Thursday, 17 May 2012

Facebook, popular delusions and capitalism

Today Facebook will close its first sale of shares to the public (IPO) at a record price to an unprecedented retail demand.

In the process it will make the kid who created this popular site (that signed one in every seven human beings) a billionaire beyond his wildest dreams. Will his invention ever return profits that justify valuing his company at such high price (26 times its sales)? Probably not!

As usual, some pundits will protest against such market irrationalities that, from time to time, degenerate into speculative mass delusions of a Ponzi-like kind. Some will even use such episodes to claim that capitalism is rotten and needs to be replaced by a more rational system.

Yet, past manias (tulips, canals, railways,, etc.) have shown that such episodes are temporary purges providing a peaceful escape to the many frustrations accumulated periodically in all societies.

This was recognized brilliantly by the most quoted critic of unregulated free markets – John Maynard Keynes – in this famous sentence: “It is better that a man should tyrannise over his bank balance than over his fellow-citizens.”

Indeed, the fact that capitalism ends peacefully its own episodes of irrational exuberance is a testimony to the beauty of the capitalist system.

Be prudent but do not blame the system.

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