Monday, February 15, 2010

Statistics Don't Reveal Extent Of The Evolution To The Information Age

Bespoke Invest gives a good account of the per industry weightings of the US S & P 500.

I think this conveys a very important message.




According to Bespoke Invest, (bold emphasis mine)


``Technology currently has the biggest weighting in the S&P 500 at 19.2%. This is the highest weighting the Tech sector has had since the Internet bubble burst in 2000. After falling all the way down to just 8.9% at the March 2009 lows, the Financial sector's weighting in the S&P 500 now ranks second at 14.4%. Health Care, Consumer Staples, Energy, and Industrials are the other four sectors with a weighting of more than 10%. The Consumer Discretionary sector is close to 10% at 9.8%. From 1998 to 2007, the Consumer Discretionary sector was bigger than the Consumer Staples sector. When the bear market hit in 2007, Consumer Staples overtook Consumer Discretionary, but the spread has tightened to about two percentage points recently. If the bull market continues, we'll likely see Discretionary overtake Staples once again. While the Materials sector gets a lot of attention in the media, especially because it has the gold stocks, it's important to remember that it only makes up 3.5% of the S&P 500. The Utilities sector is even bigger than Materials."


Taking a look at the charts of the S & P Information and Technology we notice that while indeed the sector has significantly outperformed it hasn't reacted in bubble like proportions similar to the late 1990s.



we can also see this in the behavior of the Nasdaq


What I am trying to say is that the contribution of the technology sector to the real economy could perhaps be more accurately reflected on the performance of S&P, however, such contribution may have been underrepresented by conventional statistical metrics.


Even during the aftermath of the dot.com bubble crash, the shift towards advancing high tech industries or high paying tech jobs has also been evident in the job market dynamics.


According to the CRA.org,


``Since 2000 (when trend data become available), there has been a shift away from low-wage jobs to high-wage jobs in the IT sector. The lower-paying IT jobs also have experienced higher unemployment rates and a greater number of job losses. These are the types of jobs that may show signs of being replaced by offshoring. However, the economy is in the midst of an unusual recovery: relatively fewer jobs are being created at the same time that average productivity growth is at the highest level recorded among post-World War II recoveries. This also appears to be playing a role in the lack of job growth in the IT sector."

``An industry-based definition of the IT sector shows a shift from lower-paid manufacturing jobs to higher-paid service jobs. In 1994, 33.4 percent of IT-sector employment were in services. In 2004, this had risen to 54.6 percent. Manufacturing jobs accounted for 70 percent of job losses in the IT sector from 2000 to 2004.


As Erik Brynjolfsson and Adam Saunders of the MIT Sloan writes, (bold highlights mine)


``The irony of the information age is that we know less about the sources of value in the economy than we did 25 years ago. GDP is a more accurate metric of value in industrial-age industries like steel or automobiles than in information industries, and can miss most of the value in information goods. However, there is one measure that economists have thought about for decades that may help us determine the value of these innovations: consumer surplus. Consumer surplus is the aggregate net benefit that consumers receive from using goods or services after subtracting the price they paid. While it can be difficult to measure directly, economists can infer consumer surplus using price experiments from purchase data, lab experiments or surveys. Consumer surplus can be enormous even if — in fact, especially if — the price is low or zero.




``Let’s go back to the recording industry. Suppose that for most people, the vast majority of the value of a CD comes from their three favorite songs on it. Those consumers will do much better paying $3 for those three songs on iTunes, rather than paying the $18.99 retail price for the CD. While most of the record company revenues disappear from GDP, consumer surplus increases enormously — but that amount is unmeasured. This is not a bug in the free market system. In fact, it is its essence. As Adam Smith noted more than 200 years ago, the invisible hand of competition drives producers to deliver ever more value to consumers at an ever lower cost. If the cost of producing a good is zero, then over time, the competition should drive the price to zero as well. The invisible hand has been particularly ruthless in information markets. As a result, consumer surplus has soared even if the contribution of information goods to GDP hasn’t."


In short, there is growing evidence that statistical GDP does understate the role of technology in the real economy.


A final note from Murray N. Rothbard,


``Technologically, history is indeed a record of progress; but morally, it is an up-and-down and eternal struggle between morality and immorality, between liberty and coercion. While no specific technical tool can in any way determine moral principles, the truth is the other way round: in order for even technology to advance, man needs at least a modicum of freedom to experiment, to seek the truth, to discover and develop the creative ideas of the individual. And remember, every new idea must originate in some one individual. Freedom is needed for technological advance; and when freedom is lost, technology itself decays and society sinks back, as in the Dark Ages, into virtual barbarism."


Freedom is progress.

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