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Warner Bros. has announced it will begin streaming films on Facebook.  In some ways, this is a good move for the studio, allowing them entrance into a market that could potentially put rivals such as Netflix and iTunes out of business.  Unfortunately, Warner has agreed to led Facebook users pay them with Facebook Credits rather than actual currency.  If they, or Facebook's Mark Zuckerberg, were paying any attention to history, they'd know why that's a bad idea.

The idea of Facebook Credits is to provide a virtual currency that works only within the boundaries of Facebook.  You can purchase Credits for $0.10/Credit, though you can't currently sell them back to Facebook for dollars (more on why that's bad in a minute).  You can then use these credits to power Facebook applications, which are now expanding to include streaming movies.

Why is this a good idea for Facebook?  Why don't they just use cash, or a service such as PayPal or Amazon, to manage payments?  The secret is in the fact that you can't turn Facebook Credits back into dollars when you're done with them.  What Facebook wants to do is to wall off your money from the outside world -- to turn it into a currency that can only be used inside Facebook.  That way, you'll be forced to buy products from within Facebook, expanding its market and driving up demand within the closed ecosystem.

For Facebook, the benefit of this sort of system is the ability to control the flow of capital and goods inside the boundaries of the closed system.  Also, there is the potential to manipulate the currency artificially -- for instance, declaring that Facebook Credits pucrhsed for $0.10 are now worth $0.05 (instantly doubling Facebook's profit margin) or worth $0.15 (provoking a mad rush to convert cash to Facebook Credits, and boosting the ecosystem with an influx of new currency).  These things can't be done when you participate in a universal open currency network, because Facebook would have no way of, for instance, convincing the Federal Reserve to deflate the dollar in order to maximize Facebook's profits.

Walling off currency and markets within a single social-networking application is new territory in the virtual world, but it's old hat in the physical one.  There's an economic term for this type of behavior -- autarky -- and there was a time, not so long ago, when it seemed to be fast becoming the new world order.  In the late 1930s, much of the world was divided into three autonomous autarkic spheres of influence: the Axis Powers, consisting of the Nazi- and Fascist-controlled areas in Europe; the Greater East Asia Co-Prosperity Sphere, consisting of the vast areas controlled by Japan; and the Soviet Union.  As Jeffry Frieden has argued, the United States and its allies were faced with an "autarkic alternative" to the global capitalism they had enjoyed before 1930 (and especially before the First World War): with Europe, Asia, and the Soviet Union closed to American export markets, all that was left available was the British Empire and the impoverished Third World -- a de facto American autarky.  It was this autarkic stalemate that was broken up by World War II, whose Bretton Woods system once again allowed for global capitalism in defiance of autarkic impulses.

Indeed, William Appleman Williams famously argued in The Tragedy of American Diplomacy (1959) that American leaders went to war against Germany and Japan in order to preserve global export markets against autarky.  It's an interesting analysis with a lot of truth to it, but I think it misses the point in suggesting that exclusion from autarkic markets was a greater hardship for the open-markets power (the United States) than for the autarkies themselves.  It's well to remember that, in this global battle of wills, one of the autarkic powers, Japan, snapped first.

(Above: the Greater East Asia Co-Prosperity Sphere, 1942.)

Economically speaking, why did Japan attack the United States?  The answer points up one of the classic weaknesses of autarky, and it should be quite disturbing to Facebook.  Autarky works just fine as long as everything you need can be found inside the closed system.  But what do you do if you need something that doesn't exist inside your autarky?  If you're an open-economy power, like the United States, you simply trade for it.  If you're the Greater East Asia Co-Prosperity Sphere, though, the absence of rubber, a crucial natural resource, can be fatal.  There simply was no way for Japan to acquire rubber except to conquer a country that produced it, which they did in Southeast Asia (see the purple areas on the map above).  But the US, reasonably enough, refused to let them just walk away with Indochinese resources, and created a shipping embargo between Indochina and Japan.  Faced with a choice between attacking the United States and being unable to drive their military vehicles because of a lack of rubber tires, the Japanese found it was not a choice at all.

Something similar is likely to happen to Facebook, or to their new autarkic partner, Warner Bros.  Let's say the Warner film-streaming experiment goes really well, and Warner expands it to become a marquee business.  But then the rest of the company starts to fail, and Warner wants to use its Facebook business to leverage, say, the home video market until it can get back on its feet.  There's only one problem: Warner's Facebook money isn't in currency, it's in Facebook Credits -- and Mark Zuckerberg suddenly decides to charge a 15% conversion fee to liberate that money into actual currency that can do work in the world.  That's going to get old really fast.  You think other businesses are going to take the plunge into Facebook after something like that happens?

It's worth noting that Facebook isn't the only company making the autarkic mistake.  Wikipedia founder Jimmy Wales sees Apple's iPhone and iPad app program in the same light:

It's quite likely that Apple is going to commit the classic Apple mistake of trying to be too controlling and therefore the market gets away from them and people start to move towards Android. ...

Apple runs the risk that if they don't embrace a bit more openness in their platform, people will actually say, I've got this iPad, and my kid can't play this Flash game. So Apple's in a fight with Flash? I don't care. And yet this other device lets me run Flash. Simple as that.

Wales is right.  Autarky doesn't work.  Just look at the rise of Firefox, of Linux-based systems, of Android.  Or look at history.  Meatspace or cyberspace, the principle is the same: an economy that walls itself off from the rest of the world for economic reasons (as opposed to, say, fair trade/human rights reasons) is doomed to failure.

(Cross-posted at The Crolian Progressive.)

Originally posted to History for Kossacks on Thu Mar 10, 2011 at 12:42 PM PST.

Also republished by Emerging Technology and Activism.

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