Commons Finance

Commons Finance is a concept that marries the incentives of traditional financial products with commons-based peer production. The goal is to finance Commons projects providing incentives to invest in them, but without forcing the projects to work like a traditional company. Together with the concept of the Zero Marginal Cost Factory, it could make a post-scarcity economy possible, where an increasing share of products could be produced for free.

Traditional Finance and Commons Finance

Traditional financial products have often two functions:

First, they transfer a value into the future. You renounce to consume something today, to be able to consume at least something of the same value in the future. This is the concept commonly known as saving.
Second, they increase the value. To provide an incentive to invest in them, the issuers gives you a reward, for example, an interest rate or a dividend. This is commonly known as profit. It is often related to a risk - the higher the risk, the higher the reward can be.

There are severe difficulties if you want to finance a Commons project, whose goal is to produce abundant goods, with traditional financial products. The problem is, above all, the profit people expect when they invest in something. To be able to return the profit to investors, a regular company tries to grow and pays the interest or dividend from the profit it earns from selling goods. But to be able to sell goods, they must have a price, and thus be scarce.

But there is, fortunately, a way how you can design financial products: guaranteeing the investors a profit in goods. As the goal of the Commons projects isn’t to make profit but to deliver goods, this is totally compatible with their “business” model.

The Commons bond: the simplest form of Commons finance

A Commons bond works very similar to crowdfunding and is a very simple example for Commons Finance.

How it works:

An investor is interested to acquire a product in the future.
Instead of saving the money or buying the product at a futures market, he buys a Commons bond pegged to that product from a Commons project.
The Commons project guarantees him to deliver the product in the future and additionally bonus goods. The bonus could be an increased quantity of the same product or another good the project is producing.

This allows the investor to have an advantage to the act of simply hoarding the money and buying the product in the future.

For this to work, Commons projects must be organized in a way that allows efficiency to increase over time, with the goal of eventually reaching (near) zero marginal costs. This is not really different from the goals of a traditional company, which also is always trying to grow economically. The crucial difference is that the goal isn’t to use the efficiency gains to increase profit, but to deliver more and better goods to the consumers. It is comparable to a hypothetical company where always 100% of profits are re-invested.

If Commons projects are able to convert their whole production chain into zero-marginal-cost factories, then the product at the end of the day is almost zero-scarce. That would mean that the investor, thanks to his investment (and the investments of others), can get the product several times more, so his needs related to the product are always satisfied (even if he technically can’t get an infinite quantity).

Other forms of Commons finance: Commons shares and Commons pensions

The Commons bond has a problem, above all, for nascent Commons products: It is a very strong bet on an efficiency increase, as the guaranteed bonus goods must be delivered on time, or the project is in danger of insolvency.

An alternative can be Commons shares. This model works a bit similar to regular company shares: In good times, when the project’s expectations regarding efficiency are reached or surpassed, the investors get a kind of dividend in goods produced by the project. This means a bit more flexibility for the project, as in bad times, when the efficiency gains aren’t enough to deliver the bonus goods, the project isn’t forced to deliver them.

Commons finance products can be combined to form a complex concepts. One important example is the Commons pension. In this model, the investor pays regularly to a group of Commons projects, and when he reaches a certain age, these projects provide him a basket of goods they produce, for his whole lifetime. Commons pensions are, again, strong bets on efficiency, and so they could be provided above all of groups of mature projects with an advanced roadmap to zero-marginal-cost production.

The Commons pension is an interesting model for societies with decreasing population, where the traditional pension model comes under pressure. When population decreases, demand for goods - and thus, scarcity - should decrease too, and so it could be easier for the Commons projects to reach the goal to achieve abundance.

The incentive model

Commons Finance’s incentive model is a bit different from traditional financial products. It provides incentives to invest and incentives to reach zero marginal cost in production (e.g. via Free Factories).

Incentives to invest: The investors will not be granted a general financial advantage, like the traditional Return On Investment (ROI). They need to have a need for the particular product or product basket the project/project group offers. However, this is also one of the greatest strenghts of the concept. As the model’s goal is to reach zero marginal cost, once the projects’ production cycle is established, they can guarantee the delivery of the product to investors, potentially in high quantities and for free. Thus, if the investor has really a need for the product, the Commons Finance concept fulfills its role better than traditional financial products.
Incentives for projects: The goal of the model is that Commons projects have intrinsic incentives to really reach zero marginal cost production and not to use the income provided by investors for other means. This is reached with the combination of two factors:
- Investors will only invest in projects when they have a credible roadmap. As they need a continuos influx of money in the first phase (until the production cycles are established) they have to plan well and communicate their progress in a continuous way to attract new investors. Thus, if there are doubts about its seriousness, they’ll will have a much harder time to reach the needed influx.
- Commons Finance products can grant investors certain rights, like the shareholder’s rights of traditional shares. For example, if the team leading the Commons project is proven to be incompetent, shareholders can change it and thus have an influence over decisions the project takes. This would make these Commons Finance products more attractive. However, in the statutes of the project it must be made clear that shareholders should not have the right to change the goals of the project, for example, to seek financial returns for shareholders or even to change the scope of the project to that of a commercial company.

Influences

The following concepts have influenced the Commons Finance concept: