Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity (26 page)

Instead of facilitating mass investment in the same old securities and marketplaces through largely the same old extractive intermediaries, networks can promote direct funding among peers. The way to tell the difference—as with any networked commerce—is if the connection is truly lateral. Are you giving money to a platform or to a person? Is that person retaining the value he or she creates, or is that value going to the much larger corporation he or she works for?

Microfinancing platforms seek to foster that peer-to-peer connectivity, and in some measure they succeed. If crowdfunding platforms like Microventures can be thought of as alternative stock markets, then
microfinancing sites from Kiva to Lending Club are more like a bond market. People lend money directly to their chosen peers, for a fixed rate of interest.

Kiva functions more like a charity than an investment. Lenders peruse the site for opportunities to help an impoverished person get started in a business. Farmers in Guatemala need two hundred dollars for seeds, seamstresses in Africa want fifty dollars for buttons, and a messenger in Calcutta wants twenty dollars for new bicycle tires. As numerous studies have now shown, microlending works better at growing economies than charity because recipients are under pressure to grow a business and pay it back. This works even better when borrowers are put into small, local groups whose borrowing power is dependent on everyone’s credit histories. For example, if a borrower’s husband tries to take the money to buy alcohol, the woman’s friends will exert tremendous social pressure on him to return the funds.

Unlike World Bank loans, which trickle down through government, if at all, microlending goes directly to entrepreneurs—with no policy strings attached and no further obligation once the loan is paid. The job creation is more organic and long-lasting than when a foreign corporation comes and plops down a factory, and the funds tend to stay within the community instead of being extracted. This is no longer a fringe activity but a primary catalyst for business and employment in these regions.
64
,
65
And it’s not the sort of activity from which foreign corporations can simply extract value. Once, after I gave a talk about the promise of microlending, a marketing executive from a European cosmetics firm asked whether I thought that the millions of successful loan recipients in Africa might constitute a network through which she could distribute her products. No, I explained, these women are not her future marketers; they are her future competition.

Still, the microfinancing model has served as a proof of concept for less altogether altruistic platforms, such as Lending Club and Prosper Marketplace, which connect borrowers directly with lenders looking for returns. The sites let prospective borrowers list their requests, along with personal information and stories about their experiences and aspirations.
Lenders peruse the listings, then choose the loans they wish to finance. Because they are connected more directly, borrowers pay less than they would to a bank, and lenders receive more than they would in interest on a savings account—usually in the high single digits.

Borrowers defaulted significantly less on these platforms than they did on traditional loans, largely because the psychology of failing to repay another human being is much different than that of owing money to a faceless bank. To magnify this payback effect, lending platforms learned to use faces of real people in their ads and communications.

Unfortunately, the microfinancing industry did so well that it became plagued by the very force it was designed to sidestep: institutional capital. These platforms took on significant investment from the venture capitalists and needed to scale much faster than their individual subscribers could support. So the platforms welcomed the participation of banks and other institutional lenders that could provide volume and justify higher company valuations. As of early 2014, Lending Club and Prosper Marketplace alone facilitated over $5 billion of loans. Lending Club did its IPO in December 2014, at a valuation of about $10 billion.
66

Although institutional lenders help these platforms justify their valuations, they push out the human users and undermine any peer-to-peer ethos or activity. The banks and credit companies on the platform use algorithms to cherry-pick the best loans for themselves as soon as they are listed (like professional shoppers taking the best clothes from the thrift shops), leaving only the dregs for the regular people visiting the site. These institutions enjoy the benefits of all that peer-to-peer psychology, earning a sense of loyalty usually owed only to other human beings. But slowly, as these sites’ human lenders become aware that they no longer have equal access to the best opportunities, they leave, disillusioned. The nascent peer-to-peer lending landscape is discredited before it even has a chance to propagate.

The sweet spot in digital investment is for investors, lenders, and the enterprises in which they want to participate to be able to create value together without surrendering the human connection that elevates the
success rate of peer-to-peer business solutions. As we have seen before, this doesn’t necessarily mean exploiting digital technology so much as the digital sensibility.

The most promising new structure I’ve come across so far isn’t really new at all but the repurposing of an old one, called the DPO, or direct public offering. It’s a legal structure that was most famously retrieved and employed by Ben & Jerry’s when it was seeking its first $750,000 of capital from 1,800 ice-cream-loving Vermonters to build a new plant.
67
(It would have been wise to continue on this path instead of reaching for an IPO, losing control of the company to anonymous shareholders, and getting acquired by Unilever.)

