Both production and
consumption no longer resemble what we have envisaged them over last 300 years
or so. As we begin the third decade of the 21st century, the
economic universe is stark in it contrast to its look a mere 80 or so years
ago. Simon Kuznets and team ‘invented’ the concept of GDP in 1937, yet eight
decades down the line, the limitations of the same are getting becoming ever
more visible. The answers lie in the emergence of what one terms the information
revolution. Internet and subsequent rapid diffusion has touched upon daily
lives in many ways. Manifest is the new theoretical discussion on the role of
production and consumption in microeconomic literature.
Economics functions on
the notion of scarcity. Implied is constant endeavor to produce goods using lesser
and lesser resources. In production analysis, isoquants represent locus of all
combinations of inputs producing same level of output. Derived from the same is
the idea of least cost production. Factoring the input productivity, presumably,
technology leads to production of same quantity of output using lower amount of
inputs. In other words shifting of isoquants downwards without compromising on
the output. Kaldor termed it technical progress. Similar analysis was done
among others by Kuznets, Solow etc. In fact to Solow, technical progress did
ensure the lower use of resources the yet the improvements in productivity
using technology function remained unobserved in the macroeconomic statistics. It
was a sort of paradox which later has been expanded among others by
Brynjolfson, Hulten and Nakamura etc.
The seemingly rapid
expansion of the knowledge economy has transformed knowledge as key factor in
production. More than labour, it is the knowledge that drives the output. Yet,
away from the shifting knowledge output equations, technical progress is
increasingly being reflected in the utility analysis too. What was once perhaps
theoretical and certainly not primary, is slowly gaining a momentum in terms of
research literature.
As Lancaster pointed out
in 1968 itself, utility is derived from characteristics of goods acquired and
not from goods themselves. A rational individual does not derive utility from
television set per se, instead the utility is derived from it characteristic
from visuals ranging from news to entertainment to sports to shopping that it
beams to his or her couch potato seat. Similarly the multipurpose utilitarian characteristics
of the smart phone that create its utility for the user and not the device
itself. Implied in the above is the assertion that separate ‘consumption
technology’ transmutes goods, measured at production cost, into consumption
‘activities’ or ‘commodities’ providing utility.
Consumption technology perceptibly
was not static. It had to evolve over time. As anticipated, the changes evolved
with innovation. The outcome was palpable and increased efficiency in consumer
choice. Augmentation of efficiency occurred
through more or less costless improvements in product quality. Oblique to the discussion is these
improvements resulted in satiating the same wants to be bought for same amount
of money. Those purchasing television
sets in the 2000s paid more or less same money as those who were purchasing
television sets in the mid to late 1980s. However, the quality in term of
product and service had considerably improved in the intervening years. In real
terms prices of television sets had contracted while the product and
characteristics associated with the product that generated consumer utility had
significantly expanded. The incomes having increased saw a rightward shift of
the budget line, inward shift of the isoutility curve thus in some ways
creating sub-optimal consumption given the constraints. Movement towards the
optimal bundle of the goods and thus consumer equilibrium allowed consumers to
buy greater amount of goods thus shifting outwards the point of consumer
equilibrium. Today, the ubiquity of smart phones accompanied by generativity of
varying degrees is creating similar outward shift in consumer equilibrium.
This shift in utility
function relative to consumer budget constraint has multiple catalyst in terms
of improvements in the development, storage, and dissemination of information,
the rise of social media and information exchange, the continuous expansion of
online services etc. Smart phones not merely represent instrument of
communication but also of storage and access to information. The social media
has democratized exchange of information besides creating a production of
information itself. The evaluation of these new features that embody a smart
phone for instance has ensured the consumer generates more utility per given
amount of expenditure. As pointed above, in real terms the marginal expenditure
to generate additional utility from the good is indicating towards a downward
sloping trend. This amplifies the utility further.
The ubiquity of search
engines have resulted technology underpinned lower cognitive costs of choice
evaluation. Consumption of narrow range of goods, loyalty etc. were often a
product of constraints in terms of costs of choice evaluation rather than
distaste for experimentation. If there were to be an isocost line for cognitive
costs for choice evaluation, search engines have expanded it outwards. While the
increased offers on exhibition might result in diminishing returns, there is no
doubt that possibility of adverse selection has reduced thanks to proliferation
of information and consequent ease of access to the information. This access to
information transforms behavior and has attained critical mass which amplifies
utility than mere technology underpinning it.
In conventional economic
thinking, the focus was resource saving and was associated with the innovation creating
costless shifts in aggregate production functions. It would we illustrative to
indicate capital and labour might be scarce yet the knowledge the labour brings
in utilizing capital to develop the output is not scarce. On the other hand, it
is often observed a multiplier effect, non-rivalrous or even anti-rivalrous effect
of the same. The new paradigm of output
saving innovation contrasts the resource saving innovation and impacts the
aggregate utility function. Output-saving innovation allows consumers to
generate increased consumer surplus both in terms of utility generated by the
good consumed and the ability to consume additional goods facilitated by income
saving. Therefore, the add-on to conventional model allows innovation to go
directly to consumer. Macroeconomic impact of the same is perceptible in the monetary
gains of innovation bypassing GDP. In terms of GDP measurement, prices might be
down and the increased quantity produced might not compensate for the same, yet
what is undeniably that has increased is the consumer surplus. Of course,
consumer surplus is indirect, subjective and not very easily measurable.
Despite the
difficulties, utility-augmented version of sources-of-growth model in orthodox
thinking might have run out of time. The express linkages of these models with
the associated expenditure & indirect utility functions mandate
reconstruction of the same. Indirect utility functions along with expenditure
function factors the consumer behavior of linking preferences to consumption
and quantity of consumption than prices. The shifting emphasis in microeconomic terms
is likely to have a macroeconomic understanding. It might be early days yet,
but consumption technology and consequent utility functions are presenting in
their own ways new pathways for economics in the digital domain.
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