Dear Economist

Network worth

Dear Economist,

I am a senior political figure who has just left office. I always believed that I could make up for years of badly paid public service by advising a major company for a fat retainer. I know nothing about business, yet my network of contacts would be invaluable.

But somebody has just shown me a thing called “Facebook”, which they say is being used by lots of new graduates. I have been told that the economic value of my “network” is not what it was. What is going on?

Yours, T.B.

Dear T.B.,

Perhaps you were busy contemplating international affairs when the dot-com bubble burst?

You seem to be thinking of a simplistic model of networks, in which size is everything. One fax machine can do nothing, two can talk to each other, and because each new machine can connect to the entire network, each new machine adds more value than the last. Ditto for mobile phones, eBay and Facebook: twice as big is much more than twice as valuable. Venture capitalists therefore pay big bucks for large networks, no matter how shallow.

Yet this simple arithmetic ignores an offsetting effect: diminishing marginal returns. The first mobile phones were used to conduct multi-million-dollar deals. One more mobile phone today is one more source of classroom text messages. Many people who sign up to Facebook quickly find they have no use for it.

So do not despair that your network is smaller than your son’s list of Facebook friends. He may share the latest U2 single, but you have Bono’s phone number. There should be no trouble monetising that sort of access. Don’t fritter away your retirement leisure on Facebook.

First published at ft.com.

28th of July, 2007Dear Economist • Comments off