Capitalism

Beyond Bitcoin

Is Bitcoin a misguided information technology tool here to create more problems than it solves?

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By Vasilis Kostakis and Chris Giotitsas 

A growing number of economists are concerned about the widening rift between the actual productive economy and its financial counterpart, noting that new banking tools create value that translates into money but not also into real production value. The utilisation of money as a credit tool is criticised by many, who claim that in a world of finite resources, unlimited financial expansion is an illusion (Greco, 2009). Although money is a legacy of the first phase of industrial capitalism, it must now be attuned to the information age and its characteristics; a key critique for the discernment regarding the future form of currencies.

According to Carlota Perez (2009), we are now experiencing the turning point of the information technologies revolution. Already, we have gone through its installation period where economies experimented with – and finance capitalists invested in – new technologies, albeit only in the short term. The NASDAQ bubble of 2000 and the financial crisis of 2007 are, according to Perez, consequences of such speculative behaviours (Perez, 2009). This calls for a period that will better utilise the dynamics of new technologies, creating synergies throughout society: a structural change that will offer new solutions.

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It seems logical, then, that digital currencies are emerging to present an alternative to this dire situation. Modern technological capabilities of global connectivity, along with older concepts such as cryptography, have enabled individuals and online communities to experiment with digital currencies. They signal the struggle by the general society for autonomy from the centralised financial system. Currently, no state has been involved in the conception of digital currencies (although they do play a role in digitised form of traditional currencies) – they are the product of individual and community activities. It is important to note that there are two types of digital currencies: those used exclusively in virtual economies (e.g. the Linden dollar in Second Life or the various currencies in World of Warcraft) and those used in the real economy. We shall have a critical look at the latter, and will focus specifically on Bitcoin.

Bitcoin was first introduced as a piece of open source software that supports the movement of currencies in 2008 by the cryptic Satoshi Nakamoto (likely a pseudonym). The software enables the circulation of alternative currencies by utilising peer-to-peer networks, hence circumventing banks. Instead of distributing the currency through a centralised network controlled by a central bank, Bitcoins are distributed by nodes participating in a peer-to-peer network.

All Bitcoin transactions are recorded publicly in a ledger known as the “blockchain”. This feature is, arguably, the main innovation of Bitcoin. It makes it near impossible to spend a particular Bitcoin unit more than once, as all transactions are certified by other users on the network. The work required for the certification of transactions and the maintenance of the ledger is energy-intensive, and is often done by large computer systems participating in a peer network; as an incentive for users to participate as “miners”, they are rewarded with new Bitcoins, or in some cases a fee. The Bitcoin protocol is designed to create new coins at a decreasing rate, and when the number of Bitcoins reaches a designated limit (21 million units) at a future time (estimated around 2140) then the system will stop producing new Bitcoins. After this point, the only financial incentive for miners to continue certifying transactions will be in the form of transaction fees.

Bitcoin is often viewed as an “apolitical currency”, devoid of the troubles that burden other currencies, due to it seemingly consisting of just code; a currency free from state intervention and large corporate interests, according to the egalitarian rhetoric that surrounds it. However, it is evident that this is not the case. Besides the fact that there are signs of emerging governance structures in Bitcoin (similar to those of other open source projects), we can also see that its entire logic follows the fundamental rules of other, one might say less revolutionary, currencies.

Instead of a regulating central bank, the code is in charge. Lessig (2006) explains that in the digital realm the “code is law”, drawing underlying connections to the political nature of traditional currencies: politics are imbued in each piece of software. In the real world, the law enables banks to mediate credit transactions between the various parties. The law ensures the credibility of contracts, protects property rights and regulates money circulation. In the digital world, the code assumes this role and influences what users can and cannot do. Therefore Bitcoin, as a piece of software, is saturated with ideas drawn from pre-existing political frameworks.

As previously mentioned, Bitcoin is deliberately scarce. By limiting it to 21 million units, Nakamoto has created a condition in which the more popular Bitcoin becomes, the higher its price gets, making it more and more difficult to produce. Presumably, the creator’s intention was to create a currency that is rid of debt, in the spirit of various politico-economical critiques against the credit system. After all, Bitcoins do not come about as credit relations between two parties but as “private” information in a network. But the code’s architecture has led to the creation of a Bitcoin “aristocracy” and a tremendously unequal distribution of wealth within the system.

