• Part 1: The JOBS Act will unlock $30 Trillion in long-term investment capital that can legally be invested in startups and small businesses through crowdfunding portals.
• Part 2: Currently, investors have a stranglehold on the fundraising process. Once the JOBS Act is implemented, there will be a leveling of the playing field in which entrepreneurs and citizen-investors control the process.
• Part 3: Investment crowdfunding enables individuals to invest in companies they are passionate about, and in so doing, outperform professional investors.
• Part 4: “Do you want to sell sugar water for the rest of your life or do you want to come with me and change the world?”
• Part 5: There is a second revolution coming: investing directly in people. When it collides with crowdfunding, this will create a perfect storm….

Related posts:

1. The Economics of Abundance
2. Investing in Superstars, part 4
3. Revenue Sharing

Revenue sharing, sometimes referred to revenue-based finance and income-contingent loans, is just recently starting to take off. The White House is making a big push for income-based repayment of student loans.*  And at least two private (and highly capitalized) startups are launching soon to provide revenue-based financing options for individuals who agree to pay a portion of their future income in exchange for cash upfront.

With U.S. consumer debt topping $2.5 Trillion and student loans now totaling over $1 Trillion, it’s no wonder that there’s a lot of interest in revenue-based finance. Let’s look at several common debt scenarios and see how they could be different — and better for all parties — if they were based on revenue-sharing instead.

There are many ways to structure a revenue-share contract, but let’s start by assuming a very basic model: investor pays a lump sum in cash to investee, in exchange for a fixed future return, with a minimum annual payment based on post-tax income/revenue.

Instead of Student Loans

Let’s say you have $100K in student loans.  Based on the 6.8% federally guaranteed annual interest rate, you’ll be able to pay it off in 10 years, but only if you can afford the $14K per year starting when you graduate.  If you are one of the lucky American college graduates to find full-time employment you’ll make an average  annual salary of $27K.  You can expect to pay $5K of that in taxes, leaving you with just $8K to live on for the entire year, once you meet your student loan obligation.  You can get your annual loan repayment to under $8k, but only if you want to be saddled with debt for the next 30 years.  And by the end you will have payed $135K in interest on that $100K loan.

Now consider that you find an investor who wants to give you $100K revenue share contract instead.  In exchange you agree to share 33% of your post-tax income up to a total of $150K.  Instead of paying $14K of your $22K post-tax annual salary, you’re paying about $7K (lower than you cold have gotten with a student loan).  But, where it gets really interesting is looking at two extreme scenarios:

1. You defer college and agree to work for a startup for three years without a salary, living off the $100K.  Because you are saving your company valuable seed capital, they give you a large chunk of equity.  Two potential outcomes:
   • You cash out, and 33% of your post-tax income exceeds $150K.  You’re investor has just made the equivalent of 15% interest compounded annually, and is fully cashed out in 3 years instead of 30.
   • You have to get a “real job” in three years, but now you are a hot commodity because of your experience, and you’re earning $130K a year.  You’re sharing $25K annually with your investor, which means that they are made whole 9 years after they invested in you.  While their effective ROI is 4.7% annually compounded, they don’t have to wait 30 years.  Plus they have a “free shot” at doing better, assuming you will get raises and bonuses along the way.
2. You go to college, find your calling, and decide you want to work in the non-profit sector for the rest of your life.  While your starting salary is only $25K, you make an average of $70K per year over the course of 30 years.  Your average revenue share is $15K annually, and you’re contract is complete in 10 years.  Very similar to the 6.8% student loan over the same period, but you are not being squeezed by large payments in lean years — remember, you only pay based on what you actually take home as income.   And rather than paying more than 100% in total interest, you are capped at the pre-agreed upon ROI (in this case 50%).  Finally, you have the flexibility to take a different path at any time without worrying about the debt spiral of compounding interest.

