The impact of crowdsourcing on the economy

I’ve been thinking a lot about the consequences of Crowdsourcing lately. For sure, crowdsourcing has the potential to change the nature of work, but how will it affect the economy as a whole, and government finance more specifically?

Just follow me in a though experiment…

Let’s say, for the sake of argument, that the total economy of country X is made of 2 record companies making a total Turnover of 500$ and a profit of 20%. If profits are taxed at 50%, this generates a government income of 50$.

Suddenly two ‘fan-funding’ companies arise (like Sonicangel.com, or Sellaband.com), taking a 20% market share. Typically these companies take less margin (let’s take 5%), since they have less overhead to finance. What happens is that governments now only have 42,5$ income, a decrease of 15%.
But let’s go one step further.

Let’s say the economy of country X only consists of 2 advertisement companies doing nothing else than inventing brand names. Creating a brand name takes multiple workshops, brainstorms, testing etc. Each project is worth 10$, and there is a market of 50 projects a year.

Suddenly two crowdsourcing initiatives like for instance ‘NamingForce.com’ enter the market, and offer a platform for the creative crowd to brainstorm on Brand names and test them out. The person that submitted the Brand name that is ultimately selected by the client gets a reward of 1$. Let’s assume again that these crowdsourcing initiatives get 20% of the market.

What happens now? Not only does the government income drop 20%, but the total market (equivalent to the economic size if the country’s GDP only consists of this activity) also drops, by 18%! Crowdsourcing effectively lowered the total size of the economy!

Before you ask: no, this should not necessarily be alarming. The ‘real’ world (as opposed to the theoretical world in my examples) has seen such waves of innovation and productivity increases in the past, and this has never been catastrophic. It obviously would have a short term impact on the labor market (crowdsourcing tasks by definition take less employees to perform), but the wave of innovation will most probably create new jobs as well…

Food for further thought nevertheless.