Therefore, it can be said that Bitcoin is not a commons-oriented project aiming to satisfy the needs of society, but a currency that reflects a new type of capitalism – a “distributed” one. This new capitalism is one which adapts to the characteristics of the network era, and uses the peer-to-peer infrastructures to achieve capital accumulation. Bitcoin may appear to exist outside the financial system, but by promoting scarcity and competition, it actually aggravates the over-accumulation of capital and exacerbates the social inequalities that its supporters hope it will combat. Distributed capitalism’s premise is the idea that everybody can trade and exchange; or put more bluntly, that “everyone can become an independent capitalist” (Kostakis and Bauwens, 2014).

Some libertarians advocate the elimination of the state in favour of individual sovereignty, private property, and free/open markets. In theory, you have individuals that are equally capable to participate in a project, but in practice what one gets is concentrated capital and centralized governance. We dare say that the anarcho-capitalist design of Bitcoin, based on the Austrian school of economics, exacerbates the characteristics of the neoliberal era; the promise given by the idealistic concept of distributed capitalism doesn’t pan out in reality.

So is Bitcoin a scourge? A misguided information technology tool, here to create more problems than it solves? Not necessarily. Bitcoin should be viewed as a new technology, not just a currency. One might say that rather than providing answers and solutions to the current views of the financial crisis, perhaps Bitcoin provides some useful and timely questions about the principles and bases of the dominant political economy.

Furthermore, since it is an open source piece of software, it can be forked (meaning the original code can be copied and developed separately). It has, thus, paved the way for a new type of currencies that utilize new technological infrastructures and whose dynamics should not be ignored. The blockchain enables a decentralized network to achieve consensus without requiring any trust between parties and the potential of its innovations is very promising. The possibility to record every interaction on an incorruptible public ledger, and the ability to encode a particular set of rules linking these interactions to specific transactions, makes it possible to design new sophisticated incentive systems.

Going a step further, as new projects like Ethereum illustrate, this technology is applicable for various applications. The decentralized power of the blockchain, if harnessed properly, may provide users and communities with the opportunity to create tools for collaboration in large scale without the mediation by either the government or private for-profit entities. Tools for the creation of a true sharing economy, where all the power lies with the users, instead of large corporations whose goals and methods are questionable to say the least, as illustrated by the numerous controversies surrounding Uber. So the question here is, who will utilise this technology, and for what means?

References

Carlota Perez, ‘The Double Bubble at the Turn of the Century: Technological Roots and Structural Implications’, Cambridge Journal of Economics 33.4 (2009): 779-805.

Lawrence Lessig, Code. Version 2.0, New York: Basic Books, 2006.

Thomas H. Greco, The End of Money and the Future of Civilization, Vermont: Chelsea Green, 2009.

Vasilis Kostakis and Michel Bauwens, Network Society and Future Scenarios for a Collaborative Economy, Basingstoke, UK: Palgrave Macmillan, 2014.

Originally published at KLCEconomics.com

2017 January 8


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  • AxeChop

    Lessig: “Code is law.” 2006
    Imagine he’s developed this much more. Not sure where Dr. Lessig is now.

    Code is more than law.
    “The story of human intelligence starts with a universe that is capable of encoding information.” Ray Kurzweil

    Code is physics efficacious, fundamental relationship infrastructure in bio, cultural & tech networks: genetic, language, math, moral, religious, legal, monetary, software, etc.

    Sad that the public and economists don’t understand code, including monetary code, in a physics, evolution & complexity context.

    Sad that neither the public nor politicians can pass natural selection tests.
    Public Hint #1: Ya can’t do natural selection with monetary code.
    Culture, Complexity & Code: http://ow.ly/4mJQ2r

    On another level, our species is not adequately coded for navigating exponentially accelerating complexity, i.e., our unprecedented environs, largely generated by exponentially accruing knowledge.
    Humans in these environs: Somewhat analogous to dropping a penguin on a summer dune in the Sahara. Code ain’t gonna work.

    Passing natural selection tests: processing complex relationship information with sufficient reach, speed, accuracy & power.

    Both our bio & cultural genomes are complexity deficient, that is, they can’t adequately process information. Hence they/we fail to generate selectable relationship hierarchies in-&-across geo eco bio cultural & tech networks, and across time.

  • Why don’y you guys post the dates on these things?

