mankind, in the hands of human beings. We can organize without organizations and thus eliminating the monopoly for traditional organizations like government, corporations (producers), universities, religious leaders, in favor of each other. Iran is the perfect example!

  • Christopher Boynton

    Seems like that unmeasurable utility created by the web, for which you have done a nice job of itemizing (enjoyment, social connection, intellectual growth) absolutely needs some definitive metrics. Some sort of "human enrichment index" that is partly scored qualitatively by placement on Maslow's hierarchy of needs and partly scored quantitatively by perhaps a measure of one's economic output? Fascinating article and topic!

    I'm @crboynton on Twitter

  • Marc Drucker

    Thank you, I think you are making an incredibly important point. There is such an unquestioned assumption that GDP equates to human good. GDP is just spending - that could be hurricane Katrina clean up. It is unfortunate if things that bring us pleasure and meaning that take place outside the formal (monetized) economy are implicitly devalued. Let's bring back eating a meal at home with friends, going for a walk, having rich conversation... and tweeting! New metrics like the Genuine Progress Indicator or happiness measures can take a place alongside GDP to have a fuller picture of "economic output".