Netflix streaming is added to the UK’s official inflation-tracking index, Netflix DVD is dropped


netflixThere’s a rather dismal idea coming out of the dismal science these days, that we face a Great Stagnation in innovation and thus in economic growth and living standards for the future. Two major names putting this idea forward are Robert Gordon and Tyler Cowen.

I have to admit myself that watching the tech world whizzing by, I find the basic contention to be difficult to believe. Their argument back is that sure, the Internet and the Web are great, but they’re nothing like as important as the invention of the indoor toilet or electricity. There’s just one little detail that’s come out of the Office of National Statistics in my native UK that rather neatly makes my point for me about technological change.

Netflix has both been added to the index by which we measure inflation and also dropped from it at the same time. For a company that’s only 17 years old that’s pretty good going if we’re in an era of technological stagnation.

The full report is here, and allow me to explain what’s going on. We’d like to measure inflation in the economy. For if we try to deal with the whole thing with nominal numbers, then we’re going to get all sorts of calculations about it wildly wrong. We want and need to convert the prices we actually see into something comparable with the earlier data sets we have from previous years. We want, in short, to be able to see what’s happening to real prices, not nominal ones.

To do this we need to be able to work out what it is that people are buying, for only then can we work out what the inflation rate is on the basket of goods that people actually do consume is. And of course that “typical” basket changes over time in two important ways. The first being that of course what people do buy changes. There’s not much point in tracking the prices, nominal or real, of buggy whips these days. But, as an example of today’s changes to that basket, canvas shoes perhaps should be added, because many more of us are buying these as well as the leather and synthetic leather shoes that are already counted.

The second change is in quality improvement of what we’re buying. This is a horribly contentious issue, and there’s a lot of people who think that the US stats guys have been getting this wrong and thus overstating inflation and understating growth over the past few decades. An obvious example is that an iPhone 5S isn’t today particularly different in price than the original iPhone was on its release. There have obviously been some quality improvements along the way though. Wrestling with this is known as hedonic adjustment and is controversial: Fortunately it’s not the point I’m talking about here.

And what we’ve got in today’s changes to the basket is the following. DVD rental/video on demand subscription services have been added to the basket. They’re a sufficiently common item that we think it necessary to track their prices so that we can mimic the consumption patterns of the average household. So that’s Netflix into the basket then along with several other companies. But also at the same time we get that DVD rental Internet subscription drops out of the basket. Which means that that’s Netflix leaving the list of things that are sufficiently common that we can take it as part of a normal household’s consumption.

Which is rather where I take issue with the concept of the Great Stagnation. When a company that has only been around since 1997 sees one of its major services being dropped as being too ancient to bother tracking any more, that same company on the same days sees its second major service being added to the average consumption basket, well, I’m really, really, inclined to the idea that we’ve got technology moving along pretty briskly here.