Group Theory

A theory on how working as a group when it comes to financial resources could be mutually beneficial to all and some examples of this.

Hunter-Gatherer Origins

The human  race has always depended on each other. Back in the stone-age, society depended on the compliance between hunters and gatherers to share resources. Since then society has built up a complex system  of production and trade. It is because of this interdepence that society has thrived.
Interestingly, society does not deliberately work together to achieve in this way. The great Economist and thinker Adam Smith once said, that it is not from the benevolence of the butcher, brewer or baker that we expect out dinner, but from their regard to their own self-interest.

Smith hit the nail on the head. We work together because it benefits ourselves. If we have just met and I grow bananas and you grow apples it is not through our mutual admiration, charity, love or friendship for each other that encourages us to trade. It is simply through our own selfish needs. I want to spice up my fruit-eating life and I do this by offering some of my awesome bananas for some of your apples. Smith refers to an "invisible hand" that works in the economy guiding us to produce together all the things we need. If it did not work like this then you would need to have all the skills yourself: imagine you are a carpenter, blacksmith, forager, hunter, farmer, electrician, businessman, clown, entertainer etc all rolled into one. Not only would this be a bizzare sight to witness (send me a picture of yourself in all your work clothes) but it would mean that you wouldn't be any good at any of these jobs. It is because we specialise in one or two things and then come together to trade that TOGETHER, we thrive.

Selfish Finance

I been developing a theory that we are selfish with our money. By this, I don't mean that we don't give enough charity (this is a separate issue). What I mean is that unlike the hunter-gatherers we don't (in general) pool our financial resources together in a selfish attempt to benefit oneself. Of course there are some people who have figured out the benefits of working together financially. Occasionally there are groups of friends that play the lottery together or go into business together. But, what I am talking about is a little bit different.
Currently in the UK it is very difficult for a first time buyer to get onto the property ladder. However, imagine if you got together with another couple or a few friends to collect the deposit together and pay off the mortgage as quickly as possible together. Before you start complaining, I realise its not ideal, especially if you want your own privacy, bring up kids etc, but hear me out. You and your partner have grouped together with another couple to buy a two bedroom house. That's now 4 income's and 4 sets of savings funding one mortgage. Your monthly mortgage outgoings will be smaller than had you just bought a house for yourself and your partner. This means that you can save a lot more a lot quicker and after a few years, hopefully incomes, savings and house prices will have increased allowing you to all sell the house together and move into your respective homes.
Another application of this group theory could be to top up any tax-free allowances for your savings (in the UK this would be ISAs). Instead of 4 individuals struggling to save, imagine the possibilities of a group of people coming together to save together. A person whose savings per year exceed his ISA allowance could top-up somebody else's ISA allowance, for a small fee, benefiting both parties. I will write up a post on an efficient application of group theory to ISAs in the near future. Lookout for it.

Food for Thought

To make Group Theory viable you would have to write up secure contracts covering all possibilities, particularly in the case of housing (when can someone sell, for instance). Clearly, the whole process relies in part, on trust, so the first thing to do is to find someone that you trust enough to come together to share financial responsibilities and resources. Nevertheless, pooling financial resources should, in theory, through the "invisible hand", be mutually beneficial to all those involved.

What do you think? Is there any validity to group theory? Are there any other applications where group theory would be mutually beneficial?

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