The Great Value Inversion
Enter right: Musician
Let’s dial back a couple of hundred years ago and imagine a simple musician in a village trying to earn a living based on the music he/she (referred as she in the rest of the article) produces. It’s a simple life. She writes music, performs in front of a live audience, and gets paid in cash. There’s instant value exchange between two parties who don’t necessarily know or trust each other.
As an enterprising person, our budding musician is thinking of a couple of things: a) Not everyone in her village likes her music, and b) She wants her music to reach millions of people all around the world. To accomplish these goals to expand, she needs to reach a wider audience so she can find the maximum number of people who like her music and will reward her for it. But this audience is globally distributed and she is separated by time and distance from all her potential customers. How can she do it alone?
Enter left: Intermediaries
To reach a wider audience, she decides to hire companies who specialize in digitizing the music, marketing the music, striking up partnerships with various channels, distributing the records, collecting the money from all around the globe. She has to pay these intermediaries for these services, but, hey, it’s better to get a smaller share of a large pie, right?
Our musician is really happy because she is earning a lot more money and reaching a lot of people and becoming famous. Sure, she is very disconnected from her fans now, but does it matter?
Expansion of Power
Soon, the intermediaries realize that they could offer the same services to other musicians. So they start scaling up to aggregate the business of other musicians. After a point of time, the different players start consolidating and becoming even bigger. They realize that they have a lot of power over the musicians now, so they start extracting more value.
Extraction of Value
Our musician friend realizes too late that she is in trouble. She is receiving very little money for her work because the intermediaries have started demanding a bigger share, and she can’t do much about it because she is in a very poor negotiating position. She has very little clue about who her fans are and what they like, dislike and how she can reach them. She also often has to make music according to what the intermediaries tell her. She has no control and all the value is extracted by the intermediaries.
The problem: Disproportionate Value Distribution
There are three types of players in the value chain:
1) Original value creators
2) Derivative value creators who extract disproportionate value
3) Rent seekers who extract value solely based on arbitrary position of power (think government licenses, information asymmetry)
The result: Severe Income Inequality
I posit that disproportionate value distribution is the primary reason for severe income inequality since most value is accrued by actors that are intermediary, powerful, and add commodity value to the value chain from creator to consumer.
The above scenario has played out in every industry imaginable, every product and service, even within corporations, in which disproportionate value accrues to the top.
The solution: Radical transparency due to blockchain technology
One of the big promises of public blockchains (Bitcoin, Ethereum) is radical transparency in all transactions and the ability to establish direct value exchange between creator and consumer.
E.g. The musician can now embed her bitcoin address in her music allowing fans to pay to the bitcoin address that results in the payment being transferred directly from fans to the musician. The musician can then distribute value to the intermediaries and hence holds more power. Due to radical transparency, the musician has a real-time view into the distribution of her fans around the world, what music is selling or not, how her music is being used (radio, advertisements, conferences, etc.). This informs give her the option to make changes to her music to attract bigger audiences, or not. In this world, the artist and the fan is at the center and all the intermediaries simply exist to serve in exchange for appropriate fee.
Radical transparency will lead to power flowing back to the creators and (in some cases) consumers. This will result in a massive redistribution of value, hence wealth, resulting in a mass correction of income inequality. I call this: The Great Value Inversion.
P.S.: This post is a work-in-progress, hence constructive feedback is welcome and appreciated. I plan to add images and examples to make the post easy to understand.