Google’s California headquarters is one of the more unusual places where you might find economists hard at work. While economists did not have a place at Google when it launched in 1998, by 2002 Google had begun to hire economists in advisory roles as the demand for Google’s ad space grew in size and complexity.
In 2009 Wired.com, an IT magazine which frequently covers the inner workings of Silicon Valley, published an article on ‘Googlenomics’ or the Economics of Google, a concept pioneered by U.C. Berkeley professor Hal Varian, Google’s chief economist.
Varian, has built his career by adapting and translating widely understood mainstream economics concepts for use in Google’s daily operations. He initially joined Google as a consultant in 2002. In 2010, Varian delivered one of the keynote lectures at the American Economics Association’s annual meeting, in which he spoke about the parallels between Henry Ford era assembly-line optimization and the data processing optimization that underlies most of Google’s production. Whereas early production in the 1900s was dominated by micro-innovations related to the optimal arrangement of interchangeable and constantly improving production factors such as gears, wheels, and energy sources, the e-economy in the early 2000s has come to be dominated by micro-innovations related to the optimal arrangement of protocols, programming languages, and software.
Wired.com outlined both micro and macro-economic spheres of operation. In Google’s Macroeconomics, Google’s bottom line is affected by systemic factors and is analyzed via the calculation of multi-equation, multi-sector models, much like at a central bank, or in the macroeconomics classroom. At stake is how the fluctuation in numbers of internet users affects the demand for Google’s products and services in various sectors. It is this calculation that is apparently behind Google’s free access to its browser, its apps, and even its smart-phone operating system. In a line of logic reminiscent of monetary economic models, both the quantity of users and their “velocity” (user activity levels, rather than velocity of money in Google’s case) affect Google’s bottom line. Google’s microeconomics on the other hand, is about the optimal employment of Google’s resources in terms of huge pools of information and highly-skilled labor. At the heart of the matter are vast quantities of data, which are put to use by Google’s economists for the benefit of the company. Among other things, Google uses empirical methodology to deliver accurately targeted ads to users, based on correlation to their search keywords.
Beyond simple, straightforward adaptations of micro and macroeconomics, Google’s economists have adapted a number of economic concepts for Google’s use. This ranges from information asymmetry and contract theory intended to align properly incentives in its revenue sharing arrangements, to supply chain management, and even exchange rate theory, which is used for relative valuation of products. Ultimately, Google’s data-rich environment leads its economists employ regression models involving trillions of data points and hundreds of millions of explanatory variables. This is used to optimize Google’s logistics, as well as to map out more accurately the highly volatile marketplace in which Google thrives.
Varian’s academic research on auction models has also been put to use by Google in order to determine quickly and correctly the highest bidder among a vast heterogeneity of firms, valuation systems, computer systems and revenue models competing for Google’s attention and ad space.
Overall, the future of economists working within Google (and likely, most of Google competitors, such as Microsoft and Apple) seems bright given all that there is to be done by sharp economic minds in what is ultimately still a growing and maturing sector. Add to this the claim that Varian made in his 2010 keynote lecture, that Google’s researchers took advantage of the data-rich environment to conduct roughly 10,000 empirical experiments in 2009, and it becomes evident that the economists are there to stay.
Max Berre’s Blog: The Commission of Ideas