A recent news flash is that Elon Musk wants out of his deal to buy Twitter. He claims he was misled as to its value and that the company has not provided sufficient data for him to assess its true worth as a capital asset.
I like using the word “worth” in such a case where a company makes money off social media.
We can learn from a play on words – worth can indicate cash value, but it also can indicate the intangible qualities of goodness, which are honorable, highly thought of, but not necessarily reducible to the “cash nexus” that Karl Marx was so fond of disparaging.
Twitter, on the stock market, is a highly valued cash asset, but is its business of social media worthy of our esteem and appreciation? Is social media worthy of a great civilization? Why should society pay a lot of money for a service that sows division, corrupts social capital and engenders low self-esteem, resentment, despair and hurt feelings in many lives? Why not treat social media like guns, drugs and alcohol?
The root words for our modern English word “worth” are:
Old English weorþ “significant, valuable, of value; valued, appreciated, highly thought-of, deserving, meriting; honorable, noble, of high rank; suitable for, proper, fit, capable;” from Proto-Germanic *wertha- “toward, opposite,” hence “equivalent, worth” (source also of Old Frisian werth, Old Norse verðr, Dutch waard, Old High German werd, German wert, Gothic wairþs “worth, worthy”), which is of uncertain origin. Perhaps a derivative of PIE *wert- “to turn, wind,” from root *wer- (2) “to turn, bend.” (https://www.etymonline.com/word/worth)
The root word for our modern English word “wealth” is: mid-13c., “happiness,” also “prosperity in abundance of possessions or riches,” from Middle English wele “well-being.” Farther back, the root concept in Proto Indo-European was “wel” or to wish, to choose, to prefer, to desire.
With the narrative of wealth, our choosing to be happier is welded to the materialism of money and assets at the lower levels of Maslow’s hierarchy of human needs, not to the higher levels, where well-being flows more from our internal possession of pride, courage, love and resilience.
Musk argues that Twitter has failed in producing data on how many actual human users it has. His challenge is that if many “tweets” come from bots and not real people, the revenue potential of the company is better projected using a lower number of “users” because bot use of Twitter won’t generate any value to the company. Bots are free-riders. Twitter makes its money by receiving data on human persons to be used more effectively to exploit their needs and desires through advertising to them. Twitter accounts which can’t produce data which is wealth producing can’t add value to the company’s asset value. Thus, Twitter’s current market value is not realistic, just what the herd of market players is willing to believe it is worth.
The simple formula for calculating the value of a firm is to project future revenues and then discount those future earnings back to the present to arrive as a net present value of future income. A company which will most likely earn $100 in the future is worth more today than a company positioned to earn only $50 over that same span of time.
Valuation is the heart and soul of capitalism. It is simultaneously the interdependent vascular and nervous systems of the firm and the private economy. Valuation draws forth capital and sends it around to the different cells to energize them with life. Valuation gathers information and processes it in order that the system’s boney structures are nourished and its dynamic muscles and ligaments can move optimally, resulting in work. Without good valuations, there is system disfunction – chaos, loss, lethargy, the death of bankruptcy.
Turning profits into capital is often analyzed as paying a return on financial capital – dividends to owners and interest to creditors and amortization of their loans.
But a firm has other forms of capital which need tending: its stakeholders, those who keep it alive and kicking healthily, are also capital assets. Employees – human capital – need salaries and benefits and respect; the social capital of governance and culture needs constant attention and that is a cost to the firm. Cultivating customers with quality and attractive prices, with developing and popularizing brand appeal, is a responsible use of gross earnings. The social capital of community needs to be kept healthy and not degraded through responsible behavior, good citizenship and charitable donations. Managing and paying for a better environment is another use of profits to sustain a capital asset of the firm. These expenditures on improving capital assets are costs met with gross earnings and so a factor in how the firm “profits” from its business model.
Just focusing on the “net” cash profit determined on the P&L statement short-changes the value of the company. Not paying a return today on all its forms of capital threatens the firm’s ability to earn money in the out years.
Now, for capitalism to be sustainable, profits must be channeled into capital. Just making profits is not capitalism, only extracting rents. Taking profits out without using them as a return on capital is eating the seed corn. That is stripping assets of long-term value, turning a firm into a wasting asset, like oil in the ground. Heedlessly extracting rents is akin to rushing headlong into the tragedy of the commons.
Thus, we can learn a lot about capitalism from the Elon Musks of the world.