Crowd funding is a wonderful free market capitalist solution for projects looking to get startup capital. Except it’s not. It isn’t even a market solution.
This does not necessarily hold true for equity crowd funding systems that are emerging, and this article will not cover those forms of crowd funding. In order to understand this, we need to first consider what it means for something to be a market. A market is a location (physical or virtual) in which buyers and sellers exchange goods or services for a price.
A price is just the amount of another good or service a person is willing to give in exchange. In general, a person, who purchases a good or service, should be able to turn around and sell that good or service in the same market for roughly the price he paid. This is of course only true in the general sense. If there are only a few willing buyers or sellers of the good or service, then it might be difficult to resell it. This is also only true, of course, if the person has not yet used it, thus changing its value, and if the time passed is relatively short. We see this all the time in the stock market. If I purchase 100 shares of Corporation A for $20 a share, then I should be able to sell it back for roughly the same amount, if I don’t wait too long.
But does this hold true in crowd funding campaigns? The answer is generally not. The combined prices of the goods and services for the pledge level is largely detached from the amount that you must pledge to receive them. A t-shirt might cost twice as much to get through a crowd funding campaign than if you were to purchase an equivalent shirt somewhere else.
But there’s another component which makes the stock market an actual market. Once initiated, there is a contractual agreement between the buyer and the seller. The buyer is required to pay the agreed upon price. The seller is required to provide the good or service. If one party delivers, but the other does not, legal actions can be taken.
This is not the case when it comes to crowd funding. The project has no legal obligation to provide the perks. Why? Because crowd funding pledges are not considered a purchase. Crowd funding platforms are not stores, and in the case of Kickstarter, their staff goes to great lengths to make sure that people know this. Your pledge is a gift to the project team. The perks are gifts that they want to give you, the backer, in return. However, they are only gifts. If the project fails to come to completion, you have no recourse to get your money back or get the perks.
Connection to Markets
That certainly does not sound like a market, let alone a capitalist market. That’s because it isn’t. Now, the next question is whether or not a non market system can be considered capitalism? It doesn’t seem very reasonable. It is however connected to the market and to capitalism. While there are campaigns for charities, which generally reside on other crowd funding sites like Indigogo, Kickstarter campaigns generally exist to get a product into the market. Once the project is successful, the business sells its product to the general population where the price is set by supply and demand, and where the business is obligated to deliver the items sold.