Sunday, May 27, 2012

Why I am glad Facebook didn't create many jobs

Let's start with a good example what I mean when I say that "flows matter". Here is a piece by Ross Douthat on the Facebook IPO:
"By contrast, the more purely digital a company’s product, the fewer jobs it tends to create and the fewer dollars it can earn per user — a reality that journalists have become all too familiar with these last 10 years, and that Facebook’s investors collided with last week...The “new economy,” in this sense, isn’t always even a commercial economy at all. Instead, as Slate’s Matthew Yglesias has suggested, it’s a kind of hobbyist’s paradise, one that’s subsidized by surpluses from the old economy it was supposed to gradually replace."
 What is it that makes people so easily miss the ball whenever they talk about money flowing (or not flowing!) somewhere? I will argue that both, the concern about few jobs and few dollars earned by Facebook are not just inconsequential but in fact get things exactly backwards:

The fewer jobs the better

Material prosperity is the result of high productivity - being able to make a lot more stuff with the people you have or, equivalently, to make the same amount of stuff with less people, releasing some of that labor to do some other useful thing.

So when Douthat says that Facebook entertains hundreds of millions of people while hogging "fewer jobs" of the general economy in the process, I say hooray! Lots of people happy and very little resources used for it!

To put it differently, most economies don't have any trouble creating jobs. The problem is creating productive jobs. To bring in some of my background: East Germany was terrific at creating jobs. Everyone was employed who wanted to be employed (and some even if they didn't). Unfortunately morale, technology, incentives etc. (not the place for the socialism debate right here) were not so great and so East Germany had fallen behind to less than half of West Germany's per capita income at the time of reunification in 1990. To get back to Facebook: it is easy to create jobs where people do nothing productive. It is hard to produce a lot with very few people. Being able to do the latter is the reason many in the Western world live lifes in abundance and Facebook seems to be doing its part.

Making no money is good for society

This point links in with the argument I just made: Facebook seems to take in very little real resources as payments from its consumers for the services it provides. Absent strogn evidence that Facebook is somehow secretly harming   its users, I would say that points to a fairly high consumer surplus. Can you imagine an interactive anything in the 1980s that would allow you and your friends to use it for free 24 hours a day? I would say Facebook definitely created value. The question is whether it is able to capture a large part of it. Low (zero?) marginal cost of adding another user and the competitive nature of the social media market (think Google+) means that Facebook is having to give up a lot of the surplus in favor of its users. Following the flows of money in this calculation is of no import: who cares about the flow green paper if there is happiness to be had?

In conclusion, Facebook offers a free product (I guess one could talk about how we pay with our "attention span" but set that aside for another debate) and uses very little human resources - people - to do so. March on towards utopia, comrades!

It flows...

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