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The Kickstarter Recession

If crowdfunding is too successful, the economy may suffer in surprising ways.

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Screenshot of a Kickstarter project

Kickstarter, the impressive Web service that lets would-be artists or entrepreneurs raise funds from the broad public, has captured the imagination of the world. In many ways, it’s the ideal company for our time. Entrepreneurial, capitalistic, dynamic—and yet not a bank. In fact, it’s in opposition to the traditional bank funding structure. Just this past Wednesday, legendary Harvard Business School professor Clayton Christensen officially proclaimed crowdfunding “disruptive,” with an excellent chance of “taking root in these underserved areas” outside of high-tech and health care “that traditional financiers have traditionally found unattractive.”

When I first heard about Kickstarter, I was skeptical that it could possibly work. But the company’s done a great job of solving the problems that would normally dissuade someone from handing money over to a stranger in exchange for a product that doesn’t even exist. In the future, people may use crowdfunding to opt out of the traditional business framework and pursue their passions, with startup money offered not by greedy, return-obsessed bankers but by fellow enthusiasts. This sounds wonderful! But if it comes to pass, it may deal a major blow to the American economy.

Life is full of tradeoffs. You could go to law school, or you could take that underpaid job as an assistant editor at a magazine. You could become an ice road trucker, or you could drive a delivery truck and watch Ice Road Truckers at home.

One path is probably more lucrative, the other more pleasant. In desperately poor countries, people are generally willing to do whatever it takes to boost their incomes a little bit. That’s why sweatshops in low-income countries can get away with dangerous conditions and terrible hours. In the United States, even in a deep recession, Americans are much more reluctant to accept difficult work. Jobs that are unusually dangerous or unusually unpleasant carry a wage premium. Nevertheless, even the prospect of a pay bump isn’t enough to tempt most people into working on a commercial fishing crew. The death rate for fishermen is sky high compared to typical work, and you’d have to live on a boat.

And though a minority of small business owners are out to make a fortune, the majority are seeking a lifestyle they enjoy. They want the business to succeed, of course, but the goal is to achieve personal autonomy and derive satisfaction from running a business on your own terms.

In conventional finance, money doesn’t care about your passion or the joy you get from being your own boss. People deposit money in bank accounts, and then the banks try to make a profit by lending it out. That means giving credit to people with sound business plans and likely profits. The genius of Kickstarter is to open the door a bit more widely. People sponsor something like Neal Stephenson’s sword-fighting game or the wildly successful Pebble smart watch project not because they think kicking in capital is the optimal investment strategy, but because they—like the founders—are just enthusiastic about the idea. In other words, Kickstarter gives investors the chance to do what workers and small business people have been doing forever—sacrifice potential earnings for the sake of passion. The more passion-based capital there is out there, the more people will be able to opt to follow their dreams. It’s in many ways an incredibly appealing vision of a somewhat utopian world in which human choices will shape the economy rather than the other way around.

Unfortunately, economic growth—gross domestic product—is made of money, not dreams. A sudden shift in the share of labor and capital that are devoted to dream-following would show up in national account statistics as a large fall in productivity. The psychic rewards would go unmeasured. We thus might mistake an outpouring of creative energy for a collapse in wages and incomes, leading to some potentially serious policy errors.

And the government can’t tax psychic returns. A traditional banking sector channels money to profit-seeking uses, and the income streams that result become the government’s revenue. We need that money to finance public services. No miraculous Kickstarter project is going to change the fact that buses need drivers. By the same token, the aging American population is going to require more nurses and more home health aides. To pay for them we need to tax the rest of the economy. It’s conceivable that musicians and documentary filmmakers will be satisfied living modest, crowdfunded lifestyles pursuing projects they and their funders are enthusiastic about. It’s easy to imagine more physical production being done less efficiently but more intimately and sold over Etsy. But these kind of strategies aren’t going to mop hospital floors. For that you’re going to need to need to motivate people with old-fashioned cold hard cash—most of it raised from taxes.

In the short run there’s no problem. Crowdfunding models are in their infancy and clearly not driving the macroeconomy. But over time they’re likely to grow, and it’s worth trying to understand the consequences. Profit-driven traditional finance and tax-and-spend welfare state policies have important synergies. They both thrive when the complexity of human desire can be translated into dollars and cents, into profits to be made and incomes to be taxed. If technological innovation starts to undermine the building blocks of financial capitalism, the consequences will be found in some surprising places.

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