The DPO allows small and medium-sized businesses to raise investment capital from any number of accredited and unaccredited investors—as long as they do it within their own state of incorporation. Unlike an IPO, the DPO happens on a state level, where it isn’t subjected to the expensive and arduous vetting process; and unlike crowdfunding, a DPO can offer equity and dividends instead of just a payout on exit. Most important, a DPO gives a business a framework through which it can raise money from the people who know it, work for it, and buy from it.
68
It’s like a “friends and family” round, through which entrepreneurs can embed their values right in the capitalization structure, as if programming an ongoing operating system. Rather than platform engineers or even well-meaning intellectuals coming up with more equitable business models, people in the trenches—enabled by a more distributed digital sensibility—often figure out the best approaches simply by solving their own problems.

For example, after a decade of growth, Dan Rosenberg and Addie Rose Holland’s organic cannery, Real Pickles, needed to expand their operations. They knew that traditional financing could force them to compromise their commitments to treating workers properly, sourcing materials locally, and using organic practices. They wanted to accept funds without diminishing their workers’ role in the company—particularly in the distant future.

So they filed for a DPO, which cost them $15,000 in legal fees but let them raise half a million dollars from seventy-seven investors—all from among their existing network of grocers, small farms, longtime customers, and supporters, who were happy to ensure the success of a company they saw as a vital member of their community and, for many, an important business partner.
69
Imagine having a company in which your investors were also your suppliers and customers; each stakeholder has multiple stakes in your success and multiple ways of ensuring it.

Best of all, the looser regulations on DPOs let Rosenberg and Holland tailor the conditions of their offering to their own values. They wanted to be able to resist the pressures for fast growth that they believed had compromised many other originally mission-driven companies. So they created a rule stipulating that investors have no voting rights and that they must wait a minimum of five years before cashing in their shares. When they do, they receive only their original purchase price. Any return on investment would come from a dividend. Meanwhile, part of the new valuation of the company went to giving workers shares in the enterprise, without the same obligation to retain them for five years.
70

By rejecting the one-size-fits-all logic of industrial investing, businesses restore a modicum of agency to their own operations. Instead of using digital platforms to amplify the expectations and liabilities of traditional venture capital, they can employ a hacker’s DIY sensibilities to build locally capitalized companies on their own terms. Investors, meanwhile, gain the ability to support and benefit from network connections that flow in more than one direction at the same time. Instead of extracting value, they exchange it.

We can’t survive in a real-time, entirely liquid economy, no matter how much we might want to. Bad things happen that can destroy a person’s ability to make a living wage. People get old and find themselves without a community or family to embrace and support them. Even a limited
ability to invest capital, grow savings, and retire on those funds is better than nothing. We have all, to some extent, depended on the industrial economy’s ability to preserve wealth over time: to lock in earnings and then grow them at least at the rate of inflation.

The new digital landscape reverses a lot of this. Nothing stands still. The shift from physical paper to charged pixels is a great metaphor for how everything is rendered dynamic and fungible by digitality. The facts in the encyclopedia used to just sit there on its pages; they were both unchangeable and undemanding. The facts in Wikipedia need to be actively maintained on servers and then delivered to those who call them up.

Likewise, as we’ve seen, digitality changes money (over a number of steps) from a physical piece of gold to a charged particle; from an institutionally guaranteed value to a collaboratively maintained ledger. The former might need to be protected by a vault, but the latter needs to be kept alive with electricity. It’s always in an energized state. Money is moving off the hard drive and into active RAM. This makes it harder for anyone but the platform monopolist to make money by standing still—and even the platform monopolists are losing their grasp on the economy. Money alone won’t buy security, and everyone is going to have to learn how to invest through work, active participation, and assets other than cash.

Not to worry: this isn’t all happening so fast. As disappointing as it may be to the revolutionaries among us, the traditional debt-based investment economy is not flipping into a real-time, distributed, peer-to-peer, cryptocurrency marketplace overnight. Those of us with jobs and families and mortgages ignore the investment markets at our own peril. And there are still ways to invest plain old money that capitalize on the current economic transition without overly compromising our potential for a more equitable economic future. I’ll briefly touch on some of these strategies now because, believe it or not, there are readers who came for this alone and have been skimming to this point. I’ve waited until the end of the book as a way of forcing them to absorb a little something about how the digital landscape can promote entirely new value creation and exchange, even
though all they really want to know is which ticker symbols they should buy in the meantime.

