The importance of Facebook

Recent deals in the digital economy do not suggest that there is an economic crisis in many parts of the real world.

Earlier this week, Chinese online giant Alibaba paid Yahoo $7.1 billion to buy back a 20% stake that the American Internet firm had bought in 2005 for $500 million. The Facebook initial public offer closed last week, valuing the social networking firm in excess of $100 billion. A few days earlier, investors bought into social networking company Pinterest at a price that valued the company at $1.5 billion. Facebook itself had valued photo-sharing service Instagram at $1 billion, when it agreed to make the purchase in April; the start-up is now valued at over $1.2 billion because of the current market price of the 23 million Facebook shares that Instagram got in the cash-cum-stock-swap deal.

Bubble trouble? Such rich valuations will naturally bring back comparisons with the infamous dotcom mania of the late 1990s, when investors paid huge amounts of money for companies with no profits (and often with no hopes of profits), though the contemporary digital economy has many companies with proper cash flows, Google and eBay being cases in point. Concerns about a new bubble are genuine, for there are many deals that have ended badly. For example, media mogul Rupert Murdoch bought Myspace for $580 million in 2005, around the time Facebook started, but sold it for $35 million last year.

But there is another interesting possibility as well: Are these advance signs of a Schumpeterian renewal of the global economy?

In 1939, Joseph Schumpeter, the prophet of innovation, wrote a classic book on business cycles. He said in the book that economies expand and contract in long cycles that are linked to technological change. Schumpeter identified the main cycles from the Industrial Revolution till the time he was writing. The first wave of innovation was unleashed by the development of the steam engine and better textile technology. The second wave rode on the development of the railways and the growth of the iron and steel industries. The third wave was powered by electricity, the internal combustion engine and plastics. One could update this list with a fourth wave, focused on the development of semiconductors and computing, after the 1960s.

Is digital networking the fifth wave? Or could it be low-carbon technologies that will help create a new green economy? It is impossible to tell because technological forecasting is even more difficult than economic forecasting is. But the very idea that the global economy could be at the beginning of a new tech wave should spark off some discussion about the potential opportunities for India.

“Some economists have pointed out that long business cycles have coincided with these long waves of innovation. Each new innovation wave presents opportunities for upstarts to gatecrash into the big league. This is true for countries as much as it is for companies: periods of discontinuous change usually throw up new leaders. India could gain some advantage from the information technology age just as Japan could do in the age of automobiles and plastics,” this column had noted two years ago.

There is little the Indian government can do by way of explicit policy to encourage Indian companies to jump onto the next tech wave. It is a bit like what happened during the information technology wave—Indian entrepreneurs spotted the outsourcing opportunity and profited from it. A ministry was formed much later, and whether it has done much since then is a matter of debate.

The government could have a bigger role in indirectly supporting innovation—by rebuilding our universities, funding basic research, protecting intellectual property, providing good digital and physical infrastructure, and nurturing a vibrant start-up culture, for example. Much will depend on how new ideas are nurtured and how the entrepreneurs who will take these ideas to the market are not crushed by either government regulation or corporate monopolies.

Tired economies are often at technological turning points. In the 1930s, when England was trapped in the Great Depression, two perceptive writers pointed out how there was something new afoot. J.B. Priestley wrote in his book, English Journey, that there were now three Englands: the old rustic England, England of the Industrial Revolution that was in terminal decline and a new England that was American in inspiration. And George Orwell wrote in The Lion and The Unicorn: “The place to look for the germs of the future England is in light-industry areas and along the arterial roads.”

So, is Facebook a bigger story than Greece? There is no doubt that an economic implosion in Europe will lead to immense pain across the world. But do not discount the idea that people looking back 20 years later will say that the explosion of social networking helped rewire the global economy, taking it to a new growth path.

Niranjan Rajadhyaksha is executive editor of Mint. Your comments are welcome at cafeeconomics@livemint.com

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