    • William Ellis

      I didn’t see it at first either…but there it was at the very bottom…
      “Originally published at KLCEconomics.com 2017 January 8”

      • Thanks. Idk why they don’t just put the info near the top. Makes it all so much easier.

  • Emma Makhno

    >the code’s architecture has led to the creation of a Bitcoin “aristocracy” and a tremendously unequal distribution of wealth within the system.

    The “bitcoin aristocracy” this guy refers to are not the same as the current bailout taking, bankster elites.

    When someone has a lot of bitcoin and spends them they no longer have them and the only way to get more is to do something someone is willing to pay for.

    The so-called “bitcoin aristocracy” cannot just maintain their wealth and privilege printing bitcoin and getting bailouts.

    If they don’t spend their bitcoin and just “hoard” it that is great because it just makes everyone else bitcoin more valuable by keeping supply off the market.

    If they aren’t spending it they are not materially better off than non-elites.

    If they are spending it then the wealth is being distributed and making its way through the economy to people providing goods and services.

    >By limiting it to 21 million units, Nakamoto has inadvertently created a condition in which the more popular Bitcoin becomes, the higher its price gets, making it more and more difficult to use.

    Ok the above does not make sense unless you don’t know btc is dividable to 8 decimal places. If anything the more valuable and the more users and more velocity the more it will be a stable currency.

    >Bitcoin may appear to exist outside the financial system, but by promoting scarcity and competition, it actually aggravates the over-accumulation of capital and exacerbates the social inequalities that its supporters hope it will combat

    There is no such thing as over-accumulation of capital. That is called saving and it is necessary to start a business or purchase things that cost more than you currently have.

    If you hold more than you will need to make purchases all you are doing is driving up the value of all participants bitcoin.

    >Libertarians advocate the elimination of the state in favour of individual sovereignty, private property, and free/open markets.

    There are many forms of libertarianism that are for free markets but not propertarianism, so that is a false statement.

    >design of Bitcoin, based on the Austrian school of economics, exacerbates the characteristics of the neoliberal era; the promise given by the idealistic concept of distributed capitalism doesn’t pan out in reality.

    Is the distribution of bitcoin becoming more or less concentrated? they didn’t bother attempt to even demonstrate the claim they make.

    • Vasilis

      Dear Emma,

      My rebuttal is following:

      1) We are not claiming that the “bitcoin aristocracy” is the same as “the current bailout taking, bankster elites”. The term refers to a group regarded as privileged or superior in a particular sphere. In our case this sphere is the Bitcoin sphere.

      2) Our argument certainly needs to be softened and refer to the 8 decimal places. However, still Bitcoin would be difficult to be used by non-experts.

      3) This is arguably a matter of perspective. Bitcoin favours early adopters and those who have access to powerful (expensive and energy consuming) computers. I am not sure whether the top 1% saves or accumulates (see point 5).

      4) You are totally right. We need to rephrase here.

      5) This is a short article with a bit of journalistic flair. Hence, going into details is not always possible. But that’s why there is a comment section where constructive discussions like this one can take place. I would suggest the reader has a look at an
      easy-to-follow infographic here: https://www.cryptocoinsnews.com/owns-bitcoins-infographic-wealth-distribution/

    • Vasilis

      Dear Emma,

      My rebuttal is following:

      1) We are not claiming that the “bitcoin aristocracy” is the same as “the current bailout taking, bankster elites”. The term refers to a group regarded as privileged or superior in a particular sphere. In our case this sphere is the Bitcoin sphere.

      2) Right. We meant to write “produce” and not “use”. It is still debatable how easy would be to use a currency divided in several decimal places. Anyway, the sentence needs to be rephrased to clarify our argument.

      3) This is arguably a matter of perspective. Bitcoin favours early adopters and those who have access to powerful (expensive and energy consuming) computers. I am not sure whether, say, the top 1% saves or accumulates and/or speculates (see point 5).

      4) You are totally right. We also need to rephrase here.

      5) This is a short article with a bit of journalistic flair. Hence, going into details is not always possible. But that’s why there is a comment section where constructive discussions like this one can take place. I would suggest the reader has a look at an easy-to-follow infographic here: https://www.cryptocoinsnews.com/owns-bitcoins-infographic-wealth-distribution/

      Thank you.

  • Manu

    you call yourself “evoeconomics” and you don’t even accept bitcoin for donations…… sad and not very evolved