How has Facebook shaped the economy as we know it?

The purpose of this research is to identify economic theory within the company Facebook, to explore the potential that social networking sites possess, and to recognize the influence that they yield in merging many smaller economies into a more globalized one. In the opening, the history of Facebook is covered briefly, and then the stated reasons as to why Facebook has aided in globalizing the economy is discussed more in depth, lastly mentioned is the impending long term outcomes are considered. The sources herein include a scholarly article by John P. Tiemstra, professor of economics at Calvin College, an interview with hosting founder Mark Zuckerberg, and other select articles and videos relating to the company.

The social networking site known as Facebook originated in 2003. With less than stellar beginnings, Harvard student Mark Zuckerberg hacked into the university databases to populate his site called "facemash" with student profile pictures. Facemash was terminated because of its offensive content; however, it turned out to be the precursor to something far greater: Facebook. In March 2004, Zuckerberg registered thefacebook.com as the domain name which was eventually shortened to just facebook.com. In the same year, Facebook extended out to Ivy League schools such as Stanford, Columbia, and Yale. It did not take long for it to expand to all the universities in the U.S. There were several outside companies that were very eager to pursue investing opportunities in the fledgling company because it appeared to have such budding potential. PayPal, a popular online banking system, was one of the first to invest a half million dollars in Facebook in exchange for 10.2% of the company. In April of 2012, Facebook acquired Instagram, a photo sharing timeline used to communicate with acquaintances in an entertaining fashion, for $1 billion. Another milestone for Facebook was May of 2012, when it went public for $38 a share with a company valuation of $104 billion taking the record of being the largest newly listed publicly traded company in history. Currently, worldwide there are over 1 billion users on Facebook. Obviously the demand for Facebook is high and is anticipated to rise in the next several years. This puts pressure on the company, the supplier, to be continuously providing innovative applications and new upgrades that satisfy users and keep them engaged. Facebook is revolutionizing and transforming the world into a more interconnected global economy.

Ideally, globalization aims to eliminate all poverty in the world, at the same time avoiding any compromise when it comes to the well-being of the middle class. More realistically, it is more likely that globalization will rather reduce, though not completely eliminate, poverty and will affect the middle class, though preferably not on a drastic scale. Tiemstra acknowledges that technological advancements in communication have aided in stimulating a global economy when he says:

The globalization of the economy has been a prominent topic of public debate at least since the 1999 Seattle meeting of the World Trade Organization filled the streets with protest demonstrations by environmental, labor, consumer, religious, and other civil society groups… Technological developments that reduced the costs of transportation and communication further accelerated the trend. (Tiemstra, 2007, p. 143)

Clearly, without community, there is no commerce. Facebook has enlarged the size of the virtual community so that it is over a billion people large. Facebook is not solely just an attractive outlet for virtual socializing, it is also a practical means of advancing e-commerce to the next level of connectivity. Businesses have the ability to create their own Facebook pages, allowing them to see who is talking about their business and how many "likes" they get on their fan pages. In late 2007 Facebook already had one hundred thousand business pages. The atmosphere of Facebook generates a very nonthreatening avenue for businesses to post surveys and questionnaires, and display advertisements and newsletters. Businesses are then able to collect data that will aid in their research and development as a company along with maintaining better communication with customer questions and concerns.

Combined with other social networking sites such as Twitter, My Space, and LinkedIn, Facebook could probably be considered to be part of an oligopoly. An oligopoly is “a theory of market structure based on three assumptions: few sellers and many buyers, firms producing either homogeneous or differentiated products, and significant barriers to entry” (Arnold, 2011, p. 547). In the social networking world, there are few suppliers, as listed above, and it is evident that the demand for social networking sites like Facebook is high and will most like continue to increase in the future. Out of all the available social networking sites they all have similarities; their product is homogeneous in some ways, though each site is distinctly unique in focus and content overall. It seems as if there would indeed be significant barriers to entry for social networking sites at this point because so much of society is already satisfied with what is already available it would be hard for a new social networking company to create something that is more appealing to the vast majority in order that they might have serious competition with Facebook.

