Is the growing social-sourced economy the modern back door into socialism? I read a really insightful post a couple of days ago that suggested the use of social network funding sites like “Go Fund Me” and “Kickstarter” have come about and gained popularity in part because the existing economy in no longer serving its purpose for anyone who isn’t already wealthy. Have the traditional ways to get new ventures funded become closed to all but a few who aren’t already connected to them and so onerous as to make them unpalatable?

In the current investment economy, the locally owned bank is largely gone as a source of funds. To the big banks and venture funds, any idea not big enough to promise a half a billion dollar IPO isn’t interesting and any project that needs long term development is a non-starter. That leaves out a vast range of businesses that may never make millions of dollars but can provide quality goods, useful services, and a healthy income for their owners and employees. The few exceptions to this are service businesses, primarily the restaurants and trades, and even those are increasingly getting swallowed up by the giant homogenized national organizations. The result is an abject failure of our current economy to fund the kinds of small business that support a healthy middle class.

Traditional funding sources say that for truly vetted ideas there is plenty of capital to be found. Many entrepreneurs argue that getting access to that funding means turning over control of their venture to management teams who are only interested in the rapid rise and public offering payout. Further, the original owner is expected to personally guarantee large parts of that funding even as they hand over control of how it is spent. The entrepreneur keeps the risks even as they lose the control and most of the likely reward. The model is only possible when the potential gain is far more than any small business can look for. Today’s entrepreneur has to go big or go home. There is no room for the local business.

The problem resonates for me with a similar problem I have written about before. The problem of our information technology organizations being unable to adequately explain their costs to management which has led to repeated rounds of job loss as management looks for a simple cost per desktop number. First it was outsourcing – moving the I.T. organization to an outside company. That failed to reign in cost because the requirements on the technical team remained, but any interest in corporate success by the IT people was lost. Next, insourcing was tried – bringing a third party organization into the building to manage the infrastructure. Both failed to rein in costs and were expensive to back out of. The current trend is cloud-sourcing and it will meet the same end for much of the larger corporate attempts as it plays out because like the attempts before it, it doesn’t address the underlying problem. Our economy faces a similar problem, and while the result in corporate outsourcing has been lost jobs and reduced wages, the result of failing to successfully fund small business is resulting in a destruction of the middle class.

Unfortunately, social capital schemes like “Go Fund Me” and “Kickstarter” are no panacea. Recent abuses have shown how easily these investments can go wrong. From fund raising that either never gets to its target or in fact was never intended to, to misrepresented success stories and business plans, social funding opens the door wide to the mistakes of the less skilled investor. The real story of their rise is the reason they have become necessary. Our traditional economy is failing the smart, young, ambitious achievers. That failure should worry us now, because it is going to hurt us later. Our economy needs to begin to embrace social democratic ideals now so it can happen smoothly, because if we hold off until the present system crumbles it is going to be much more unpleasant for everyone.