From the investor’s standpoint, the risk of losing their investment is lower with a revenue share contract than a loan.  After all, they have no collateral in either case.  And and if you declare bankruptcy — or even threaten to — they are likely to lose some or all of their investment.  With a loan, you pay the same regardless of what you earn.  But with revenue share, your payments are tied to what you can actually afford.  Less likelihood of bankruptcy means lower risk for your investor.

As for ROI, the investor has traded lower total return on investment for a higher rate of return and a shorter time to liquidity.  This is valuable because there is a cost (the so-called time premium) associated with having your money locked up over a long period of time.  To understand this concept, consider the following choice: would you rather have $10,000 in cash now $12,000 in two years?

Finally, the sooner the investor is made whole, the more money they can earn by reinvesting with someone else, or in an unexpected opportunity.  If you are waiting for someone to repay a loan, you can’t use that money to invest in that foreclosure down the street.

Real Estate Financing

Speaking of which, let’s say you are looking to purchase a home using a standard mortgage.  It might be a good financial investment, but only if you are willing and able to sell it at a loss when the market (and your finances) dictate.

If you use a revenue share contract instead, you are aligning your investor with your total earning potential rather than just the value of your equity in the house.  That total earning potential includes the scenario where you sell your house for a profit, but it also includes your other sources of income, like your salary.

But the real value to both you and your investor is that you are never forced to sell at a loss, and the investor is not forced to foreclose.  You are partners in the success of the home-as-investment, and you are partners in your overall financial success.

The situation is even brighter for someone who is in the business of real estate development.  In my previous blog post I discussed the insidiousness of debt financing for real estate projects.  Let’s look at what happens with revenue share, using the a familiar example: you need $300K to purchase land and build a house on it.  This should take you a year to complete, after which you hope to sell it for $400K, yielding $100K in gross profit.

Suppose you find an investor willing to give you $300K in exchange for half your post-tax income, up to a total of $600K.  Now, in the desired scenario, you make $100K gross income on the initial deal, pay $50K to your investor, and have $350K in the bank to finance your next deal.

Compare this with the bank loan where you might pay off the $300K principal plus $30K in interest, and be left with only $70K in capital.  But what’s even worse is that the $70K is all taxable capital gains, whereas in the revenue share scenario, $50K is your capital gain.

Again, with a revenue share contract, you and your investor are aligned as partners.  So if you’ve proven yourself a good earner, they might be excited to help you earn more by helping you find more development opportunities.  Plus, your investor’s risk goes down again, even compared to a loan secured against the property.

To see why, let’s consider what happens if the market tanks and the completed home is now worth $200K.  If a lender forecloses, they are stuck with a $100K loss (plus they have to go through the hassle and cost of selling it themselves).  But with a revenue share contract, you are taking the risk, as it should be.

The investor owns a share of your future revenue (up to the cap), no matter whether that comes from real estate or not, and no matter if it takes you a while to reach the cap. And once again, the investor has a “free shot” at doing really well, if you find yourselves in an up-market.

Beginning with the example above, let’s say you parlay your things, and after several years, your post-tax bankroll stands at $900K.  You may decide to pay off your revenue share contract, netting $300K free and clear.  If so, your investor has just doubled their money in several years.  Compare this with the 10% loan, where the investor doesn’t double their money until at least year 7.

Financing Your Startup

An entrepreneur looking for seed financing of $50K – $100K can expect to spend 9 months full-time, without pay, to close the deal.  Most never do close a dime.  And after you spend that cash (which will last you 6-9 months at most), you’re in need of Series A, which can be even harder to close.

But what if you and each of your co-founders got backers to fund a year’s worth of living expenses in exchange for a piece of your upside? For the sake of comparison, let’s assume you are a sole founder and have an angel investor willing to give you $50K in exchange for 6% of your business.  Instead you convince them to give you the $50K to spend as you see fit, and in exchange you agree to give them 10% of your post-tax income and 50% of your capital gains and dividends, up to a total of $500K.

