Monday, November 23, 2015

Notes on Crowdfunding as Concept

Arnold Kling recently responded to a Project Syndicate post from Robert Shiller regarding crowdfunding. Here, Shiller explains some technicalities:
True crowdfunding, or equity crowdfunding, refers to the activities of online platforms that sell shares of startup companies directly to large numbers of small investors, bypassing traditional venture capital or investment banking.
Arnold wasn't particularly impressed with crowdfunding as an investment opportunity, so he made some suggestions (which I'll return to shortly). What interests me, is crowdfunding as a recent version of so many group activities which - while generally thought of in a financial or economic context, also correlate with the "group sourcing" of basic political expectations. And instead of investment opportunity, the context is one of taxation "benefits", so to speak.

Only one problem: government "crowdfunding" in the U.S. is slowly leading to diminishing returns for the population as a whole. Expectations for fiscal policy were once quite simple, compared to what they ultimately became in the twentieth century. Somehow, income taxation in particular, has morphed into a labyrinth of subsidies which are impossible to decipher. Who could have predicted - when arguments for the U.S. Constitution were still occurring - that "crowdfunding" for the new nation would end up well beyond the basic needs of military, justice and provisions for public safety? When taxation inroads did eventually take place, their implications were seldom thought through, in terms of efficiency. Consider these startling arguments Alexander Hamilton made, in "Original Meanings: Politics and Ideas in the Making of the Constitution" (page 196):
Over time, the wants of the States will naturally reduce themselves within a very narrow compass, he predicted in Federalist 34, while those of the Union will ultimately prove "altogether unlimited." Anti-Federalists need feel no alarm over the national advantage in taxation, Hamilton implied, because the revenue needs of the states would verge on insignificance!
One is reminded how Keynes also expected people to have their working hours gradually reduced, as few individuals would supposedly need to work anymore once progress reached a certain point. But who can afford to give up working...if in fact their work pays the bills? Even though working hours have been reduced, governments and special interests alike haven't wanted to give up the benefits of rigid structures for asset and consumption patterns. Those consumption requirements translate into higher profits and more taxation revenue from asset formation.

None of this is to say that crowdfunding - government style - is a mistake. Rather, it is an incomplete setting for overall economic access and employment. The fiat monetary policy which originated in the twentieth century, brought greater liquidity to monetary transmission and remains capable of generating spontaneous services formation in prosperous regions. However, the gradual growth of asymmetric compensation now contributes to inequality, decreased labor force participation, and hollowed out economic formation in less prosperous areas.

When the "crowdfunding" concept of the Constitution was set, it would have been difficult for the founders to imagine, the degree to which individual sovereignty for production capacity, would gradually be transferred to external production processes. This also matters because government primarily exists in labor creating service terms which are difficult to quantify.

In a recent post I noted how losses in labor force participation are also reflected in recent losses of input as contrast with output, per Dietz Vollrath. He also highlighted government composition as pure labor and housing services as all capital and no labor. When trying to sort out current production mysteries, it helps to remember government's large role in services labor - alongside the fact that labor aggregates and housing wealth accurately reflect one another.

There's a graph in Vollrath's above linked post which illustrates the degree to which capital's share of costs have skyrocketed since 2000. Given the tight market in housing - in spite of capital's share - this only further illustrates the degree of input which has been sacrificed. To what degree is a nation's "altogether unlimited" wants represented by the growing pattern of capital, minus labor representation? Government as crowdfunding, hasn't quite gone as planned.

All of which brings me to Arnold Kling's suggestions for crowdfunding. First, note that national governments and business interests work within a general equilibrium which exists as a basic given. General equilibrium remains open ended for international flows, in the sense of Wall Street and in terms of bond creation. I only reference this because I find Kling's suggestions more applicable for alternative equilibrium settings. Monetary transmission would reflect the local circumstance of time arbitrage, alongside local resource application and asset formation. Here's Arnold's first suggestion:
1) Suppose that people are only asked to invest in companies where they want to buy the company's offering.
Local corporations could be thought of as a combined government/business interest "crowdfunding" approach, in which participants "buy" a unique non tradable environment as it is physically and intellectually constructed. Time value and monetary investment both count for ownership capacity, rather than taxation. And service formation represents shared choices for "taxation" of time aggregates. Again, from Arnold:
Suppose that the crowdfunding platforms provide some of the legal protection that venture capitalists and other high rollers are able to give themselves against subsequent misbehavior by founders or follow-on financiers.
Local corporations would need legal protections in particular, for small and (relatively) spontaneous business formation which has become otherwise difficult to achieve. Another concern: rights to knowledge use would need basic, long term protections. Research which originates in knowledge use systems, could not be appropriated by private interests elsewhere. Others could freely use what is developed, but not in ways that would render this mutually supported work unusable in low cost settings. In all likelihood, knowledge use systems would gain knowledge protection through means similar to creative commons.

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