Tag Archives: BitCoin

The Coming Micro-Ownership Revolution

In the more than two centuries since the beginning of radical transformation of economic life that accompanied the rise of industrial capitalism, one of the most interesting trends has been the changing nature of the forms through which people have engaged in economic activities. Before the industrial revolution, an artisanal mode of production predominated, with many small work-shops producing the goods required by the largely agrarian economy. At first glance, such the existence of many small firms would suggest a highly competitive economy; however this was not the case. Rather, the high cost of transporting goods created by primitive transportation networks, the risk of brigands, etc., meant that, rather than a single integrated economy, there existed many small economies between which only low-bulk, high-value goods (such as spices) were exchanged. In this situation, workshops were almost universally owned locally, since the cost of monitoring an agent in a distant city would be prohibitively high (the exception being those in the aforementioned low-bulk, high-value businesses, but they also helped ensure the loyalty of distant agents by using family members).

However, the advent of the 19th century transportation and communication revolutions, which brought better roads, canals, steamships, railroads, and telegraphs into widespread use, changed the game. The many local markets became increasingly integrated, and the prices of commodities converged over the course of the century. These changes also led to radical shifts in how firms were both run and owned. With huge, growing markets at their disposal, firms could, as Chandler describes in his brilliant book Scale and Scope: The Dynamics of Industrial Capitalism, drastically reduce the unit cost of many products by engaging in capital-intensive mass production. However, in order to fully take advantage of such available efficiencies, firms needed to mobilize amounts of capital beyond the resources of almost any individual or family. As a result of this problem, the “managerial firm” emerged as the dominant model in many industries by the end of the 19th century. Where, previously, the owner of a business was generally involved with its operations, managerial firms were characterized by a separation of ownership and management (which began to be undertaken by salaried professionals).

The practical result of this change was that it meant that the ownership of a firm could be divided between a far greater number of individuals than had been previously possible when owners were responsible for directly monitoring a firm’s performance. Such a division would not have been cost effective at the beginning of the 19th century, but the drastically reduced cost of information brought about by the aforementioned revolutions meant that, by the 1920s, a small but respectable percentage of the American population held some ownership stake in a corporation through the stock market.

I believe that this historical dynamic has a very interesting implication for our contemporary situation. If the cost of information, in fact, influences the optimal structure of firm in the economy, then the growth of the Internet over the last decade should be understood as a signal that the traditional corporate model is heading the way of the dinosaur. Indeed, there is plenty of evidence to suggest that small to mid-size firms can use their flexibility to outmaneuver the existing behemoths in many ways; however, there are certain industries in which economies of scale will remain extremely important. However, certain very recent developments have to potential to radically alter the ownership structures of such firms.

Of paramount importance is the emergence of peer-to-peer online monetary systems such as Bitcoin. By drastically reducing transaction costs and allowing for true micro-payments (on the order of hundred-thousandths of a cent), such systems have the potential to drastically reduce the minimum barrier to entry to obtaining an ownership stake in a firm. As a result, I believe we might begin to witness the organic transformation of many large firms to co-operative ownership.

The logic of such a transition is as follows. In a perfectly competitive market, the margin of profit trends towards zero, with consumers obtaining products at cost. In such a situation, the motivation for shareholders who do not use the firm’s products to retain ownership is fairly low, while the only tool left for a firm to attract customers away from its competitors would be to offer them an ownership stake in the business, which would guarantee that they would continue to receive the firms products at cost in the future. As such, it would be reasonable to expect the gradual transition of the ownership of many companies in the coming years from absentee shareholder to consumers.

A possible objection to this scenario would be to inquire as to why such a transition has not already occurred? The answer, I believe, lies in the relative cost of ownership. In 1800, owning a share of a London blacksmith’s shop while living in New York would have been prohibitively expensive, due to the fact that the transaction costs necessary to receive the benefits of ownership would eat up most, if not all, of the profits. However, once the underseas telegraph cable was in place, such costs were reduced to the point that such ownership became possible. It seems there is a similar dynamic at play with co-operatives.

In the past, co-operatives have only been successful in economic sectors in which the size of the economic relationship they have with their members is sufficiently large to offset the transaction costs of ownership (i.e., groceries, insurance, feed for livestock), and they have often further defrayed such costs through the use of volunteer labor. However, with such technologies as Bitcoin sending transaction costs plummeting towards zero, the range of firms that could be economically owned by their users/consumers is drastically expanding. The logic is simple – why patronize a for-profit firm when you can be assured you’re receiving goods and services at cost from your co-op store/auto repair shop/social networking website. Just as the first communications revolution gave birth to the age of the corporation, the rapid changes that our contemporary world is experiencing could be paving the way towards the age of the co-operative.

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Crypo-Currencies: A Proving Ground for Theories of Optimal Monetary Systems

After having been cued in to Bitcoin a few weeks ago, the crypto-currency’s rise has been quite impressive. Its value has quintupled since I began following it, and the amount of goods and services for which people are willing to accept Bitcoin has been consistently expanding. Barring any unexpected catastrophe, then, I feel like it’s reasonable to expect that crypto-currency will be an important part of the economic landscape in the years to come.

That being the case, I think it is important to engage in a meaningful conversation as to the nature of the optimal monetary model for a crypto-currency. After ingeniously solving the double spending problem, the initiators of Bitcoin chose to implement a system in which, for the first few years, a large amount of money is created but, within a decade, the supply of currency will reach a cap of around ~21 million units. This model of a predictable and stable money supply could very well be the optimal one, but it carries certain risks, the largest of which might be some of the pernicious effects of deflation.

The primary concern is that, in a deflationary environment, people will choose to horde rather than spend their money. For instance, why buy a t-shirt today for six Bitcoins today when you’ll be able to get it next week for five? Such incentives might hobble the growth of the Bitcoin economy, meaning more transactions happen in other units of value while people with Bitcoins hang on to them in order to realize potential capital gains.

Different schools of economics hotly debate the legitimacy of such concerns, but, until now, they’ve never really had a chance to engage in a full blown competitive experiment to test the issue. However, since the Bitcoin source-code is open source, it would not be difficult for someone to create a rival currency that, rather than capping off at ~21,000,000 units, is designed to consistently increase the money supply by 1% per year indefinitely after the initial takeoff period. By doing so, it might be possible to learn an enormous amount about monetary economics by comparing the performance of the two economies. Additionally, an environment might emerge in which currencies with innovative elements are regularly introduced to the mix, allowing for the empirically-based semi-organic evolution of an increasingly optimal monetary system. Truly, this is an exciting time to be an econ nerd!

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Dipping My Toe Into the Bitcoin Economy

Given my recent interest in the new crypto-currency, I figured I’d try to put my money where my mouth is, so to speak, and initiate a casual venture with a friend selling actual, honest-to-god goods in exchange for Bitcoins. After a bit of brainstorming, we decided to produce some Bitcoin-themed t-shirts and *exclusively* accept btc for them through a website. Well, the shirts have arrived, the website is up, and I just sealed our very first package destined for a fellow in New Zealand. The next few weeks should be interesting as we get a sense of the benefits and pitfalls of running a (very) small business in the Bitcoin economy. If any experiences or insights of particular interest should crop up, I’ll make sure to post them on ASR, so stay tuned…

P.S. If you want a t-shirt, head over to http://www.iusecoins.com!


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2011-04-20 Geoff Golder on the New Crypto-Currency BitCoin

Local software developer Geoff Golder comes on the program to explain and discuss the implications of the newly developing online currency called BitCoin.

[blip.tv http://blip.tv/play/AYK0w2MA%5D

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