Distributed Ledger, Markets and Socialism

  1. 1. Long-Term, Socially-Minded Economics
  2. 2. The Star Trek Economy

Here is an idea for how distributed ledgers could allow us to combine the benefits (as espoused by their proponents) of both capitalism and socialism.

Here’s the setup: organizing the economic distribution of resources is difficult: free markets offer some benefits but always lead to some level of poverty. The centralized control of economies or even some intentional control of production and distribution represents in our minds the chance at correcting things, but raises immense challenges when put into practice: the most popular example being the deprivations suffered by the people of the USSR.

I ponder whether distributed ledger technology (the most popular instantiation being blockchain, featured in the epoch-making cryptocurrency Bitcoin) might represent an alternative. These technologies can transmit information securely and reliably, but while sharing information and responsibility among users.

Might this technology represent a way to combine the rapid, free and open transmission of information found in capitalism, alongside the intentional distribution of resources we might want in order better to take care of each other?

First: Capitalism

I should note that this essay claims neither to be an argument for nor a critique of capitalism: the reader can find better and more complete attempts elsewhere. I want to explore capitalism merely as a means of information transmission.

Put simply, capitalist or market economies are based on the idea that citizens should be able, freely, to contract and exchange with each other. With this simple assumption and the ability to communicate, market economies handle astonishing amounts of information and satisfy the needs of millions through buying and selling, with surprisingly little deliberate intervention.

Here is an illustrative folk story: Gorbachev, visiting the UK near the end of the Soviet Union, asked how Thatcher and her government saw to it that the people were fed; Prime Minister Thatcher responded that they didn’t, the market did. It did so using the price of goods to tell producers what do make and when; price is both the signal and the incentive.

In this way, markets can host massive information flow: in the UK alone, millions of individuals coordinate with thousands of organizations and, with limited government intervention, see to it that a nation is fed, clothed, housed and more.

Against capitalism I’ll raise just two objections (remember that this treatment isn’t supposed to be complete):

Firstly, capitalism has always been shown to arrange the economy such that a certain number of people are in poverty, both physical distress and/or lacking the opportunity to change their circumstances.

Secondly, capitalism has shown itself to have blind spots, for example, it can be hard for a free market to coordinate around something that people really need or care about, when price pushes hard in the other direction: our markets, for example, have been slow to address conflict minerals.

I can’t track down public polling regarding people’s opinions on the minerals used in our phones, but I’m pretty sure that a high percentage of people, shown a photograph of a warlord-run mine in the Democratic Republic of Congo, would rather we got our gold elsewhere. But it’s challenging for an individual to signal this to a firm in a meaningful way, and for a firm to use more ethical supply chains when at risk of being undercut by competitors.

Second: Planned Economics

The boldest reaction to the free market is what was termed in the 20th century the “planned” or “command” economy. As one can judge from the name, the idea was that the government would determine what ought to be produced for the people, have the factories make it, then send it to them.

Economies like this are very rare today: the USSR’s collapsed and China quietly set aside its planned economy in favor of markets. There are countless theories on how and why this happened: I think that the most compelling case is that it’s simply not possible for a government, office or even a committed manager with a mainframe to handle the information necessary to coordinate an economy. These economies were benighted by shortages, famines, and low innovation.

This is to say nothing of the immense sacrifice of freedom that such systems necessitated: I can only refer you to the writing and work of others who have addressed these topics more completely than I can hope to.

Not only were these centralized systems unable to handle the overall information throughput, the information itself was often exploited by operators within for personal gain. In China, for example, inflated steel production reporting from local officials keen for praise lead to ballooning steel quotas, with farmers melting their ploughs to make low-quality iron while crops rotted in the field.

The Trade-Off

One might say, therefore, that the theoretical trade-off is this:

  1. One can adopt free markets and obtain the benefits of swift and free information transmission, but must necessarily accept a certain amount of poverty, and ethical and environmental shortsightedness.
  2. One can adopt a planned economy and see to it that those in distress are helped and that we make long-term plans but succumb to poor information transmission and the resulting shortages.

