William posted a fascinating and thought provoking piece on the Social Economy. I think we are using some words inappropriately, and in so doing making it harder to see the future than it needs to be. One of those words is ‘economy’.

william azaroff | blog

To me the social economy is the same as what others call the reputation or conversation economy. From the time humans started trading what they had for what they needed, we had a social economy. People’s knowledge of the others they were trading with was a crucial factor in those trades and dealings. The industrial age added a level of anonymity into our economy and set us up to pay fixed prices for goods and services from the money we earn from our labour. The information economy didn’t change this at all

So I posted this response on Williams blog, and wanted to go further here.

I am going to challenge everyone so here goes. Social economy, and reputation economy are misnomers. There is no fourth dimension that has suddenly appeared with new ways to buy and sell things. For an economy to operate basic elements are required to facilitate transactions, eg, mainly contract & currency, with heavy reliance on trust.Everything else is just a facilitator- social and reputation [in the way Web 2.0 means] are new elements that have been brought about by internet, and web based tools which provide disruptive alternatives to old ways of transacting.

I suggest what is needed are ways to capture social and reputation in meaningful ways that facilitate commerce. Then we can talk about economy.

Open questions for me – whats the financial value of a:

• FaceBook friend?
• a five star eBay user?
• an OpenID?
• a Prosper group lead?
• a prosper group lead who bid 25% on a prosper loan?
• a LastFM friend?
• a personal acquaintance who purchased something that you are now considering?

Relevance to Bankwatch:
Another word which is taking on new meaning in Web 2.0 land is friend. Robert Scoble and Jeremiah Owang do not have thousands of friends. They have thousands of acquaintances, whom they enjoy banter and debate with, but thats not what a friend is.

Wikipedia: Friendship is a term used to denote co-operative and supportive behavior between two or more humans. This article focuses on the notion specific to interpersonal relationships. In this sense, the term connotes a relationship which involves mutual knowledge, esteem, and affection.

In no way am I attempting to denigrate the new and evolving nature of the interactions which take place in social media, and I have made many new friends through this very blog. My point is only that when we turn to economy, money and risk of financial gain or loss, we have a long way to go before such online “friendships” can bring broad economic value and begin to assert themselves meaningfully on the economy.

One potential such connection is TripAdvisor. Many of us read those reviews and allow them for form part of the travel purchase decision. Similarly with Chowhound and restaurants. I would argue that is not economic, rather is a form of referral. If we place a financial slant on this; what if a Tripadvisor type service contained referrals for financial products? Would you purchase an investment based on the loosley defined TripAdvisor network? I think not.

I maintain for social and reputation to form part of the ‘economy’ we need more robust tools, risk assessment, and proof. I also think that is coming, and we see some building blocks underway, stumbling, and working at coming up with the right set of formulae.

Looking at the social lending space, Zopa manage it by taking a quite non-social, bank oriented approach. Prosper are the most ‘out there’ by experimenting in the full public eye, and kudo’s to them as they stumble, and regain their footing, but they will get it right.

There is a formula of interconnections supported by algorithms yet to be defined which will allow social and reputation to form parts of the economic structure, likely as part of the trust component.