Scenario A: You Cash Out

After 5 years working 70 hours a week, your hard work pays off and your company is sold for $30M.  By this point you’ve been diluted to a 30% shareholder, so net after taxes and completing your revenue share contract you clear $6M personally.  Your investor gets a 10 times their original investment.  Had they invested in the company directly, they would have ended up with $540K, just about the same as the revenue share deal.  However, if the company had run into problems along the way and had to dilute shareholders to raise more money, your investor could end up with less than if they invested in you directly.

Scenario B: You Crap Out

Let’s say you are unsuccessful in raising enough money to make a go of it and have to close the doors after a year.  You are in the same position as you would have been by selling equity in your company, except now you’re still under contract for revenue sharing.  This might seem like a burden, but it can also be an opportunity.  Because your investor, instead of parting ways and probably never helping you again, now has a vested interest in your future success.  Maybe they back your next startup directly and get the extra value of making good on their original revenue share with you.  Maybe you get a job working for them to help analyze and oversee their investments.  Either way, this is a much better deal for your investor than purchasing stock in your first company.

Small Business Finance

It’s not hard to see how revenue share contracts can be a good way to raise capital to expand a business with decent cashflow.

In fact, for many such businesses this is commonplace and is known as cash-flow factoring.  The difference though is that factoring is really a loan based on cash flow projections, where as revenue sharing is based on actual booked revenue.  And just as with any lender, a factor is not a value-aligned investor.

Revenue share contracts for businesses can be structured either based on gross revenue, net revenue, EBIT, EBITDA, or net profit, depending on how aligned the investor wants to be with the success of the business.

On the totally-aligned end of the spectrum (net profits), the investor can expect a higher ROI and a higher minimum share percentage.  On the other end of the spectrum (gross revenue), the investor can still expect better ROI with lower risk than a factor could.

Impact Investing & Social Enterprise

Whether they are mission-driven and want to continue to oversee the impact of their business in the world, or whether they see the business as supporting a certain lifestyle that they don’t want to give up, more and more founders are in it for the long haul.  Which presents a real challenge when raising startup capital.

The whole reason and early stage investor would want equity in a startup is because of the potential for a big score when the company sells or goes public. Once again, revenue share presents a win-win solution that has the benefits of equity and eliminates the problems with debt.

Structuring Your Revenue Share Agreement

Each situation is different, which means one size does not fit all.  However, there are some overlaps and lessons to be learned from my experimentation with Personal Investment Contracts.  Also, check out Upstart.com and watch this space for the announcement of another venture which aims to create a marketplace for personal equity.

If you are interested in creating your own revenue share contract now, contact Kinetic Law and ask for Orlando Medina.   And post your experiences, ideas and questions below.

* It’s worth noting here that some people are calling for student loan forgiveness on a wide scale.  At first this seems like an even better option than Obama’s idea of converting these loans to income-based repayment.  Until you realize that it’s not the lenders, but the taxpayers, who will be footing the bill.

Related posts:

1. Investing in Superstars, part 4
2. Lo@n, D*bt and Other Four-Letter Words
3. The Economics of Abundance

1. The power of the free market comes from competition
2. If you are nice to someone, you will be rewarded commensurately
3. A penny saved is a penny earned
4. The more scarce something is the more valuable it is

I no longer believe these statements to be true.  To understand why, I’d like to share a little of my journey as an entrepreneur and investor.

In the mid to late ’90s I was working on a startup and getting my feet wet as an angel investor in Silicon Valley.  I, like everyone I knew, was an adherent of the Chicago School of Economics and the Efficient Market Hypothesis.  One of the mantras of this religion is that

The invisible hand of the marketplace will feed us all, but we have to compete vigorously with one another for it to work its magic.

Signing a Non-Disclosure Agreement on a first date — that’s not just good business, but a moral imperative as well.

Flash forward to my first TED Conference several years ago.  I learned phrases like “Social Entrepreneur”, “triple bottom line” and “doing well by doing good”.  And while I didn’t feel like these were exactly oxymorons, I didn’t really understand how powerful this new mindset could be.  Can you really make more money by putting your customer’s well-being ahead of your own?