1. No Growth, No Problem: Invest for Flow

So fine: the key to investing in the emerging digital landscape is to diversify. The Talmud instructed ancient Jews to keep one third of their assets in land, one third in commerce, and one third “at hand.”
71
This would mean real estate (your home), speculation (business, stocks and bonds), and cash or currency equivalents like gold. The real estate is a capital investment that grows, the commercial securities should produce dividends (with risk), and the cash is there to be spent or used for emergencies. These are roughly the same as the three main components of Bernard Lietaer’s proposed currency: trees, highways, and gold.
72
Trees are the real estate component, only they have built-in growth. Toll-collecting highways provide the business component in a relatively stable way. And gold is the on-hand cash. The interesting thing to note about both trios is that the business component is not understood as the way to achieve capital gains—that’s what the property is for. Instead, the focus is on business investing as a productive, real-time asset generator.

That’s also an appropriate strategy for investors who understand the way a properly functioning digital economy will diminish the power of standing capital to suck value out of real commerce. At the very least, it will be for those who don’t
want
their own security to depend on sucking the value out of real commerce. It’s a path to making money that’s not dependent on the entire economy continuing to grow. Investing in flow over capital accumulation is as easy as picking a few high-dividend stocks in sectors that are consonant with your own values, or a dividend-focused mutual fund or ETF.

Of course, you have to do a bit of research. Read quarterly reports and interviews with management—not to time your trades (pointless) but to see how CEOs are incentivized and whether the company has share-price targets (bad) or earnings targets (good). What are the company’s profits relative to its total asset value, and is that ratio going up or down? These
are better indicators of sustainable revenue for you, as an investor, than the metrics touted by the professional traders on business shows that treat the market like fantasy football.

This is not radical or new, and it works in any market environment. Warren Buffett, one of the most conservative and successful investors of all time, invests primarily in dividend-paying stocks and holds them for a very long time. The top five companies in his Berkshire Hathaway fund—Wells Fargo, Coca-Cola, American Express, IBM, and Walmart—may not be the enterprises we want to support, but they all pay high dividends and increase their payouts regularly. These are stocks that literally pay you to buy and hold them. By refusing to sell a stock, you also avoid the taxes, commissions, and other frictional costs of a portfolio in constant turnover. Instead of profiting from the change in the price of the stock, you profit from the constant flow of revenue from the business itself. As Buffett puts it, “Our approach is very much profiting from lack of change rather than change.”
73

You still have to be careful; some companies produce dividends in pretty abstract or destructive ways. You want to be invested in companies that create value through flow of revenues, not the extraction of a fixed resource from the ground or an asset from a community. Other companies just do evil things you won’t want to be rooting for. Sure, there’s some karmic safety in the fact that buying a share of a cigarette company is not an investment in cigarettes. As we have seen, the stock market is utterly abstracted from whatever businesses those stocks may have financed decades ago. You’re buying shares from traders, not from companies. In that sense, a share of a munitions manufacturer is no more morally encumbered than a share of an organic-food supplier. But when you invest for flow, you are much more dependent on the ongoing profits of the company. This means your dividends may depend on sales of the very things you detest and the escalation of activities from smoking to terrorism that fuel those sales.

Numerous filters have been developed to help people invest more responsibly. Mutual-fund companies such as Ariel and Calvert offer modified versions of the S&P index, filtered for liquor, cigarettes, weapons, and
others of the most objectionable industries. Many of these funds also check to see whether a corporation offers overtime and maternity leave to workers, supports the communities in which it operates, and has an environmental responsibility policy. But many companies have learned how to meet the requirements of social responsibility filters without really functioning in a socially responsible fashion, and the indexes are filled with the names of companies most ethical investors would hope to avoid.

2. Bounded Investing

To invest in companies that promote your social or even practical goals, it’s a whole lot more straightforward if you start closer to home. Many union pension funds, for example, target their investments toward companies that employ the unions’ respective members and directly benefit people in the same socioeconomic bracket. The AFL-CIO Housing Investment Trust funds union-constructed affordable housing in an effort not only to reap profits but also to keep wealth circulating within the working class. The trust invested $750 million in New York City to finance the first construction after 9/11, generating 3,500 union jobs and building 14,000 housing units, 87 percent of which were designated as affordable housing.
74
Another billion went to mortgage loans for union members and city employees. Similarly, the union invested in restoring the Gulf Coast after Hurricane Katrina and in addressing multifamily housing shortages in Chicago and Massachusetts. The investments generated jobs, goodwill, and homes, in addition to retirement fund returns for union members.
75