Economists define money as being “any good that is widely accepted for purposes of exchange and the repayment of debt” (Arnold, 2011, p. 252). The three major functions of money, then, are that it is a medium of exchange, a unit of account, and that it has store of value. Facebook Credits are a virtual currency that someone can use to buy games and applications of the Facebook platform that accept payments. Facebook Credits appear to possess the unit of account characteristic and does seem to retain a store of value, though it is not quite yet considered to be a medium of exchange in a complete sense because of other countries limitations and acceptance. Tangible goods cannot be bought with Facebook Credits at present, though that may not be too far-fetched in future. There certainly seems to be potential, but the question is: “Will Facebook Credits evolve to be some kind of a real-world currency and how might that open the door for an explosion of peer to peer currencies?” (FutureOfFacebook, 2011).

Another way in which Facebook has positively affected the economy is the amount of jobs its applications have produced. According to The Daily Record, in 2011 more than 53,000 new jobs were created in software companies that make applications for the Facebook platform and another 129,000 jobs were accredited to businesses that supply app developers. Everything from productivity tools to popular games such as "Farmville" is considered to be applications (Daily Record Staff, 2011). The increase in demand for software and application advancement is promising to stimulate even more jobs in the future.

What are the implications, then, if Facebook should continue to expand, connecting the nations of the world, producing a global economy? There would certainly be a major problem between differing exchange rates. As of now, Facebook Credits can only be used for a select few things such as applications for the iPhone, but what about when the virtual currency is expanded, enabling people to purchase other goods and services? “Facebook is in a position to both facilitate immense social good and also cause massive disruption in our traditional economic institutions” (FutureOfFaecbook, 2011). Also, each country has different institutions and cultural practices as to how certain business transactions should be conducted. If there were a shift toward globalization then who would assume the responsibility of ordaining a new set of business procedures and guidelines? “These choices are based on the most profound beliefs, and basic ethical principles and the nature and purpose of human life, and they usually have religious roots” (Tiemstra, 2007, p. 146). Would the United Nations take on the authority? If the United Nations did take on the role of setting the institutions would that stimulate a shift toward a one world religion? Obviously there is a high degree of normative economics when contemplating futuristic globalization. There abounds a host of differing speculations, value judgments, and opinions that cannot truly be tested like that of positive economics.

In conclusion, there are several ways in which Facebook is shaping the economy as we know it. Businesses now have new ways of communicating and marketing. Facebook is a part of a giant social networking oligopoly that has just simply broken forth into the market over the last decade. A relatively new phenomenon, virtual currency is surging forward, becoming convenient and more acceptable. New job opportunities that were not even fathomable a couple of decades ago are now available in the job market. Though the long term implications of how Facebook will affect the economy in the future are indefinite, there certainly seems to be remarkable imminent possibilities ahead.

Resources

Arnold, R.A. (2011). Economics selected chapters for Pasco-Hernando Community College (Tenth Edition). South-Western, Cengage Learning.

Computer History (2010, July 25). The Facebook Effect with Mark Zuckerberg. Retrieved March 13, 2013, from http://www.youtube.com/watch?v=_TuFkupUn7k

Daily Record Staff. (September 19, 2011). Facebook’s impact on U.S. economy. In The Daily Record. Retrieved March 17, 2013, from http://thedailyrecord.com/2011/09/19/facebooks-impact-on-u-s-economy/.

FutureOfFacebook ( June 30, 2011). Future of Facebook: Economy. Retrieved March 13, 2013, from http://www.youtube.com/watch?v=cCw6UvY-CeY.

Martelli, D. (February 21, 2013). The Ultimate History of Facebook [infographic]. In Technorati. Retrieved March 15, 2013, from http://technorati.com/social-media/article/the-ultimate-history-of-facebook-infographic1/.

Tiemstra, John P. (2007). The Social Economics of Globalization. Association for Social Economics (ASE). Volume 36, Issue 2.