Alternative finance, capital formation and inequality

Here at Entrepreneurial Underground, one of our main themes is that of market innovation, especially that which departs from the status quo or the current “system” however broadly one may define it. Evolution and change in the state of systems are the key drivers of organic growth.

While we are in an age of rapid innovation, including finance (specifically financial technology), one space that is behind due mostly to antiquated regulation is the realm of private investment and capital formation. The standard formation system is of large capital markets with public issuers where the supply of capital is essentially the savings of the public. This model works by funneling capital to business supported, in effect, by Wall Street and its related institutions.

The “disruptor” to the status quo, we believe, is set forth in many ways by this book and is a wealth of introductory knowledge for both entrepreneurs and prospective investors alike. The basic premise is that nearly all household savings goes to Wall Street, with very little toward Main Street when it accounts for about half the economic output of the country, and is in many ways just as good if not a better investment. The description is as follow:

Americans’ long-term savings in stocks, bonds, mutual funds, pension funds, and life insurance funds total about $30 trillion. But not even 1 percent of these savings touch local small business—even though roughly half the jobs and the output in the private economy come from them. So, how can people increasingly concerned with the poor returns from Wall Street and the devastating impact of global companies on their communities invest in Main Street?

In Local Dollars, Local Sense, local economy pioneer Michael Shuman shows investors, including the nearly 99% who are unaccredited, how to put their money into building local businesses and resilient regional economies—and profit in the process. A revolutionary toolbox for social change, written with compelling personal stories, the book delivers the most thorough overview available of local investment options, explains the obstacles, and profiles investors who have paved the way. Shuman demystifies the growing realm of local investment choices—from institutional lending to investment clubs and networks, local investment funds, community ownership, direct public offerings, local stock exchanges, crowdfunding, and more. He also guides readers through the lucrative opportunities to invest locally in their homes, energy efficiency, and themselves.

We are not here to advertise or sell this book and nothing is gained personally from recommending it (though I recommend reading it, its a quick read), but it forms a starting point for the basis of thinking we will be developing extensively here as it aligns well with our motto – “commerce, decentralized”.

How does this relate to inequality? The basis of wealth creation is capital formation and asset accumulation. Capital formation is the demand side for capital – entrepreneurs. Asset accumulation is the supply side of capital – investors and “capitalists”. Business owners in many way intersect with these two as they are usually the entrepreneurs, but often with Main Street businesses are also the largest capitalists in their firms. Wealth inequality stems from the basic segmentation of asset ownership. The current system of channeling the vast majority of savings to Wall Street (with their fees and plethora of unknown tail risks) is, in our view, the biggest factor in exacerbating the wealth divide from a causal standpoint. Think – in the idyllic 50’s and 60’s, that golden age of the middle class, Wall Street was a backwater and much of the country’s savings was tied up locally (Jim Rogers interview).

We will be delving into this topic with more specifics in the coming weeks, but in our mind this is a synthesis of systems that may be able to satisfy those who cherish market entrepreneurship and liberty with those who are concerned about wealth inequality and creeping oligarchy.

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One thought on “Alternative finance, capital formation and inequality

  1. Pingback: Alternative finance part 2: Co-op Capital | The Entrepreneurial Underground

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