James Surowiecki: Valuing the Free Digital Economy: The New Yorker Twitter's recent I.P.O. bonanza gave us all some striking numbers to consider. There's the company's valuation: an astounding twenty-four billion dollars. And its revenue: just five hundred and thirty-five million. It has more than two hundred and thirty million active users, and a hundred million of them use the service daily. They collectively send roughly half a billion tweets every day. And then there's the starkest number of all: zero. That's the price that Twitter charges people to use its technology. Since the company was founded, ordinary users have sent more than three hundred billion tweets. In exchange, they have paid Twitter no dollars and no cents. Ever since Netscape made the decision to give away its browser, free has been more the rule online than the exception. And even though traditional media companies have been erecting paywalls to guard revenue, a huge chunk of the time we spend online is spent consuming stuff that we don't pay for. Economically, this makes for an odd situation: digital goods and services are everywhere you look, but their impact is hard to see in economic statistics. Our main yardstick for the health of the economy is G.D.P. growth, a concept devised in the nineteen-thirties by the economist Simon Kuznets. If it's rising briskly, we know that the economy is doing well. If not, we know it's time to worry. The basic assumption is simple: the more stuff we're producing for sale, the better off we are. In the industrial age, this was a reasonable assumption, but in the digital economy that picture gets a lot fuzzier, since so much of what's being produced is available free. You may think that Wikipedia, Twitter, Snapchat, Google Maps, and so on are valuable. But, as far as G.D.P. is concerned, they barely exist. The M.I.T. economist Erik Brynjolfsson points out that, according to government statistics, the "information sector" of the economy - which includes publishing, software, data services, and telecom - has barely grown since the late eighties, even though we've seen an explosion in the amount of information and data that individuals and businesses consume. "That just feels totally wrong," he told me. Brynjolfsson is the co-author, with Andrew McAfee, of the forthcoming book "The Second Machine Age," which examines how digitization is remaking the economy. "We're underestimating the value of the part of the economy that's free," he said. As digital goods make up a bigger share of economic activity, that means we're likely getting a distorted picture of the economy as a whole. The issue is that, as Kuznets himself acknowledged, "the welfare of a nation . . . can scarcely be inferred from a measure of national income." For instance, most Web sites are built with free, open-source applications. This makes running a site cheap, which has all sorts of benefits in terms of welfare, but G.D.P. ends up lower than it would be if everyone had to pay for Microsoft's server software. Digital innovation can even shrink G.D.P.: Skype has reduced the amount of money that people spend on international calls, and free smartphone apps are replacing stand-alone devices that once generated billions in sales. The G.P.S. company Garmin was once one of the fastest-growing companies in the U.S. Thanks to Google and Apple Maps, Garmin's sales have taken a severe hit, but consumers, who now have access to good directions at no cost, are certainly better off. New technologies have always driven out old ones, but it used to be that they would enter the market economy, and thus boost G.D.P. - as when the internal-combustion engine replaced the horse. Digitization is distinctive because much of the value it creates for consumers never becomes part of the economy that G.D.P. measures. That makes the gap between what's actually happening in the economy and what the statistics are measuring wider than ever before. Figuring out the invisible value created by the Internet is no easy task. One strategy that economists have used is to measure how much time we spend online (on the assumption that time is money). A recent study by Brynjolfsson and Joo Hee Oh concluded that in 2011 the value of free goods on the Internet was hundreds of billions of dollars, and that it was increasing at a rate of more than forty billion dollars annually. Another study, by the economist Michael Mandel, contended that the government had underestimated the value of data services (mobile apps and the like) by some three hundred billion dollars a year. These are rough estimates, but they give a sense of how much better off the digital economy has made us. There's a catch, though. The enormous gains for consumers in the digital age often come at the expense of workers. Wikipedia is great for readers. It's awful for the people who make encyclopedias. Although the digital economy creates new ways to make money, digitization doesn't require a lot of workers: you can come up with an idea, write a piece of software, and distribute it to hundreds of millions of people with ease. That's fundamentally different from physical products, which require much more labor to produce and distribute. And while digitization has already transformed the media and entertainment businesses, it's not going to stop there. "There are very few industries that are going to be unaffected," Brynjolfsson told me. The value that the digital economy is creating is real. But so is the havoc. ♦