Whenever you hear of businesses or others carping about the lack of financing for this or that preferred cause, and demand that the State (ie, you, the taxpayer) steps in to fill the gap, it is worth bearing in mind that one of the glories of capitalism is in coming up with ever more inventive ways of putting those who want capital in touch with those who have it. This is the thrust of an article in the magazine Reason by Greg Beato (February 2014 edition):
Traditionally, the wealthiest members of society have had little trouble leveraging their resources. Those resources are highly concentrated and thus easy to strategically deploy when necessary. For the 99 percent, government provided a way to accomplish this too. Everyone pays taxes, and as a result, we get streetlights and Yellowstone National Park.
But taxation is a pretty crude form of crowdfunding. You don’t get to choose the size of your contribution. You can’t directly specify its intended use. And even though our tax system lacks the functionality of Kickstarter, participation is mandatory. When some senator-of-a-friend-of-a-friend decides he wants to follow his bliss and finally build that $2.2 billion dream dam he’s been talking about all these years, you’ve got to chip in whether you like it or not.
Crowdfunding, in contrast, privileges hands-on, voluntary democracy. If you think the United States needs more solar infrastructure sooner rather than later, crowdfund it. If you think that service-sector jobs that pay livable wages are the key to widespread prosperity, crowdfund businesses that pay such wages.
For the allegedly disenfranchised 99 percent, it has never been easier to seek common cause with like-minded souls, to pool your resources, and to exert influence in strategic and tangible ways. You might even call this a shining age of middle-class empowerment. If anyone ever decides to make a documentary about it, the financing should be fairly easy to swing.
As I sometimes note, while Hollywood, for instance, often produces films that slag off capitalism, (Michael Moore being the most egregious case) or smaller independent film producers do the same, the irony is that they make use of the innovation in fund-raising that modern capitalism constantly throws up.
A related area of capital provision that bypasses banks – and their current, often stringent capital rules – is what is known as “peer-to-peer” lending. And needless to say, the UK financial regulator is getting concerned about this, fearful that people who lend money might make mistakes or, horrors, those who borrow might not fully understand the risks. Rob Fisher of this blog wrote on the topic last year.
All this flowering of capital-raising is not really all that new, if you think about it. The idea of equities and other securities has been around for a long time; what is new is that the internet has put both sides to the transaction in touch much more easily, reducing barriers and the frictional costs associated with it. That’s surely an example of the “long tail” effect at work.
Although I agree with and applaud the notions in this article, I really hate…
… no, that is not ‘democracy’. Democracy is the Demos voting on what other people will be forced to do. A different word really is needed.
” A different word really is needed.”
Agreed.
However, the basic point, that crowdfunding can potentially do what we’re normally told only taxation can achieve, but without forcing you to fund activities you find wasteful or morally repugnant, is an excellent one. The few conversations I’ve had with people on this subject in the past have generally ended in some very thoughtful looks on others’ faces, which is usually a good sign I think.
The only aspect missing from crowd-funding is profit participation. But Govt is playing very nasty at preventing that. Too scary a concept to have people directly investing without a controllable, licensed middle-man they can put the squeeze on,
Actually, in the US the Securities and Exchange Commission has recently liberalized its rules to permit “crowd-funding” of profitmaking ventures. I know some people who are using that approach already.
Perry:
As much as I agree with you, I think it’s a losing battle. Language has a life of its own and it’s much more likely that the understood meaning of “democracy” will expand to cover how people are now using it than that it can be forced back into the box it came from. So I’ve started to use “popular government” to differentiate power over others wielded by the majority (or a sufficiently large voting block) from the more charitable uses of “democracy.”
To be a money lender one must first have the money.
Either one’s own real savings or the real savings of other people – entrusted to be lent out (on the understanding that the savers do not have the money that is lent out till when, and if, it is repaid).
The above may seem obvious (indeed it is obvious), but it is denied by most economists.
Some (not all) of these economists I strongly believe know perfectly well that the basic point of “credit expansion” is to lend out more than the level of real savings (i.e. to create a credit bubble), but pretend they do not know (translation I believe some of these economists are not making an innocent error – I believe them to be liars).
However, whether or not they are liars, economists who support credit expansion (i.e. the expansion of lending beyond real savings – creating a credit bubble) are giving bad economic advice.
Modern banking is based upon this principle (i.e. the princiople of lending out more “money” than they really have) which is why bankers (and those connected to them) are so terrified of “deflation”.
For example, the “fall in the money supply” after 1929 did not involve evil deflation elves breaking into the vaults of bankers and stealing (or destroying) the money that was there – the money was never there in the first place, because it did not really exist.
No one went around burning Dollar notes or melting coins after 1929 – what shrank was bank credit (“broad money” not real money).
Even in the days of the first Mr J.P. Morgan (before the creation of the Federal Reserve) bankers (such as him) tended to lend out thirty Dollars for every ten Dollars of real money they actually had – these days the gap (the gap between real savings and bank lending) is so vast that it makes no sense to even imply that bankers (and their credit bubbles and endless Corporate Welfare from the government backed Central Banks) have much of a connection with real savers (the free market – rationality) at all.
“How does all this fit in with cloud finance?”