So, in the spirit of TED, I started experimenting with a personal monetary policy that combined philanthropy with investment.  In practice this meant spending my time and money helping others with their ventures, not worrying so much about “return on investment”, and seeing what would happen if I left that part up to the universe.  In other words, testing out how real Karma actually is.

I would give people loans to go to conferences that would enrich their lives, and I’d ask them to “pay it forward” instead of pay me back.  I would invest in ideas and projects that had little “logical” chance of success because I believed in the individual, and that they’d somehow figure out how to make money.  I did deals on handshakes and email confirmation.  I let the other party suggest terms they thought was fair, and I didn’t negotiate looking to get the biggest piece of the pie that I could; instead I worked with the other party to increase the size of the pie that we would share.

Normally when we give our time or money to people in a business context, we are expecting an immediate quid pro quo, whether it be an airtight contract or a thank you with a solemn promise to return the favor.  But because I was feeling financially secure at the time, and I’d adopted this mindset of presuming the universe would sort out the Karma in the end, I was treated to a much different experience than I’d ever encountered in business.

First off, the Karma was often instant; I’d do something for someone and within days, sometimes hours, I’d get an unexpected favor in return.  Secondly, the return I received was usually greater than what I gave.  Third, it wasn’t always the person I gave to who gave back to me.  Sometimes I could tell that the original person talked to another and there was a sort of “Karma chain” that was coming full circle. But other times I couldn’t see a causal relationship between my giving and what I was receiving.  Maybe it was there, but it certainly was not obvious or predictable.

I started to get this odd impression that if I were trying to give my money away — which I certainly was not — that I actually couldn’t do it.  What I sensed was that the more I gave out, the more came back.  Now, I’m not suggesting that the Karmic return I received was in cash, but rather the social currency I was building up exceeded the value of the cash and time I was putting out.

A Theory of Abundance

Being trained as a cognitive scientist, and having earned most of my living by understanding probabilities, I know that this impression could easily be explained away with cognitive biases and logical fallacies.  But since it cost nothing to imagine an alternate explanation, I started to explore the idea that Karma was a universal force, just as real as gravity, entropy, and the invisible hand of the market.

In science, for a new theory take hold, it has to explain and predict all the same observations that the old theory did, but also explain and predict stuff that the old theory can’t.  In physics, we saw this when Einstein refined Newtonian mechanics with his Theory of Relativity, and then again when Quantum Mechanics showed us a more nuanced understanding still.

So let’s re-examine the tenets of “Newtonian Economics”:

1. The power of the free market comes from competition
2. If you are nice to someone, you will be rewarded commensurately
3. A penny saved is a penny earned
4. The more scarce something is the more valuable it is

I suspect if asked to answer True or False, most people would say they believe these statements to be True.  And it’s not that I think these aren’t perfectly valid under many conditions.  But like we found out with Relativity and Quantum Mechanics, there’s a more nuanced refinement which better explains and predicts.  Here’s my Theory of Abundance in a nutshell:

1. The real power of the free market comes from competition cooperation
2. If you are nice to someone, you will be rewarded commensurately with multiples
3. A penny saved is less valuable than a penny earned
4. The more scarce something is the more valuable it is; but some things are more valuable the more you give them away

Let me explain.

1. The Power of the Market Comes from Cooperation (not Competition)

“[Competitors] always beat cooperators when they encounter each other in a well-mixed population…. [But] cooperation can thrive when cooperators huddle together to form clusters.” (Martin Novak, Director of Harvard’s Program for Evolutionary Dynamics)

For a market transaction to take place, two preconditions must hold.  First, both parties have to be made better off after the transaction than before.  Second, both parties must trust that the other party will honor their end of the bargain; i.e. not lie about the nature or value of what they are giving, and not reneg or change the deal at the last minute.  In other words if you and I transact in the marketplace, I must trust you to do something that helps me, and vice versa.  This is cooperation.

