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The Berkeley EHL

Standards of Living

Matthew Yglesias:

Yglesias » The Consumer Surplus Era: This seems like a good time to trot out Karl Smith’s handy demonstration of the difference between a given sector’s contribution to GDP and its sector to consumer welfare.... The gap between what a given sector contributes to measured GDP and what it contributes to human well-being has always been with us. But the ways in which digital technology makes the non-commercial production and dissemination of information goods viable opens up vast new horizons of consumer welfare. Whether or not someone would enjoy manufacturing automobiles in his spare time as a hobby and distributing them to hundreds of thousands of people for free, it’s not possible to do. The marginal cost of building a car is pretty high, distributing cars is difficult, and the start-up costs of building a car factory are enormous.

Producing information goods—software, text, music, etc.—and distributing it on the internet isn’t like that at all.

Consequently, the realm of activities with gigantic divergence between measured GDP and welfare value is vastly expanding in ways that I don’t think policymakers and civil society donors are yet responding to in fully appropriate ways. The case for finding ways to directly and indirectly subsidize the creation of such goods is extremely strong. But more generally, I think we should expect the significance of this kind of thing to expand in the future. After all, the most active and intense hobbyists are typically senior citizens who, thanks to being retired, have the time and inclination to indulge their passions and desire for recognition and community. But the current cohort of senior citizens in the developed world has very weak digital skills.

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