“The new purpose of commerce is to provide the tools, platforms, and relationships, digital or human, that enable individuals to live the lives they choose.”
Soshana Zuboff – American scholar at Harvard and author of the book “The Age of Surveillance Capitalism”
Over the past 200 years, the idea of investing capital into profitable, economic endeavors has contributed to a degree of wealth creation like never experienced in the history of humankind. The concept of investing, to gather liquid funds in order to enable or secure more funds, creates opportunity. We’ve seen microcredits from banks and private individuals enabling farmers to build sustainable businesses, human capital investments as an enabler for poor students to say goodbye to the working-poor. And there are new, inclusive forms of possibilities to raise money: Compiled by many, crowdfunding and crowd investing help small charities and groups get their voices heard, their ideas spread and their small businesses realized. The growing impact investment market provides capital to address the world’s most pressing challenges with the goal to make money, whilst also making the world a better place. And with cryptocurrencies gaining in popularity, early-stage technology companies learned how to raise finances with Initial Coin Offerings (ICOs), another form of crowdfunding, where participants were given tokens instead of equity.
From ancient investors in Mesopotamia to twenty-first-century hedge funds, to new age ICO’s, humans have sought to grow their wealth by investing. For thousands of years, money was tethered to physical objects, like shells, salt, and precious metal coins. For this reason, growth was limited. It was not until the time of capitalism that the economy freed itself from these limitations when a new system emerged based on trust in the future. In this new system, people agreed to represent imaginary goods (those that did not yet exist in the here and now) with credit. By creating incentives for entrepreneurs to reallocate resources from unprofitable channels into areas where consumers place more value, capitalism has been a highly effective vehicle for economic growth. Funding is the fuel on which businesses and projects run. And through the mechanism of investing, capital can grow. One can say: Capitalism moves and energizes the world.
But there is a downside. A decade after the financial crisis, capitalism is held responsible for a variety of significant societal ills, the most prominent being severe inequality in wealth. This will be more evident than ever as the world seeks recovery post Covid 19. The capitalist investment structures of today cause and promote a few fundamental problems which we explain below.
Unequal access to investment markets
Firstly, not everyone has equal access to investment markets. Today, large portions of the population are excluded from the possibility of investing. The stock market is one of the few investment markets technically accessible to ordinary citizens, and even that phenomena is relatively new. The accessibility to other markets, such as commodities or real estate, only exists in theory. Why? The prerequisite for participation in these markets is a high level of capital, and therefore these markets are dominated by large investors, perpetuating the wealth divide. It is impossible to create substantial profits in these markets without access to significant amounts of capital. And the same actually holds for the stock market. Although individual investors with small assets can technically trade stocks, their ability to realize significant profits is limited due to their limited capacity to create leverage and to balance risks reasonably. So, although markets should be accessible to everybody in a free society, in reality, they are not. This is the paradox of accessibility.
What if we could create an investment market where everyone has access, regardless of whether someone has a lot or a little capital?
Rich people get richer
Secondly, because you need capital to make more capital, it follows that capital has a tendency to aggregate. While bigger investors purchase assets more easily, they use the proceeds to buy more assets and wealth, creating a wealth multiplier effect. This creates wealth inequalities among those who have access to capital and those who do not. Even more importantly, it creates inequalities of possibility. Those with access to capital have more opportunities to use their capital in order to shape the economic landscape and ultimately change the world we live in. This is the paradox of aggregation. It is inherent in capitalism and one of the main reasons for the growing wealth inequalities we observe in modern western societies. Today, one percent of the population owns a little bit less than 50 percent of global wealth. The number of millionaires has trebled since the beginning of the century, while the number of ultra-high net worth individuals (with a net worth exceeding USD 50 million) has risen fourfold, making them the fastest-growing demographic. The adverse social effects of capital aggregation are commonly attenuated through the redistribution of wealth by state authorities, but history is proving this to be ineffective at best.
What if we could democratize the marketplace for investment, giving everyone an equal opportunity to participate and to use their capital for building wealth?
Confusion of price and value
Thirdly, capitalism confuses price with value. Economists state that the price of an object and its value have very little or nothing to do with one another. In their definition, value is entirely subjective economic value, while price reflects whatever a buyer is willing to give up to acquire the object plus whatever the seller is willing to accept. Both are governed by the Law of Diminishing Marginal Utility. The capitalist system is made up of institutions and economic activities that are organized around this principle and the intention of maximizing capital, thus the driving force behind economic activity is to make a profit. With capitalism, money transforms all economic relationships according to the laws of capital growth. For the market of funding and investing that means the investment opportunities with an expected increase in their asset’s value receive all of the investor’s attention and attract capital. In that profit-driven setting, prices have become the indicator of value: As long as a good is bought and sold on the market, it must have value. Rather than a theory of value determining price, it is the theory of price that determines value. With the incentives of fast financial return, capitalism has been focusing on the short-term and on maximizing shareholder value. But what has value? And what is valuable to receive support or to attract investment – not just in the short, but also in the long-run?
What if there were a marketplace for things that have value but can’t be exchanged today?
We see three substantial problems of today:
- Limited Aaccess to investment markets; and in consequence, financial exclusion
- Aggregation of capital; and in consequence, unequal opportunities
- Confusion of price and value; and in consequence, distorted investing and funding
With the paradox of accessibility, people with a lot of capital are able to increase their capital more easily, while many are excluded from the opportunity to invest at all. Due to the paradox of aggregation, people with capital define what the world produces by their appraisal and investment preferences, while others don’t have that opportunity. And as the world invests exclusively in and produces goods that are expected to make a financial profit, we find a distorted allocation of investment capital, into financially, but not necessarily goods and services that are valuable to humanity.
Rather than subverting humanity to serve the marketplace, capitalism has to be made to serve human ends and goals. Instead of producing what has accountable financial volume today, how can we improve capitalism so that all goods of value, things we believe in, things we are passionate about, find a market? The ultimate question is: