Capitalism After Satoshi after Covid19: Implications for special jurisdictions
Jason Potts is Professor of Economics and Co-Director of Blockchain Innovation Hub, RMIT University, Melbourne, Australia. Notes from a talk given to Start-up Societies Foundation, Virtual Summit 1–2 May, 2020. https://www.startupsocieties.org/virtualsummit
Thank you for inviting me to speak here today. We really are a distributed digital community. These types of web conferences are proof of how new ways of living and working and creating knowledge are possible when we have the right tools and infrastructure — both physical and organisational — to come together and build things. We’ve had this technology for a while now, but we needed a push to get us all to use it. That’s often the way. It’s not just invention or adoption of that technology, but the coordinated adoption of the new technology that is crucial. Technologies need to be adopted by communities of use to have value.
I lead a team of blockchain researchers, mostly economists, at RMIT University. We’ve been working on trying to understand how blockchain technologies — as a general class of digital, decentralised institutional technologies — will affect how economies and societies will evolve in the future. We’ve written quite a lot on this.
In the past few months we’ve turned to look at how COVID19 will affect this same trajectory. And we have a book now out on this too.
By the way, if you haven’t yet seen it, a very good book on the economics of non-territorial states powered by crypto technology is by Dr Trent MacDonald, called The Political Economy of Non-Territorial Exit.
So I’m going to put all these things together here and argue that innovation and adoption of blockchain technology is pushing economies and societies in a particular direction — toward distributed digital economic infrastructure — and that that has several effects.
First — the obvious point. It creates competition for base-layer platforms of economic infrastructure and institutional governance. We have written about this as the V-form organisation. As industry utilities. As blockchain trade platforms and trade zones. As the crypto-electronic markets hypothesis. The argument is that blockchain technology substitutes for the administrative layer of payments, record-keeping, contracting and property rights transfer that administers to economic exchange, coordination and contracting. This is made of identity tech, fintech, trade tech, regtech, smart contracting platforms, asset registries, oracles, decentralised exchanges, and so on. Cryptocurrencies were the first major breakthrough in this space over 10 years ago, but most of the building blocks are now in place. It is becoming autocatalytic. So we’re seeing innovation and adoption of decentralised digital economic infrastructure.
This will have a huge effect on the global economy because these platforms automate a whole series of processes and lower the cost of trust. Dealing with the cost of trust — verifying and checking each other’s work along complex chains of production and trade — is still a huge cost in a modern economy. (We estimate that it’s about 35% of global GDP).
The power of a modern economy comes from what Adam Smith first explained — specialisation and the division of labour, organised through firms and markets. But this division of labour and specialisation requires a lot of trust. The industrial economy was never able to automate that. Instead, this was the role of government. But blockchain can automate trust.
Second, the less obvious point. This adoption dynamic of digital economic infrastructure mitigates much of the need for economic policy. And that means a far freer economy that is able to operate with much more decentralised governance. This is the type of environment that start-up societies will thrive in.
But industrial market capitalism caused a bunch of policy responses:
The enormous growth of industrial societies during the 19th century lead during the Early 20th Century to demand for welfare policy (due to negative social effects of hierarchy).
During the second half of the 20th century the growth of the size of government and its intervention in the economy and industry lead to demand for innovation policy to offset welfare/industry policy.
But blockchain adoption reverses the causes of these trends.
By inducing disintermediation & dehierarchicalisation blockchain unpicks the rationale for much modern economic policy
* blockchain adoption entrains a market society with weaker tendencies to corporatism
* So fewer public policy reactions to corporatism
So, reduced demand for policy to correct these tendencies
Third, and finally, how does COVID-19 affect these dynamic processes?
The simple answer is that it massively speeds them up. COVID-19, and especially the shift to work from home, drove a global coordinated adoption of digital technology. This was a demand side and a supply side effect.
During March, the global economy surged online. Consumers and businesses moved production and consumption online. This was coordinated adoption of digital production and consumption technology. And it all happened in about 6 weeks. This was an extinction level event for hold-out analogue processes, business models, skills and capital.
But it also drove deregulation. Governments everywhere quietly walked away from occupational licensing, industrial and technology regulation that was in February a major barrier to digital and tech innovation.
When you put all this together — COVID19 accelerated a powerful evolutionary trajectory that the internet and blockchain had set in motion.
Digital tech platforms for economic infrastructure will outperform, outcompete government, nation states, regulations and politics.
We can use the language of start-up societies and special jurisdictions. But I prefer the notion of pop-up economies, or ad-hoc economic infrastructure. This is second wave automation and it brings us entrepreneurial competition and innovation, productivity gains and falling prices in the base layers of the economy.