Do computers cost too little? The surprisingly complicated economic debate about how much, exactly, our technology is worth to…

Commentary about business and finance.
April 13 2011 4:13 PM

Do Computers Cost Too Little?

The surprisingly complicated economic debate about how much, exactly, our technology is worth to us.

Woman using a computer. Click image to expand.
How much is your computer worth to you?

Imagine that you stumbled downstairs this morning to find a masked burglar clutching not the silverware or the jewelry but your laptop. This unusual criminal said he did not want to steal your computer but wanted to kidnap it. He would return it if you would bargain with him, determining how much you would pay in ransom, per year, for the privilege of having it in your home.

It sounds ridiculous, but many economists would love to run this experiment. That is because they suspect that our computers are worth, in some strange way, more than what we pay for them. We currently pony up, say, $800 on hardware and $40 a month on an Internet connection. If you buy a computer every four years, that works out to about $680 a year. But we spend thousands of hours per year at leisure and doing household tasks on our home computers. We comparison shop for products from around the world, ignore poems from Aunt Millie, keep our finances in order, play fantastic games, and read newspapers in Hindi. Those activities must be worth more than just a few hundred bucks to us, given how we spend money on other things.

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First, let's consider why economists think it's important to answer this question. Isn't a computer's value exactly what the market charges for it: the price tag on the PC, plus the cost of the Internet connection and the electricity? Who cares about the value of uncounted benefits anyway? The broadest answer is that economists care because we seem to derive enormous uncounted benefits from our computers and the Internet, benefits that lie outside of the traditional metrics of GDP, spending, and income.

Erik Brynjolfsson, an economist at MIT who has spent two decades studying how technology impacts businesses and macroeconomic statistics, explains that the value question may upend the entire way we measure economic output, since going forward more and more of the goods, services, and experiences we have become of the hard-to-count, digital or online variety. In the words of George Mason economist Tyler Cowen, who just devoted a hefty part of a recently released e-book to the subject, "The more we are changing the use of our time, the less we can trust real income statistics."

Thus many economists have tried figuring out the "consumer surplus"—the fancy academic phrase for "benefits you get that you don't pay for"—of computers and the Internet. (There's a whole other literature devoted to explaining the value of computers to businesses.) For instance, Brynjolfsson zeroed in on the impact of online booksellers such as Amazon. He and his co-authors noted that the sheer variety of books available online, rather than in bricks-and-mortar stores, provided benefits to consumers. The math gets complicated, but essentially, Brynjolfsson and his co-authors figured out "how much a pre-Internet consumer would need to be compensated to be just as well off as he or she would be after the emergence of online markets," which gave her the new ability to get a rare title at fair market price almost instantaneously. All the way back in 2001, he estimated those benefits as worth from $731 million to $1.03 billion, seven to 10 times the benefit of lower book prices caused by Internet competition.

A few more ambitious studies have attempted to value the whole shebang. One of the first efforts came from Austan Goolsbee, the head of the White House's Council of Economic Advisers, then an economist at the University of Chicago, and Peter Klenow of Stanford. In 2006, they looked at the uncounted "welfare gains" we get from the Internet. "Only about 0.2 percent of consumer spending in the U.S …went for Internet access in 2004, yet time-use data indicate that people spent around 10 percent of their entire leisure time going online," they wrote. They developed a model based on the value of people's time, ultimately estimating that Internet access is worth 2 percent of full income. Thus, they estimated the value of the welfare gain provided by the Internet ranged as high as $3,800 per person.

More recently, Karen Kopecky of the Federal Reserve Bank of Atlanta and Jeremy Greenwood of the University of Pennsylvania approached a related question. They tackled the value of the personal computer, from the clunky 1977 Apple II to the supercharged models available today, using valuations of other new technologies as a guideline. Ultimately, they estimated that PCs are worth 2 percent or 3 percent of personal consumption expenditures. Back-of-the-envelope math suggests that works out to $200 billion, or about $650 per person, per year. But a more sophisticated analysis by the Wall Street Journal suggests something like $1,700.

Of course, to some extent, these studies measure the immeasurable. Granted, I am probably an outlier, but you would have to pay me a whole lot more than $2,000 to take away my Internet connection or my laptop. Plus, economists need to presume or guess at all sorts of variables to get the models to work—like the strength of your preference for using the Internet rather than watching television, and the value of your leisure time. Still, they give credence to the idea that our computers are worth significant amounts to us. But, you probably don't need an academic study or a felonious economist threatening to take away your laptop to know that.

Annie Lowrey is a contributing editor for New York magazine. She can be reached at annie.lowrey@gmail.com.

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