Facebook does not produce anything. Facebook sells personal information to advertisers. This is not to say that Facebook is not worth a lot of money, but it certainly deserves a little perspective. In order for Facebook to be worth anything, people must be doing things, making things, and organizing things – otherwise, there would be no need for the utility that Facebook provides.
Consumer Value Index
In order for people to do things and make things, there needs to be basic infrastructure like energy, clean water, telecommunications, food, roads, bridges, and airports. There needs to be housing, education, and health care. There needs to be an effective and fair legal system, equitable political representation, and civil decency.
Debt or Human Potential
Facebook adds value to the human productivity potential that already exists. It is precisely that invisible human potential that seems to be worth most of the money that Facebook commands. When we estimate a value of 100 Billion dollars for Facebook – an astonishing 99 times their advertising revenue – we estimate that the market believes that intangible value exceeds tangible value by a factor of 100:1; versus, say, Apple at 16:1 or Google at 20:1
Nothing economic happens until people get together to make something. Charles Munger, CFO of Berkshire Hathaway uttered these deeply foreboding words at a conference at Seattle University in reference to the Enron debacle; “it’s bad enough when we lose the accounting profession, but dear God help us if we lose the Engineers”.
Suppose a team of 10 engineers designs a bridge that spans a body of water cutting 1 hour off the alternate route for 14,000 people per day (connecting 2 small towns). Over the 75-year life of that bridge, those 10 engineers are responsible for 380 Million hours of increased productivity. At 25 dollars per hour per person whose time is saved, 10 engineers create nearly 10 billion dollars of NEW VALUE. As such, only 100 engineers could create the same amount of New Value as Facebook is worth in an IPO.
You are worth what is measured
We need to ask ourselves what is more efficient; making things that act as a proxy for the things that we are trying to sell, or measuring the real value of things that we make. Perhaps Facebook would be worth 10 Trillion dollars on such a balance sheet. Maybe Facebook would be worth nothing if true value were in fact measurable. Who knows?
Well, that’s exactly the problem – nobody knows.
Facebook acts as a proxy for human productivity, just like money is a proxy for productivity, but with no intrinsic value itself. Perhaps this explains their Wall Street convertibility. However, if we backed Facebook with New Value of human potential, rather than a basket of debt-able goods, perhaps we would not have a financial crisis to deal with, just a value crisis.
I wonder what Charlie Munger would say