As you, dear reader, have no doubt gathered, in most advanced economies, political economic discussions are battles over where we should exist between these two poles (e.g. which industries should be private versus state-run) and how to correct for the system’s shortcomings (e.g. welfare).

An Alternative

I have an alternative proposal. For some inspiration, I’d like to show you a fascinating image*:

This is a photograph of the control room for project Cybersyn in Chile during the early 70s. Chile’s socialist government under President Salvador Allende held to the same principles of human equality and solidarity as claimed by the USSR, but was horrified by the disaster of the planned economy.

Allende’s government, in response, sought help from pioneering cyberneticist Stafford Beer. They wanted to build a system capable of the planning and information transmission necessary to run an economy under socialism, but without succumbing to the hierarchical and authoritarian tendencies of the USSR.

Beer built them Cybersyn. Instead of personal command and control and bureaus and apparatchiks, Cybersyn was cybernetic, transmitting information between factories and demand centers electronically.

I’m sure that the reader can detect the ambition of these plans from the non-hierarchical layout of the room above; we never got to see this system in practice, however, as Chile’s government was overthrown by General Augusto Pinochet, who cast these ideas aside.

With Cybersyn as stimulus, I ask: is there a way in which we can use CNASs like Internet and the systems we’ve built on it in order to build a better means of coordination?

Such a system would combine:

  1. The swift and decentralized information transmission found in markets
  2. The long-term forward planning and solidarity demanded by those who wish to do better than capitalism

Such a system would of course need to avoid the pitfalls of both free market capitalism and command economics:

  1. It would lack authoritarian hierarchies to be corrupted by self-interested managers at the expense of the people.
  2. It would give people the ability to unite behind long-term objectives that are expensive for the individual and uncompetitive for the firm.

Distributed Ledgers

I wonder whether distributed ledger technology holds part of the answer. For those who don’t know or would like a refresher, here is a very high-level summary:

  1. Distributed ledger technology is a growing field, involving cryptography, sociology, networks, etc. for which the most popular example is the cryptocurrency Bitcoin, based on the distributed ledger technology called blockchain.
  2. Distributed ledgers work on the principle that information should be shared among participants in a system, with the system as a whole reaching a consensus on the information in question, as opposed to one or very few actors holding and managing the information (such as banks or the government in normal circumstances).
  3. By thus distributing the information, no single participant or cabal thereof should have control, while the data data exists out in the open for scrutiny.
  4. With the addition of cryptographic systems, participants can secure their ledger, making foul play it even harder.

As mentioned above, blockchain is the most popular distributed ledger. There is a high-level explanation below, which the user can skip harmlessly if they wish:

  1. In a blockchain, information is structured as a list of actions, stored chronologically and with information added at the end and never deleted.
  2. Participants store copies of of this structure on their machines.
  3. As new information is added to the system, it is committed to a chain consisting of a series of units of a set size.
  4. The chain makes use of a special mathematical process called a hash: a hash takes an input (say a number, piece of text, etc.) and processes it such the output is always of a set length (usually short) no matter how long the input. The process is deterministic, so the same input will always get the same output. (Try it here.)
  5. Each new block that is added to the chain contains a hash of the previous block (the previous block is very large, but it’s hash is short enough to include within the next block).
  6. As a result, each block contains the unique signature of the block before it, all the way back to the very first block. This means that blockchains are extremely tamper-resistant, as any changes to past transactions (say paying oneself someone else’s money) would change the relevant block and thus it’s hash would no longer match the hash stored in next block, and the chain of hashes all the way to the present.

Thus, this technology has the wonderful property of allowing provably-consistent, decentralized coordination and information-sharing. So, how will this help us to achieve our economic goals?

1. Long-Term, Socially-Minded Economics

Distributed ledger offers immense possibilities for long-term planning and signalling; here are just two examples:

Economic signalling without prices: Currently, the cost of energy (for example) is determined by supply and demand (or worse), and oil is notoriously volatile, its price rocking from unimaginably high for customers to absurdly low (even negative).

Might we voluntarily commit anonymized energy consumption information from, say, our cars to a ledger, in order to signal how much fuel ought to be delivered (locally and nationally) and produced (internationally)? Some utility companies already do this, such as with smart meters, but in this case all the data and all the value goes to them, and the dataset is limited to their customer base.

With a distributed ledger, we could build a massive dataset, hold it collectively, and share the benefits.

Long-term socially minded coordination: As mentioned above, conflict minerals are a global scandal: what if people could signal their interests and ethics through something stronger than the occasional petition and/or phone purchase? Distributed ledgers might allow us to make verifiable demands of the corporations that build our tech, even with some cost on the part of the customer to dissuade fraud, assuring companies that the demand exists and dissuading those tempted to undercut.

2. The Star Trek Economy

Distributed ledgers might facilitate something of a Star Trek-style economy: citizens receive goods but do not pay for them, and live in a state of abundance. This might be possible with a system that could handle enough information to run the economy, but which is impossible to hijack by any single organization or individual. (This is quite obviously still science fiction, in case you were wondering.)

As Jean Luc Picard said, “The acquisition of wealth is no longer the driving force in our lives. We work to better ourselves and the rest of humanity.” Strong words indeed, but why shun the acquisition of wealth and work for the common good if one is not sure that the fruits of one’s labor will be used wisely or fairly? A distributed ledger, being open, might hold the answer: we could check for ourselves how these fruits are used.

Technical Challenges

There are of course technical challenges and limitations, which I think require surmounting before we can properly put into practice and idea like this:

  • Throughput: The conventional blockchain example above has a bottleneck: only one block at a time can be added, resulting in slow or costly transactions–this will only get worse as the networks grow, without changes to the technology. There are some new ideas on how to solve this, one interesting example being the Hedera system which uses a network graph instead of a chain.
  • Ownership: Distributed ledgers are ultimately stored on machines, and these machines are owned by people and organizations, thus there is still the potential for these assets to be monopolized by the few. We should therefore take care not to embrace a decentralized approach, only to have it centralized once again.

The Purpose of Computers Is Human Freedom

In closing, I want to avoid a temptation among some technologists and enthusiasts: to think (or tacitly assume) that it’s possible to create a perfect system of information flow, without personal intercession or involvement. Jaron Lanier makes this point very neatly (but I’m having trouble tracking down the video for you).

Ultimately, this dream is impossible: all ledgers must eventually interface with the real physical world or the legacy world: this place of coming together will, if we are naive, be a point of failure. See the Mt. Gox debacle for a famous example.

Computers and ledgers are tools: they can help us in clever ways, but we can’t shed our ethical responsibility onto them. In my proposed system above, one hopes that we could improve matters, but in another sense all of our real problems are still ahead of us:

  • Firstly, by firing the apparatchik we devolve that decision-making to ourselves, along with all the associated debating and politics on what we ought to do together and how we should help those less fortunate.
  • Secondly, as mentioned above, we invent new concerns over the nature, maintenance and ownership of our shared ledgers.
  • Thirdly, with so much talk of information it can be easy to forget that nothing happens without people and things: real community work still requires people’s physical presence, so to speak, on the ground.

Capitalism fails us when we leave ethical decisions to the system: it punishes us with poverty and environmental destruction. The command economy fails us when we leave administration and tabulation to the people, and fails us with corruption and shortages.

My idea, therefore, doesn’t claim to abolish human vagaries and politics. Rather, I hope, it puts machines in their best position, reliably and repeatedly transmitting information and at a speed that is impossible for humans–allowing humans to occupy our best and most important position: making decisions together and carrying them out in the real world.

The Vision

I hope, if nothing else, that this vision is intriguing, or even a nice aside to the usual left-right political discourse. Most ambitiously, I hope that distributed ledgers might allow us to build systems that preserve human freedom and human solidarity. This won’t work, people will of course say; indeed, I can’t say it will, but this sort of ground breaking progress (as with free speech, democracy and civil rights) rarely comes to us unless we assume that success is possible hold on to what we value with enough tenacity.

* I am sad to say that I can’t track down the owner of this image; seeing it before on Wikipedia (now replaced by less-satisfying computer renderings) I hope that it is in the public domain and that if isn’t, the owner understands that I use it only to raise awareness of the project.