We call this new wave of social innovation and ethical economy, not because it is necessarily better or nicer than the corporate model that we are familiar with, but because is it is based collaborative forms of socialized production and motivated by a wide variety of values beyond that of material accumulation: programmers want to create a reputation, Makers want to express themselves, and social entrepreneurs want to change the word. True they also want to make money, but often this motive is subordinated or secondary- most social entrepreneurs simply want to make a decent living. The point is that a number of tendencies in our society means that this ethical economy is destined to grow even further: dissatisfaction with the corporate model, particularly in the younger generations; the declining ability of that model to provide the basic necessities of life, again particularly for the younger generations- in southern Europe youth unemployment is closing in on the Greek record of 51 per cent; technologies like Open design and Open manufacturing that make it possible to produce and sell things outside of the channels of the corporate economy; increasing awareness of and preoccupation with environmental and social problems, new organizational forms like Peer to peer production. But since the ethical economy builds on a multitude of transactions between small actors and lacks the large institutions of the corporate economy, it needs platforms that can reduce transaction costs and maintain trust.

We’re republishing this editorial from Adam Arvidsson, whose book The Ethical Economy is coming out this summer.

What would an ethical economy approach mean for Facebook?

Adam Arvidsson:

“The fifty per cent drop in Facebook shares after the 2012 IPO has not stopped key employees from cashing in on their options as soon as they could. Together these events indicate a fundamental insecurity about the underlying business model of Facebook, and its ability to meet its sky high valuation on advertising revenue alone. Indeed falling advertising budgets combined with insecure valuations signal a general crisis of web 2.0 business models based on offering free services to users in order to harvest their co-production of content and monetize it as advertising space. But maybe there is a different way out for Facebook. In the wake of the crisis we have seen a booming ethical economy of social enterprises, local food economies, sharing economies, makers and hackers, where business is oriented towards meeting real social needs. This ethical economy is not only a matter of doing good, however, but also the place where the next wave of innovation- technological as well as organizational- is building up. And it is in need of a platform that can coordinate transactions and help organize cooperation in ways that minimize transaction costs while maintaining high levels of trust. Could this be the future of Facebook?

In 2008 ‘free’ seemed to be the new miracle. Just like the ‘new economy’ promised endless growth in the 1990s, providing online services like social networking, video streaming and geolocalization for free now seemed to be the way to keep atracting advertising investments and venture capital. Fuelled by the spectacular growth of Twitter and Facebook, faith in the miracle of free withstood the financial crisis of 2008, as Web 2.0 remained one of the few sources of optimism around. Now however the tune is changing as very few free services actually make money. YouTube never made any money as long as it relied on exclusively on user-generated content. (In fact YouTube lost almost half a billion dollars in 2009). It is only now as the video sharing site is shifting away from amateur to professional content, in effect becoming something akin to an online television station that performance is picking up. (At the same time, anecdotal evidence form web forums indicate that people who use the YouTube AdShare service to monetize their videos online have experienced a sharp decline in revenues, as advertisers are starting out 2013 with more conservative spending strategies.) Foursquare and twitter have still to develop a viable business models, but many analysts doubt that they can be organized around advertising.

In part this is so because advertising revenues are shrinking. Overall US adspend in 2012 was lower than ever in recorded history (since 1919), with the exception of the second world war and the stagflation years of the 1970s. And even though there is an on going shift of advertising investments away form traditional media and onto social media, and in particular mobile social media, the expansion of websites and platforms keeps increasing the competition. And unless there is an (unlikely) rebound in consumer demand, overall advertising budgets are not likely to rise in the near future.

More importantly free businesses are consistently overvalued. To a large extent this is because of positive thinking. In the absence of any rational and transparent methods for estimating the value of social media platforms, valuations are set on secondary markets, which are murky and prone to be influenced by reputation and sentiment. This is the case with twitter’s recent valuation at $ 11 billion as well as with Facebook’s 2012 valuation at $ 100 billions. Both were arrived at looking at how secondary markets valued the small share of stock that they traded, rather than though any transparent analysis of the earnings potential of these companies. Much like the 1990s when companies like pet.com attracted investments on their web presence rather than on their sales, these secondary markets are more guided by faith than by rational analysis. And this is sustained by large institutional actors who cannot afford faith in web 2.0 as an investment opportunity to evaporate. Indeed the highly exaggerated valuation of Facebook at $ 100 billion was mianly the work of by Goldman Sachs and Morgan Stanley, who are now accused of having withheld information on the economic status of Facebook and miscalculated the company’s revenue streams. However this may be, the fact of the matter is that there is no way in which Facebook can support a market valuation of $ 100 billion on its advertising revenues alone. This represents a price/earnings ratio of 143, five times that of Google or fifteen times that of the S&P 500 average.