Yes, there is competition that takes place to determine which two parties get to transact.  But once that’s been determined it’s all about cooperation.  The whole trick of the market, the reason it exists, is not to facilitate competition, but rather to form “clusters of cooperation”, even in the midst of a well-mixed population of competitors.

2. If You Are Nice to Someone, You Will Be Rewarded With Multiples

This is the Karma effect that I described earlier, and we’ve all experienced it at one time or another.  One thing I’ve noticed since I started believing in Karma, is that the more trust I put in others (or in the universe), the bigger the Karmic multiple.

3. A Penny Saved is Less Valuable Than a Penny Earned

Amongst my Silicon Valley friends, there was one who was legendary for “wasting” money.  He’d never haggle, always buy the most expensive brand, waited until his lights were turned off to pay the utility bills, and leave thousands of dollars in cash, checks and stock certificates laying around, stashed in old sock drawers, forgotten about.  His cost of living was easily twice the average of me and my friends.  Yet, somehow he always had way more money than any of us.  He was the first of my friends to become a “millionaire”, and opportunity seemed to fall out of the sky and land in his lap.

What I learned from observing my friend, is that the time and mental energy most people spent on preserving the resources they had accumulated, my friend spent figuring out how to make more of it.  So while his burn rate was 2x average, his earn rate was easily 5x.

One interesting aspect of this philosophy is that, if you believe you can always earn more money tomorrow, it helps you act on the natural generosity you are born with, today.

4. Some Things Are More Valuable the More You Give Them Away

Until a brave theorist named Brian Arthur challenged the Chicago School dogma, economists thought that return on investment could only diminish as you scaled up your investment.  But now we know that with certain types of resources like the FAX machine and the internet, we get not diminishing returns, but increasing returns.  With abundant resources, the more you give one away, the more valuable every other one of them becomes.  It’s known more commonly as the network effect.

I believe Karma exhibits the network effect too, because it’s infectious.  If I see someone do a good turn, I’m more likely to do something good too.  Behavioral psychologists have shown this is true in many different contexts.  We’re just hard-wired to imitate behaviors of other humans.

Giving creates more giving.  Add a dash of cooperation and creativity, multiply by Karma, and you get Abundance.

Societal Dilemma

Taken together, these four pillars of the Theory of Abundance suggest that when it comes to maximizing profits, we’re underperforming in our society.  We’re in a Prisoner’s Dilemma on a global scale.  We are playing a game of maximizing scarce resources, and ignoring the immense — and multiplicative — shared value that’s within our reach through radical collaboration and presumed abundance.

In future posts, I’ll describe experiments being done and case studies that support the Theory of Abundance and show us the way out of our collective dilemma.

Related posts:

1. Towards an Economy of Abundance
2. Revenue Sharing
3. Investing in Superstars, part 4

Related posts:

1. Revenue Sharing
2. Are Realtors Really Making Too Much?
3. Private: Prediction Markets for Valuing Private Companies

The fragility of the global financial system (as measured by the US dollar) is a function of the gap between rich and poor.  In the past, only a small ruling elite could decide to use capital to purchase all of the following: food/clothing/shelter; savings; insurance; personal free time; investment; starting a business; buying a private jet; leverage/volatility; political influence; fame.  Today an ever-increasing population has more of these purchasing options at their disposal.  The percentage of wealthy is inversely proportional to the percentage of poor, meaning: as the few grow wealthier, more people become poor, relatively speaking.  This is what’s known as a Pareto distribution (aka the “80-20 rule”) and it’s an inexorable unintended consequence of network effects from the internet and global connectivity.

The recent financial crisis illustrated very clearly that in Pareto wealth distributions, those above you on the curve can unilaterally decide to gamble capital that is backed by you.  In particular, the top 0.01% have the ability (and incentive) to take a free shot at increasing their wealth by putting up as collateral the homes and living wages of the bottom 99.9%.  This dynamic is not something that can be “solved” by political or legislative action, for it crosses sovereign and geographic boundaries.

