Facebook worth more than Portugal? Hell, it's worth a LOT more than THAT

Zuck should have hired ME

The final page of that Facebook storyboard

Worstall on Wednesday As an esteemed editor said, one not a million miles away from here, the fact that Facebook has commissioned a report showing what vast amounts of wonderful, beneficial economic activity it is responsible for indicates that the company in fact contributes nothing. Stands to reason, that does. And even once one allows for a certain cynicism on the part of the said editor it is actually true that this report is a great big pile of steaming effluent, one to rival the worst morning-after-an-overly-brisant-curry outrage.

Not that the Wall Street Journal uses quite that language but the message is clear:

“The results are meaningless,” Stanford economist Roger Noll said in an email. “Facebook is an effect, not a cause, of the growth of Internet access and use.” ... “The value of smartphones is that they help you read Facebook – in addition to other benefits – not vice versa,” Cowen said, calling the study’s calculations “bad reasoning.”

As I say, steaming, and of the brownest.

Further, the things that they've added together as being benefits are not, in fact, benefits. I know this is a difficult concept for some to grasp but jobs are a cost, not a benefit. Thus if you swank about claiming to have created 4.5 million jobs in ancillary services then you are claiming to have added 4.5 million costs to the world economy. The opportunity to consume is just great, an income with which to buy consumption is pretty good too, but the job itself is the cost we must pay for that end desire of consumption. We'd all much prefer being able to consume without having to work and economics is about measuring how much we get of what we want, not what we don't want, which means that jobs are indeed a cost of production. Thus “creating jobs” is a cost, not a benefit.

However, having dismissed this calculation of the economic impact of Facebitch as nothing but a hot, soapy hand job to the corporate ego we do rather face the problem of working out what the hell the contribution of Facebitch to the economy is. And that's problematic, as a conversation I've been having around and about recently reveals. Because in conventional economic statistics that contribution by Facebook is only $12bn globally. And that's just insane.

GDP is the monetised value of all production, all income, or all consumption. Great, and we know that this leads to problems at times. For there's lots of all three that isn't monetised so we miss them in our measures of GDP. There's not really any other way to do it on a general basis but it does end up leading to some uncertainty about how much living standards are changing. As Keynes pointed out, when a man marries his housekeeper GDP falls – assuming they don't then hire another housekeeper – but it's not obvious that anyone's living standard has changed (depends on your views on marriage I guess).

So, in the GDP statistics Facebook's value is the advertising that it sells. That's the production. The same number can be reached by totting up the profits and the wages paid plus payments to suppliers. Obviously, that's the same number. But note what we've now said: the economic value of Facebitch is the advertising it sells? Seriously, the contribution of something that billions of people do daily is just that?

This led to Marc Andreessen musing on where the heck all the economic growth is. We can see technology roaring ahead but can't seem to see the results in GDP. Nor in productivity for that matter. So where is the effect of all that roaring technology? Larry Summers then said yup, it's all a bit of a puzzle but it's not because this new tech is deflationary, as Andreessen had mused. At which point enter me with an explanation and this led to a line that none of us ever thought an academic economist would use:

Tim Worstall is, I think, 100 per cent right here.

The explanation of that being that the economic growth is in living standards, in the consumer surplus, but not to be found in GDP. Or, more formally:

The key difference is between “Smithian” commodities – where it is a safe rule of thumb that the consumer surplus generated is about equal to the producer cost, so that GDP accounts that value goods and services at real producer cost will capture a more-or-less stable fraction equal to half of true standards of living – and ... I might as well call them “Andreessenian” commodities, where consumer surplus is a much larger proportion of monetised value because what is monetised is merely an ancillary good or service to what actually promotes societal welfare. What is the proportion? 5-1? 10-1? Somewhere in that range, I think – at least.

Don't forget that to an economist “value” is a pretty flexible thing. If you desire more Facebitch, and you then get more Facebitch, you have just become richer and the consumer surplus has got bigger even though no more money has changed hands and GDP remains unchanged.

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