So what should Facebook do? Increase its user base? That will only work up until a certain point (even if Facebook is now trying to lower its ‘age of consent’ to 13). At a billion plus users, or half of the world’s web users, the platform seems to have reached saturation point, and is actually beginning to users in core markets like the UK. Charge more for its advertising? That could work up to a point, given that more sophisticated information processing will allow for more precise targeting, but once again, competitors like twitter, foursquare and Google can do this too.

Let’s look for a moment at the success stories of web 2.0. Linked-in manages to create twenty times as much value per user as Facebook. Kickstarter, the online crowd funding platform has raised 350 million for 76.000 projects since its launch in 2009, and it takes a 5 per cent cut from that funding generating a steady cash flow. Etzy, the online commerce site for crafts has been in break-even since 2009 and ha attracted a healthy 90 million on the sustainable cash flow that this generates.. Both Google and Apple are making sound profits (more then 7 billion since 2008 in Apple’s case) from their percentage on apps that are sold on their proprietary platforms.

What unites all of these platforms is that they provide real use values that their users are prepared to pay for. Linked-in makes most of its money either through individual users paying to upgrade their accounts to make use of the full range of features of the site, or, more importantly, from corporate users , like Bloomberg paying to use the site as a recruitment tool. The other examples are even more interesting as they cater to and mobilize the creativity of an emerging ethical economy of diffuse social innovation. Kickstarter connects small ventures, commercial, but also artistic and social, to micro investors, thus facilitating a new wave of start-ups that are redefining cultural production, social services, research and development, as well as manufacturing and the food economy. Etzy gathers a new generation of technologically savvy crafts people, or ‘makers’ empowered by technologies for Open design and Open manufacturing, and connects them with clients all through the world,Google and Apple apps harness the creativity of the mass of people with programming skills that are emerging al across the world, as a new generation are growing up with widespread programming skills (China alone had close to 7 million college graduates in 2011.)

We call this new wave of social innovation and ethical economy, not because it is necessarily better or nicer than the corporate model that we are familiar with, but because is it is based collaborative forms of socialized production and motivated by a wide variety of values beyond that of material accumulation: programmers want to create a reputation, Makers want to express themselves, and social entrepreneurs want to change the word. True they also want to make money, but often this motive is subordinated or secondary- most social entrepreneurs simply want to make a decent living. The point is that a number of tendencies in our society means that this ethical economy is destined to grow even further: dissatisfaction with the corporate model, particularly in the younger generations; the declining ability of that model to provide the basic necessities of life, again particularly for the younger generations- in southern Europe youth unemployment is closing in on the Greek record of 51 per cent; technologies like Open design and Open manufacturing that make it possible to produce and sell things outside of the channels of the corporate economy; increasing awareness of and preoccupation with environmental and social problems, new organizational forms like Peer to peer production. But since the ethical economy builds on a multitude of transactions between small actors and lacks the large institutions of the corporate economy, it needs platforms that can reduce transaction costs and maintain trust.

This would seem like a great opportunity for Facebook. Facebook has already become the default platform for social interaction, much like the Bell company acquired the monopoly on the US telephone network in the 1930s. And Facebook has contributed to rendering the web less anonymous, making the Facebook profile close to an online ID card. As such Facebook would be perfectly suited to organise car sharing schemes and time sharing banks, to handle micro financing or micro transactions like purchasing organic carrots form a local urban agriculture group or to administer revenue sharing in reputation-based creative economies. The Brazilian coffee cooperative Curto Café already uses Facebook in this way. Or rather Facebook could supply the infrastructure for apps that handle these tasks, and tht are, for the most, built by people who are themselves involved in the ethical economy and who build them according to values that resonate with its social concerns. Facebook could then tax the transactions within this ethical economy, much like Etzy and Kcickstarter do, and earn a healthy sustainable profit in the process. (Alternatively it could expand its ‘credits’ to supply a currency for these transactions and make money on interest differentials, in effect becoming akin to a bank.)

But since this transformation would be driven by apps developed form below, it would also entail Facebook opening up access to user data for app developers. (Indeed one of the reasons that Facebook apps have not taken off in the same way as Apple or Google is the closed and restrictive nature of the Facebook developers platform). But this would entail a more sweeping change. At he moment Facebook keeps its data closed because its main business model lies with selling exclusive access to that data to advertisers. But could not the massive data resources of Facebook be put to socially more desirable uses than simply, as present, improving the targeting of ads for shampoo and per food? To force Facebook to open up and become more ethical, in the sense of more socially useful, could be a way to begin to politicize the platform, while saving it at the same time!”