At the same time though, because of global finance and the internet, we are also seeing the emergence of a meta-stable system of worldwide, frictionless virtual currencies.  Already virtual currencies are being traded on the open market for cold hard cash.  World of Warcraft, Second Life, Farmville and other games are just the start.  As “game-ification” of social networks takes hold we will begin to see the accumulation of vast wealth that is created strictly along the social dimensions (friendship, trust, humor, reputation, loyalty, risk-tolerance, transparency, etc.).

This shift represents an opportunity for the world economy to evolve into an what Taleb calls antifragile: a system which not only is resistant to chaos and endogenous shocks, but actually thrives on them.  Antifragile systems derive their metastability from two properties in combination: (1) ability to adapt to a changing environment (2) ratchet mechanisms. (See Parrondo’s Principle for the math underlying antifragillity).  What this means in practice is that the system has to be configured such that there is flexibility when perturbed, but flexibility in such a way that the perturbation causes the system to tighten up (not come undone).  Think of a tangled string which turns into to a sturdy knot the more forcefully you yank on it.

Unfortunately complex adaptive systems (such as the global economy) cannot be “engineered” from the top down.  But once the system is close enough to a new metastable state, it can be nudged close enough to the attractor basin so that it falls into orbit.  It is my belief that we are at that tipping point already in the global economy.  Or if we are not, we are close enough that by employing a fairly straightforward policy in the U.S. (or perhaps Europe), we can assure the metastability the world needs and desires.  Here’s the simple outline:

• Bipartite Fed Policy:
  • Continue/expand current policy to create an strong attractor towards basic cost-of-living (i.e. incentivize humane social policies)
  • Reintroduce a gold standard floor to act as insurance against total collapse of the dollar.  This is the ratchet.
• Exempt virtual fiat currencies from all tax, securities law and other regulatory regimes, creating an ecosystem of creative risk-taking
  • Upon conversion to cash, all of the normal policies would apply, including capital gains taxation.  There may not be such a thing as a free lunch, but unfettered chaos in the kitchen is important.

In essence, what I’m proposing is to assure – via the Bipartite Fed Policy – basic human rights, plus the right to earn a living and save for retirement.  This then frees up virtual currencies as a mechanism for the entrepreneurs, risk-tolerant investors, and social innovators to go as crazy as they want without infecting “real life” with toxic assets.

Here’s why this might work.  It is well-known that the physical economy (of scarce goods and resources) is governed by the law of diminishing returns.  By contrast, the virtual world has increasing returns to scale, because you can actually give something away and still keep it for yourself (e.g. an idea).  Economies based on scarcity suffer when leverage and volatility go unchecked; economies of abundance thrive on leverage, due to antifragility.

As we wake up to the new world that is emerging, we begin to see that we are naively applying economic policies designed for a scarce world, to the abundant, virtual economy.  The CAMP model above simply honors the important distinction between these two worlds and lets the inherent economic forces in each world act freely and naturally.   By segregating the scarcity economy from the the abundance economy (via the ratchet) we dampen the destructive oscillations in the physical world caused by leveraged self-intrest; at the same time we are able to reap the benefits of leveraged self-interest in the virtual world.  Think of CAMP as a pressure release valve for the current volatility in the world economic system.

And here’s the the epic win scenario: imagine what happens when tens of millions of people have had the experience that very few are ever afforded, which is to directly experience the fundamental dynamics of abundance: the more you give, the more you get.  The only way to reach such a scenario is by allowing everyone to feel safe and secure about their basic living needs.  One way or another, we will pass through the storm.  The question is, how much chaos are we willing to accept along the way?