Individuals can apply the same principles to their own investments by considering how to leverage the impact of their capital to benefit their own lives. It’s easiest to see and feel that impact by investing in regional companies and projects, big or small. A large corporation’s local activist shareholders can have a disproportionately significant influence on how the company employs, sources, pollutes, and donates. Meanwhile, as distributed technologies allow smaller, more locally connected businesses to leverage people, assets, and trends that larger conglomerates cannot, consider putting your capital right there. Do you want a local bookstore, gym,
or Thai restaurant? Invest in one. Yes, business partnerships between local merchants and friends are stickier than the anonymous purchase of stocks through a laptop, but that’s also what makes them better. Investors are more directly committed to one another’s success and get to see the fruits of their investment in their own lives. The successful local farm you’ve funded feeds not only your bank account but your family as well. And your neighborhood. And your property value. And the local economy.

Investing locally, in people and companies you know, may sound at first like conflating business and the personal or overweighting just one kind of sector. But it’s actually a form of diversification. We do not just buy a stock with a single benefit of growth; we buy into businesses whose operations benefit us and our communities. We don’t need them to keep growing; we just need them to keep operating, generating revenue and benefits. This is part of what was originally meant by double bottom line: the returns on investment take multiple forms. If we invest in companies that in turn pay us for our products or services, we end up generating a double stream of revenue. It’s not limited so much as self-sustaining.

We might better call this a strategy of
bounded
investment. By identifying a community, interest group, or region to support, we create boundaries for our capital. The money injected ends up circulating through the pool instead of being sucked out by a company foreign to the system. By targeting certain companies within the pool, we can create better customers and providers for others in the bounded network, including ourselves. These boundaries are not elitist; they are what distinguish connected, living businesses from those that merely extract our energy and money and convert it to capital in a distant shareholder’s account. Boundaries don’t exclude participation so much as allow for the same investment to touch and strengthen dozens of businesses in the same pool.

Bounded regional investing contradicts the corporate strategy of reducing municipalities’ authority over their own laws and land. Investing in a local polluter doesn’t increase the value of one’s home; investing in an organic market might. Moreover, in a networked era, boundaries don’t have to be solely geographically defined; they simply have to define a mutually
supportive range of businesses. Your target could be the business sector in which you work, such as design services, equipment, and Web sites. Or your pool could be the various constituencies in biodiesel manufacturing, comic-book publishing, or natural health care. As long as there’s a network of businesses that support one another, the boundaries make sense.

Unlike traditional shareholding, bounded investment is less dependent on growth than it is on sustainability. That includes the environment in which customers live and work but also the revenue streams of the businesses in the pool. Where an unbounded investment must continue to grow to be worth anything, a bounded investment needs only to promote the health of the others in the network and sustain itself in doing so. Unbounded investing is like air-conditioning one’s home with the windows open. Bounded investing permits an accumulation of assets, expertise, relationships, and monetary momentum.

Bounded pools also free up people and organizations to invest in more than one way—to diversify not only in investment targets and measures of return but in the
means
of investment. In a world where capital itself is inaccessible, dysfunctional, and losing its value, we need to invest with things other than our money—if we even have enough to invest in the first place. This means spending our time, our effort, our social capital, and often our sweat. Our work is our investment.

The objective here is to find ways to structure work so that, more than mere employment, it constitutes a form of ownership. We can sing for our supper, but we want to gain some traction as we do. Currently, that means outsourcing the investment of excess salary to the financial services industry. Instead, we need to find ways for labor itself to be understood as an investment. Employees must earn more than cash and a few token shares of company stock. They should own the companies they work for. Their noncash contributions to the enterprise must be valued as much as investors’ capital.

Economists have long understood that it takes more than money to create goods and services. Labor, land, and capital—together—have been recognized as the “factors of production” since even before the classical
economics of Adam Smith. Some add entrepreneurship as a special category of labor, but it was obvious to all that enterprise requires work and physical resources in addition to seed money. (Labor, land, and capital are analogous to that Talmudic trio of business, real estate, and cash.)

Thanks to the rise of the finance industries, capital has diminished the market value of the other two factors. Money is the only one that counts as investment anymore. Labor and land have been reduced to externalities—rented, disposable commodities. The only way to invest your land in an enterprise is to take out a mortgage and use the cash to buy some stock. The folks contributing their automobiles and driving labor to Uber, or their property and hosting to Airbnb, make less than minimum-wage employees and don’t own a piece of the company even though they constitute the infrastructure. Only money talks.