Even more regulations have hit the banking industry. The regulations miss the point as they do not touch (perhaps can not touch) the practice of credit expansion – the lending out of “money” that does not really exist (rather than loaning out real savings with the knowledge and consent of the savers – savers who would know they no longer had the money till when, and if, it was repaid), the whole system of banking accounting (treating loans as “assets”, talking of “crediting to the account” of borrowers rather than “lending them money” and informing the savings that their savings are no longer in their accounts – because they have been lent out).
The whole system (the structure) of modern banking is wrong – and no amount of regulation can change that (indeed the regulations reflect the false structure and reinforce it). Banks are now dependent on the drip feed of money from the Central Banks (such as the Federal Reserve and the Bank of England) there is no longer much of a real connection between real saving and borrowing.
But some people still want to save (really save) and some people still want to borrow for productive investment (not to fund consumption – either government consumption or private consumption).
How are these people (real savers and people who wish to borrow for productive investment) to get together if the modern banking system is a hopeless mess? Which it is.
Cloud finance may be one way of doing this.
Paul, I think you are probably right (about cloud financing. You are definitely right about everything else you wrote). I looked into it a while back and got a little nervous about some of the reasons people were listing for borrowing but the interest rates on those were somewhat high so it probably works out over a sufficient amount. I should probably take another look.
Richard – if you instincts tell you to avoid cloud financing then avoid it.
We are groping in the dark trying to find an alternative to banking – and many mistakes are going to be made.
Back in the days of the first Mr J.P. Morgan banking still (just about) worked. Yes he lent out 30 Dollars for every 10 Dollars (cash – gold) he really had, but there was still a strong connection between saving (real saving) and borrowing.
The vital link (between real saving and borrowing) was distorted – but it still existed.
The BBC man Mr Preston (of all people) points out that even late as 1930 the Midland Bank (the biggest bank in Britain at the time) had 20% of the money it said it had (in cash – in gold)it could physically cover 20% of all its liabilities (what dishonest banking accounting practices call “assets” but are really liabilities).
20% (a fifth) may not sound much – but it is wildly better than today (and it had a lot of Bank of England paper on top of the cash-gold).
The vital link between saving (real saving) and borrowing was distorted (wildly distorted) but it was still real.
It is gone now (quite gone) – the banking model is dead (it is just still walking around like a zombie in a horror film), but we do not know what we replace it.
HSBC and Barclays are really (but not officially) insolvent – Lloyds and RBS (the other 2 of the really big British banks) are openly insolvent (basically government owned – the head of Lloyds deliberately made the bank openly insolvent by taking over “HBOS” for the government, yet shareholders could do nothing against this evil man, which shows how corrupt the shareholding [when I was young most shares were still owned by individuals – now, thanks to tax law, most shares are owned by institutions which means hired managers in charge of other managers and all scratching each other’s backs – ordinary people should stay well away from the corrupt mockery that the stock market has become] and legal, system has become). But, I repeat, we do not know what will replace this mess.
Whatever replaces the “banking” model will have to follow one central rule.
Real savings (not real savings “plus….” – just real savings) going to borrowers who are prepared to interest for funds for productive investment.
And those interest rates will have to reflect not just payment for the use of the real savings – but also the risk of default.
The risk of default (of not being paid back) must always be central in the mind of a real saver (an investor).
Paul, I see no connection with crowdfunding and banking. It is not supposed to serve as an alternative to bank loans, but rather as an alternative to taxes.
Alisa, crowdfunding as an alternative to taxation is indeed the thrust of the original essay that started this thread. But that is not the only thing crowdfunding (writ large) is about. It is also about raising capital and providing alternatives to bank loans (especially in the realm of micro-loans). Which makes it a legitimate part of this discussion.
OK, I see Laird – thanks.
I must confess that he reference to “taxation” in the quote given in the post was just a poor metaphor.
I did not occur to me that anyone thought of taxation in this way – thinking about it, I now see that some people might.
No I do not think that this sort “crowd funding” would have any impact in taxation.
After all giving money for health, education and so on is not illegal – and never has been illegal.
The point of taxation is to use force and fear to get other people to fund stuff that one does NOT want to spend one’s own money.
Crowd funding is (if it is about anything) about getting people to voluntarily hand over money – for a commercial return.
The idea of funding a worthy cause does not need to be called crowd funding (and is not).
For example, no one talks of the RNLI (Royal National Lifeboat Association) being “crowd funded” – people just give money for the worthy cause of lifeboats (in economics textbooks such things as rescue services as a “public good” – the RNLI is proof that it is not).
However, LANGUAGE CHANGES.
If people now say that voluntary giving is “crowd funding” – fair enough then.
As long as it is understood that there is nothing new in this practice – it is just a new name.
Oddly enough it reminds of something Max Keiser would say – before explaining how Bitcoin will transform the Pine Ridge Indian Reservation in South Dakota into a model of communal ownership and Gaia supporting Eco Wonderfulness.
Of course commercial “crowd funding” is not new either.
You provide money for something – and then get a share of the profits……..
Errrr sounds like owning (non voting) shares to me.
And if it is not a share of profits – it is interest instead.
Well then – “crowd funding” is just lending people money.
I fear that I will never understand P.R.
And P.R. (getting the name right and so on) is very important – especially in the modern world.
If the name “crowd funding” can convince the young that being a money lender is hip and cool – well fair enough.
Good.
I should have typed that I thought that the reference to taxation in the quote given in the original post was a poor metaphor.
I now understand that it was not meant as a metaphor.