Related posts:

1. Cancer as a Complex Adaptive System
2. Alfred Hubler on Stabilizing CAS
3. The Good, The Bad & The Ugly

The first task is to make the sharp distinction between the economics of scarcity and the economics of abundance.  Books could be written on the topic, but I’ll sketch what I mean and hope you get the basic idea.  All economic theories you are likely to have heard of are based on the assumption that we live in a world of scarce resources.  Commodities markets allocate those resources based on price equilibrium, but in the end the market does not actually create any new value.  The supply of oil in the world, for instance, is already set, and it’s limited.  As we approach that limit it becomes scarce, and the price (i.e. marginal value) goes up.  More fundamentally, with a limited resource, my acquisition of it precludes you (or anyone else) from simultaneously having it.  From a value perspective, it’s a zero-sum game: if I win, then you must lose.

If we assume there are resources that are not limited, but rather are abundant, then an amazing shift occurs.  Such resources cannot become scarce (by definition) and thus the price/value of those resources does not rise the more they are “consumed”.  In fact, it’s just the opposite.  The value of an abundant resource increases the more it is consumed.  This is the so-called network effect.  The very first telephone was worthless and it only became worth something when it was connected to the second telephone.  The more telephones were added to the network, the more valuable each pre-existing telephone became!

You will probably be objecting right now that there’s a limit to how many telephones can be created since the raw materials are finite.  And you will probably also note that the added value in going from two phones to three phones is smaller than going from zero to one; in other words there are diminishing returns.  Both are true statements, but miss the crucial point that if the universe is more abundant than it is scarce, then the fundamental rational economic motivator goes from competition and acquisition to cooperation and giving.  Let me explain by example.

I was scheduled to meet with Stephen recently and as the meeting time approached I realized that Kim and Jose (whom I’d been meeting with just prior) would benefit from meeting Stephen and joining the conversation Stephen and I were about to have.  I also felt that Stephen and I would benefit from the inclusion of Kim and Jose in our conversation, so I invited them along.  At the close of our four-way conversation Stephen took a book from his shelf and gave it to me as a gift.  He said that, based on our conversation, I would probably get a lot of value from it.  As I prepared to stuff the book into my backpack, I noticed Kim and Jose straining to get a glimpse of the title, and I lamented to myself that there was only one copy available when it was clear that all three of us would benefit from it if we could.  So I took a picture of the cover with my iPhone and emailed it to Kim and Jose so that they could locate a copy and enjoy the book at the same time as I did.  In doing so, I also happened to connect Kim, Jose and Stephen via email.  Prior to that they only way they could get in touch with each other was to go through me.

One great thing about information is that the cost to replicate it asymptotically approaches zero, whereas the cost to replicate physical materials approaches some value greater than zero.  Just look at what it would have cost to get a physical copy of the book for Kim and Jose vs the 30 seconds of my time that it cost to snap the photo and email it.

But more importantly, information has this other crazy aspect to it: giving away information (unlike physical objects) does not diminish its value; more often than not, giving away information increases the value of that information.  There are exceptions to this rule, of course, but on average this is true.  (At the least, this is an empirical assertion that can be falsified, and you are invited to explore whether it holds true in your experience or not).

The question that I’m trying to answer here is what would it look like for a currency to be based, not on a scarce resource, like physical materials, but on an abundant resource like information?

It’s hard for us to even conceptualize an economy of abundance because our brains evolved in a time of relative scarcity.  Furthermore our thought patterns, beliefs and models of the universe have been colored by scarcity through the lens of culture.  Science is not immune to this bias either, as I’ve suggested before on this blog.

So to help with the mind-shift necessary to explore the world of abundance, I’ll ask you to observe that the constant injection of energy from the Sun into the Earth’s biosphere eventually gets converted, at least partially, into value that drives our real-world, present-day economy.  That oil came from fossils of living organisms, grown and nurtured by the Sun.  I will leave it for another time to argue for why value-creation is pervasive in the universe, and not just a function of where you draw the system boundary (as sunshine hypothesis implies).  But suffice it to say, if you grant me that value is created by the Sun and converted into a form that drives our economy, then we can proceed.

