Communities are micro-economies

12 October 2020
12 Oct 2020
West Lafayette, IN
8 mins

Two years ago, in the summer of 2018, the half-century-old Ferrari 250 GTO racing car set records, selling for a cool $70,000,000.

Since most of you probably aren’t up-to-date on the high end auto trends of today, I’ll share a comparison. Ferrari’s current top-of-the-line hypercar is LaFerrari, last refreshed in 2016, which sold initially for over $1M and currently trades on the market for $2-3M.

The obvious question here is, how can old cars be so expensive? The 250 GTO was a luxury, but certainly not a 70-million-dollar luxury when it launched. It’s gotten orders of magnitude more expensive over time, and LaFerrari will follow the same path. But we can already make sense of the rising value of these rare models with simple economics. There were only thirty-six of the 250 GTO made, and the pristine, surviving models of the set have accrued history and importance in the industry over time for the enthusiasts in the car community. The value, we can understand as simple supply and demand.

A more compelling question for me is, who are driving the prices up? Who are willing to buy and sell these cars for millions of dollars, and do they form a community in their own right? Can we glean any insight about the dynamics of large communities by studying small economies?

In this light, I think there’s a lot to learn from the venerable and beautiful 250 GTO.

Money is contextual

The bill of materials of a 250 GTO is, very obviously, not 70 million dollars. So the majority of the value of the car must come from a more artificial sense of value. Indeed most of that value comes from the car’s critical acclaim and its place within the history of the auto industry. In the famous races the model has won, the critiques of the chassis as one of the most beautiful Ferrari models of all time, and its place in the heritage of the 12-cylinder Ferrari supercar lineage all add up to make the 250 GTO more than a series of axles and gears with a very (very!) low MPG rating.

The worth of the 250 GTO is contextual – it is only so valuable within a small, tight community of people – the car enthusiasts. If I grabbed a stranger from the streets and asked them to value the GTO against your every day Honda Civic, they may pick the more modern, greener, better-equipped, safer Civic without hesitation. This is an interesting observation: within specific communities, otherwise ordinary things might take on extraordinary value.

Stated another way, strong communities can harbor a different secondary economy of things their members uniquely value. I think this can help us think about community dynamics in interesting new ways. Before we build on this idea, let’s study a few more examples.

The thing of value in a community need not be some physical artifact. Within “Tech Twitter,” the busy chatter of venture capitalists and software engineers intertwined in the technical or entrepreneurial drama du jour, follower count and audience reach has outsized value. It’s not simply that someone with tens of thousands more followers has a louder voice, they can immediately command more attention, sometimes more respect, sometimes literally more leverage and money in fundraising. Audience size is an invisible kind of currency on Tech Twitter, I think more so than in many other corners of the website. We shouldn’t hesitate to call it a “currency” – the value of a large Twitter audience comes from its liquidity. In other words, a large follower count can readily convert into other things of real value, like monetized content, marketing cost savings, or even better access to capital. It also buys you access to an interesting novel social class that exists only within the Tech Twitter community, the hierarchy capped by controversial and notorious accounts like Naval and Paul Graham.

So within the Tech Twitter / Silicon Valley community, audience size is a kind of secondary currency, the “money of the community” because it converts easily. It’s liquid – but only within that community. Having a big following on venture capital Twitter won’t draw oohs and aahs around the dinner table from a group not immersed in that community.

Besides liquidity, there’s a second way that a new secondary currency can emerge in communities – scarcity.

Within Silicon Valley, knowing someone famous won’t impress a crowd. VC’s have open office doors and big firms preach meritocracy. If you’re capable, and know the right people to poke, you can talk to anyone (and that rhetoric is mostly true). But this is decidedly not so in communities with more strict status games. In the exclusive clubs scene in Manhattan, who you know, and who you can dial up on short notice, is currency. The status game is a ladder, not a free-for-all, and reputation matters. But the value of having ties with the upper rungs of the ladder isn’t so much liquidity (sometimes connections are just connections), but scarcity. Access to the ultra elite are rare, and among the crowd – the community – that recognizes the status game, knowing the hard-to-know is itself valuable and worthy of respect.

Scarcity and liquidity are often interrelated, but together occupy the core of any kind of a currency system. That’s not new here. But I think it’s useful to study the ways in which specific communities can construct their own senses of scarcity and liquidity, and define new kinds of money that only have power within that community. Whether that currency is status that only matters to those chasing status, or Twitter clout that converts into power in the microcosm of the Valley, communities can concoct new kinds of money, specific to their contexts and identities.

The economic community

If strong communities have their own kinds of money, it doesn’t take a stretch of imagination to see that they also nurture micro-economies where that new community currency trades. The stronger the community, the more vibrant the community’s micro-economy, and the more resilient the micro-economy from the disturbances of the economic system outside the walls of the community itself.

What does a community with a strong micro-economy look like?

One very concrete example is a community micro-economy that might develop around merchandise for a particular artist (say, BTS). For the engaged fanbase, exclusive or limited-run prints, swag, and souvenirs all become a kind of in-community currency in their own right, more special than “real” money. A microphone might be just another mic to the disinterested, but might be auctioned for nearly six figures to the right crowd.

A community’s micro-economy doesn’t have to be built on physical items. Within the community of influencers with large following, whether in Tech Twitter or on Tiktok or Instagram, community leaders with large followings trade on their wealth of audiences – they shout each other out, support or reject opinions and challenges. They operate an economic system of clout and attention.

A community’s economy, like most parts of a community, hinges on the strength of the community’s shared identity and context, and the relationships between members. The money of a community has value because everyone wants something similar, and it has liquidity because members convene regularly to trade it.

When money gets cheap

In deeply developed communities with a strong sense of value, a strange thing can happen. The community’s own currency, whether reach or status or artifacts, can become more liquid and scarce than the “real” money of the outside world. When the sense of value flips like this, counterintuitive things unfold in the community. The community begins to spend money to buy community currency.

Let’s return to the “VC Twitter” community and micro-economy. Capital, in the form of investable cash, is abundant. Within the venture community, individual people rarely vie for the currency of “real” money (though firms still fundraise relentlessly). But where there’s an abundance of capital and network, the money of the VC Twitter community is an active following, an audience of people who pay attention to your ideas and takes. For better or worse, it seems that the VC Twitter community is converging on audience growth as a secondary kind of money within the community.

Something interesting has happened here. Within the membrane of this particular online community, a sense of value has flipped. Reputation and audience reach are the real currencies, and dollars and cents fade into the background details of the community’s micro-economy. As money – “real” money – got cheap, the community found a self-defined alternative.

As we explored how communities can harbor small economies of their own, we’ve seen some clear-cut examples in well defined communities like fandoms and auto enthusiasts. But the reality is that these community micro-economies arise organically anywhere there’s a community, and most of us are unknowingly part of many layers of community-driven economies of value in life. Maybe you pay a premium for style in fashion. Perhaps you’re holding onto an autographed copy of a book by an author with a cult following.

Micro-economies emerge from communities large and small organically. As we look at existing communities more intently, and build up new communities around us, it would serve us well to also ask what kinds of small, specialized economies these communities drive, and whether we can use those pocket-sized economic engines of passion for good.

Life as becoming

The future of community: a future for communities

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