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Michael Jordaan: Freeconomics is the future

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Do you contribute to South Africa’s GDP by reading this post? Traditionally, had I written a letter, I would have required 220 envelopes and 220 stamps to send this note to those subscribed to this blog. It would have clearly registered as a tiny contribution to the country’s GDP? And I would have probably charged you to receive this letter, say R20 per individual, which would also have been recorded in the C or the X of GDP. But when you read this for free on your PC or iPad or phone, is it registered as part of our GDP? No. Similarly, if we search for the telephone number of the local restaurant on Google, or the weather prediction for tomorrow on yr.no, has anything been added to GDP? No. How do we measure the ‘free’ goods and services all of us consume everyday? We don’t. But because our utility (or happiness or satisfaction) has increased significantly through these services (I assume it has if you’ve read this far), it could only mean that we are underestimating GDP or, put differently, that GDP is incapable of measuring the vast gains from technological progress we’ve made over the last three decades.

And this process is unlikely to stop. Moore’s law – where computing power doubles every two years – is likely to be true in a much broader sense: the cost of information – books, music and all the other things that we spend an increasingly larger amount of our time on – will continue to fall, halving every two years. Many of these things are already free: road maps, weather predictions, news about cricket scores and elections and Oscar’s murder trial, connecting with that long-lost friend from school, searching for the origin of the word ‘geometric’, listening to music, translating English to French. You get the point. Only a decade ago we were still forced to pay for all these things. Now its free. And that requires new economic models and measurements, because consumers behave differently when, instead of having to pay for a service, they receive it for free.

Call it ‘freeconomics’ says Michael Jordaan, former CEO of FNB and now head of Montegray Capital in Stellenbosch. Jordaan presented his first lecture as new honorary professor in Stellenbosch University’s Department of Economics last night, and captivated the audience with a crash course of the most revolutionary technological changes today (his slides are available here). Much like Malthus had compared the arithmetic increase in food production with the geometric increase in population, Jordaan claimed that the exponential growth in information and, conversely, the exponential decline in the cost of information, necessitates economists to adjust – or perhaps toss and completely rethink – their classic microeconomic models. This new model, he conjectured, is driven by technologies of the digital age, where the marginal costs of services are close to zero, where demand is unconstrained by price and where scarcity has been replaced by the abundance of products and services that are available for free online.

Clearly, the standard supply-and-demand graph needs revision. Quantity does not necessarily increase linearly as price approach zero (or actually reach zero). Free stuff with no marginal cost and nearly frictionless transaction costs can be consumed by billions of people across the globe; one more person watching a YouTube video adds zero cost. According to Jordaan, in the freeconomy, scarcity is replaced by abundance (echoing the sentiments of Diamandis and Kotler in their book by the same name). Yet there are limits, of course, to what we can consume. Jordaan recognises this by acknowledging that the scarcity of time will become our biggest constraint, although that is changing too as improvements in DNA reconstruction and artificial intelligence may result in rapidly increasing life durations. For the immediate future, how we filter the abundance of free information will likely be our greatest challenge – and the ability of consumer goods to ‘save time’ will be extremely lucrative. Hello Google’s self-driving car.

There are many insights to highlight from Jordaan’s lecture, but some of the most interesting discussions came in the question section. Responding to a question about the social inequalities that this rapid technological change will create, Jordaan predicted that we may need to think differently about unemployment in the future. As robotics and AI will replace much of the unskilled and semi-skilled jobs, perhaps, he suggested, a large cohort of people will depend on state subsidies and the free economy for their daily needs, with no need to earn an additional income. The rich will be happy with this social consensus of large redistribution through the fiscal system as long as they can continue to invest in improving technologies for the betterment of all. With more social grant recipients than tax payers, Jordaan suggested that South Africa is already a template of such a society.

Is the future a benevolent Elysium? Perhaps it is, but if the past is anything to go by, radical change will not be as simple as one, two, free.

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Written by Johan Fourie

March 28, 2014 at 16:18

4 Responses

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  1. […] – or what Michael Jordaan, former CEO of FNB and now CEO of Montegray Capital, has termed the ‘free economy’ – has made matters much worse: our ability to connect with friends (Facebook), or make […]

  2. […] A possible alternative explanation for what is about to happen is the concept of Freeconomics. […]

  3. […] something like a basic income grant or because a lot of things are now free as Michael Jordaan has argued, the truth is that ‘the old Adam in most of us’ (or is that Eve whispering in our […]

  4. […] week Johan Fourie blogged about a seminar at Stellenbosch University where Michael Jordaan talked about revolutionary technological […]


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