LEISURE-ENHANCING TECHNOLOGICAL CHANGE: New insights into innovation, the productivity puzzle, GDP measurement and how we spend our time

15 Apr 2019

Our time, attention and data are central in today’s economy: we spend ever more time glued to our screens, while businesses innovate tirelessly to attract ‘eyeballs’. New research by Łukasz Rachel considers the underlying economic drivers and the long-run consequences of this phenomenon.

 

His study, to be presented at the Royal Economic Society’s annual conference at the University of Warwick in April 2019, develops a theory of leisure-enhancing innovations – services that are supplied free of charge and are designed specifically to draw in viewers. Such innovations make economic sense, because the attention that they attract can profitably be used for advertising.

 

Building this simple mechanism into a macroeconomic model of innovation-driven growth helps explain some of the salient features and puzzles observed in the data.

 

The theory explains why so much innovation takes place in the leisure sector, and elucidates the puzzling disconnect between technology, which seems to be racing ahead, and productivity, which is stagnant.

 

It accounts for rapidly changing patterns of time allocation. It also carries implications for the measurement of GDP and, by highlighting the inefficiencies of market equilibrium, forms a useful framework for thinking about policy.

 

The author incorporates several aspects of leisure technologies that make them particularly fascinating. These services are often provided free of charge, which requires thinking carefully about reasons why they are produced in the first place.

 

They are ‘non-rival’, meaning that one person’s use does not prevent simultaneous use by others: in fact, the opposite is true. They involve strong network effects: we like entertainment options that are popular.

 

The theory suggests that the leisure sector inevitably emerges as a natural part of the growth process. This seems to describe today’s landscape well.

 

Firms involved in supplying these services are hugely profitable: the top six of the world’s largest companies by market capitalisation – Apple, Alphabet, Microsoft, Amazon, Facebook and Alibaba – are ‘platforms’ whose business models relies, at least in part, on capturing people’s time and attention. These firms are often seen as the innovation leaders of today.

 

Their innovations appear to be paying off. The evidence shows that people spend an increasing amount of time on marketable leisure. For example, in 2017, an average American spent 139 minutes a day on a smartphone, a threefold increase from 47 minutes just three years earlier (see Figure 2 in the full paper).

 

As leisure time increases, more resources are directed towards innovation in the sector. This provides a novel explanation for the productivity puzzle: technology races ahead, but productivity stagnates.

 

The model also carries implications for the measurement of GDP. Because they are priced at zero, the value of leisure services is difficult to measure. The model suggests that as currently measured GDP does not capture any of the value these services generate.

 

Finally, the author provides a framework for thinking about policy. The market equilibrium is inefficient, but it is ambiguous whether there is too much or too little free leisure. On the one hand, platforms may undersupply, providing only as much as is needed for advertising and not fully taking account of consumers’ benefit.

 

Against that, the adverse impact on growth and productivity highlights the reason why there may be too much of it. The author speculates about why the second effect is likely to dominate in practice.

 

LEISURE-ENHANCING TECHNOLOGICAL CHANGE: New insights into innovation, the productivity puzzle, GDP measurement and how we spend our time by Łukasz Rachel

 

Łukasz Rachel

LSE | 07899 810028 | l.p.rachel@lse.ac.uk