By the sunlight hypothesis, it should follow that, on the time scales that matter to us humans, there is at least one truly abundant resource: energy from the Sun.  If you are worried about a billion years hence when sunlight runs out, then I doubt we will ever see eye to eye anyway….

It also follows from the sunlight hypothesis, and the arguments I’ve sketched above, that the information economy that is so widely talked about, truly is an economy of abundance.  And as more and more human activity is devoted to the creation, spreading and sharing of information, the more our “real” economy becomes based on abundance.

It may be true that we will never move entirely away from material needs and scarcity economics.  But regardless, as a percentage of the total real economy, we are on a trajectory that suggests that the vast majority of economic value will be backed by abundant resources rather than scarce resources.

In other words, if we were to imagine a currency of abundance, we’d also have to re-imagine what what happens when the “federal reserve” for that currency grows all by itself (or if you prefer, as the sunlight pours in).  In such a world, in order for the currency to represent the true value in the economy, we’d be forced to print new currency on an accelerating basis just to keep up.  A currency of abundance is a very different beast than the currencies of scarcity we know of today, which is to say all of them.  Instead of runaway inflation being a bad thing (as it is with currencies of scarcity), it’s actually a great thing, something to be desired, and something worth striving for.

I know that last sentence is going to lose a lot of people.  And I understand why, because it is hard for me to fathom the implications too.  It means redefining just about everything, including what it means to be human.  It begs the question of what is the true nature of “value”?

One thing I’ve gleaned about an economy of abundance is that it begins with the gift.  In particular, it replaces the basic transaction of a scarce world — I give you something if and only if you give me something in return of equal or greater value to me — with the unilateral action in which I give you something, and expect absolutely nothing in return.

There’s so much more to say here, but I will leave it at this for now.  I had choices about what information I would reveal to you when I told you the story of the book.  One of those choices was whether or not to reveal the exact identity of the individuals in the story.  Another was to reveal the name of the book that Stephen gave me.  It would have cost me a lot less to share both pieces of information than the benefit you would receive by knowing them.  That is, the act of knowledge transfer could be viewed as a gift to you that I chose not to give.  As an important aside, that very same act would have benefited Stephen, Jose and Kim as well.  And it would have benefited me.  And yet, I  didn’t.  Why not?

There’s lots more about that meeting and the events leading up to it that would benefit you and many other people to know.  Time is valuable precisely because it’s scarce.  In the end, it may be the only scarce resource we humans depend on.  I could spend all of my time giving you gifts of information and thus have no time left for myself.

Just before the meeting, Jose and I were at a bookstore and he gave me a book (not the same one as Stephen gave me though).  It was at least the fourth time he’d suggested I read it, and since I hadn’t yet (despite my stated and real desire to do so), he bought it for me right then and there.  And because I trust Jose, I bought a copy right then for each of Stephen and Kim.  Here’s the book.

Related posts:

1. The Economics of Abundance
2. Complex Adaptive Monetary Policy
3. Eliminating Political Parties

It’s not just the lives of individuals who eat crap (which is most of the country, frankly, even though they have no idea how toxic what they are eating is).  It’s the happiness and achievement potential of today’s youth.  It’s the emperor with no clothes at the center of the healthcare debate.  And it’s a lynchpin for economic recovery and sustainability.

Watch the premiere, and spread the word…

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Highly informative and thought provoking. One thing that struck me was the discussion about how we don’t pay primary care physicians enough and that specialists make a majority of the dollars. This is not earth shattering news, but it I was reminded of a similar problem in higher education. Specialization is highly valued where as general studies and thinking/life skills are not, despite the fact that it’s these more general abilities and knowledge that determine how successful you are in your chosen trade (specialized or not). Same thing in medical care: it’s not the specialists who have the most impact on your health and mortality, it’s the general, preventative things you do (or do not) that have the biggest impact. And who should be looking after us on this front if not our primary care physicians?

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