Cut Out The Middle Man – Crowdfunding Promotes Economic Efficiency
by Salvador Briggman, editor at CrowdCrux, a crowdfunding news and analysis website. Check out some of the crowdfunding tips here.
The late Nobel laureate and esteemed economist Milton Friedman is famous for his insights into government spending. In most economies the government acts as a middle man, collecting tax revenue from its citizens and spending it on goods and services that will benefit society as a whole such as national defense, infrastructure, and crime prevention. Naturally, these expenditures vary between states and the federal government.
Although this model works well for certain services, there is much contention over government spending in regards to healthcare, pork barrel spending, social welfare programs, and more. As a result of being the middle man, it has been recognized that government spending can be highly inefficient and many times not produce desired results.
Below, Milton Friedman explains a few reasons why government spending is inefficient. Remarkably, there are many parallels between the inefficiency of government spending and university spending, where universities are the middle man and the students and alumnae are the two participating parties. After an analysis of Milton Friedman’s argument, I will expand on this parallel.
In a classic example, Milton Friedman proposed four scenarios which demonstrate how money is spent. Every individual can either spend their own money or another person’s money. When an individual spends this money, he can decide to spend it on himself or someone else. These four options are illustrated below.
The first quadrant (green) explains how when an individual spends money on himself, he is very careful about how much he spends and on what he spends it (value received). The second quadrant (grey) illustrates how when an individual spends money on someone else, he is careful about how much he spends, but he is less careful about what he spends it on or the value he receives.
The third quadrant (grey) shows how if a person spends someone else’s money on himself, he does not pay attention to how much he spends, but he is very particular about what he spends it on. Finally, the fourth quadrant (red) demonstrates how if a person spends someone else’s money on someone else, he is not careful about how much he spends nor does he give special attention to what he spends it on and the value he receives. Friedman argues this fourth quadrant represents government because government takes peoples’ money and spends it on other people, which leads to waste and corruption.
This is a similar phenomenon in the education industry where universities receive donations from alumni that are meant to benefit the student body. In this system, the university is spending “someone else’s money on someone else.” This is the red quadrant and according to Friedman, the least economically efficient model. How then can this problem be remedied?
It seems that a better system would allow alumni to fund specific projects that would benefit the student community. It’s true that universities may have some idea of improvements that need to be made, but likely the students themselves have the best understanding of
The bottom line is crowdfunding cuts out the middle man and promotes economic efficiency. Not only does it result in more social welfare from alumni donations. but it also can lead to student-sponsored initiatives. In the recent post, First Hand Crowdfunding Experience, Cara Pleym, underscored the community dynamics surrounding university life, saying “The education communities we have access to are massive, and we can tap into that crowd.” Rallying a community behind a project or cause that directly benefits that community is becoming a more and more realistic avenue for social change. The next time you consider giving money to your alma mater, check out Hubbub first. You might discover some awesome student projects you’d like to support instead!