Saturday, February 2, 2013

Limitations to Peer to Peer, or why equality matters

Since communal finance relies on individuals using their own knowledge and social networks instead of paid professional experts to judge whether something is worth funding, communal finance works most efficiently when wealth is evenly distributed. 

Why?  Let's say you have $1,000 to lend or invest this month.  You could easily set aside a couple hours to think about where to best put it.  That's about an hour of thought for every $500.

Now, let's look at someone who has $1,000,000 to allocate this month..  If they were to spend an hour thinking about each $500, they'd be thinking for 12 weeks without sleeping!  Sure, they could hire someone to help, but that adds a transaction cost.  What typically ends up happening is that the rich person will end up financing a handful of large companies and projects, even if there are hundreds of vegan hot dog stands that are more profitable.  They just don't have the time to deal with crowdfunding

Globally, 1% of humanity owns nearly half the wealth.  The diagram here illustrates what's going on.  There are actually one and a half Earths depicted since humanity is presently exceeding the planet's carrying capacity and using resources faster than they are replenished. 

That's a lot of money that is probably not going to make it into communal finance.  Instead, it will most likely go to megaprojects like new airports or billion-dollar companies. 

In the United States, the distribution of wealth is similarly skewed.  Five Earths are shown to the right - the amount of Earths needed if all of humanity were to live like Americans.  Almost 2 of them are owned by the 1%.  The bottom 80% of Americans own less than 20% of the country's businesses, buildings, natural resources, land, and money. 

What does this mean for crowdfunding?  As long as wealth remains unequal, large amounts of money will not go into crowdfunding.  The good news?  By cutting out the Wall Street middlepeople in getting companies, infrastructure, and home loans funded, crowdfunding can help reduce income inequality by turning back the big sucking sound of money going into Wall Street investment banks. 

As with many other issues such as climate change, consumer action can only play one part of the effort towards a more humane financial system.  Political action such as higher taxes will also be needed. Only when money is more evenly distributed and can it get the attention it deserves. 

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