Saturday, 27 April 2019

Stocks vs. flows... Tech firms vs. Ireland edition

The market capitalisation of a major tech firms is a big number. The Gross Domestic Product (GDP) of a country is also a large number. However, it doesn't mean that these two large numbers are comparable, because they're measuring different things. This week's example of journalists getting this horribly wrong is from Politico, in the context of Ireland's reluctance to get on the wrong side of the large tech firms by regulating them:
It’s a reasonable fear in a place where the tech companies’ resources far outstrip the government’s. Google’s market capitalization, by itself, is twice the size of Ireland’s gross domestic product. Facebook’s is larger by about a third.
“Regulation is a particularly fraught area for a country like Ireland because they have less leverage [over companies] than a bigger country,” said Josephine Wolff, a professor of public policy at the Rochester Institute of Technology. “If Facebook announced tomorrow, ‘We’ve had it with Ireland, we are closing down our office,’ that would be a huge deal with political and economic consequences for the whole country.”
The point made in the second paragraph is quite reasonable. However, the illustration in the first paragraph is not. The problem (as I've mentioned many times before, such as here and here and here and here) is comparing stocks with flows. The size of an economy (as measured by GDP) is a flow of resources for a single year. Google's market capitalisation is a stock (a measure of its total value), not a flow for a single year.

An appropriate national comparator to a firm's market capitalisation is the discounted value of all future GDP, not one year's worth of GDP. However, if you want to compare the resources available for a legal battle, then market capitalisation is not appropriate, because that doesn't tell you how much resources Google has available. And neither does GDP tell you how much resources the government of the Republic of Ireland has. A comparison of liquid assets (e.g. cash) might make more sense. It probably still comes out in favour of Google over Ireland, but at least then the comparison would be reasonable.

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