Will Blockchains Bring Us a New Gilder Age ?

I finished reading “Life After Google”, and Gilder’s vision of Blockchains ushering in a disaggregated, democratized, secure electronic marketplace does give feasible hope for greater freedom and fairness in the marketplaces of goods and ideas. However, he introduces some notions that he treats as axiomatic; he establishes them only as assertions with no effort made to prove them. This puts them on much shakier ground than other principles that he invokes like Godel incompleteness and Shannon Entropy to gird his arguments.

One of these is the notion that the foundational determinant of the value of any money has always been the human time that had to be expended to produce it. Here he holds that gold, and presumably the gold coinage of the past, became a standard medium of economic exchange because it was prized, had no other uses other than as decoration (jewelry), and that its value derived from the amount of time it took to find it, extract it from the ground, and to refine it.

Other than the decorative value aspect, all of these qualifications apply equally to the other metals that were used for coinage: lead, copper, bronze, silver, and to an extent even stone. If the time-determinant-of-value proposition is actually a natural principle, a simple study could be done to validate it: Determine the total extraction/production time required to produce these other metals and their coins, and then compare their relative historical valuations to see if they line-up according to the time rule. If the time it takes to produce a measure (mole or ounce) of gold is 5 times more than the time it took to produce and equivalent measure of copper, then gold’s price should be 5 times greater, and so-on (or else arbitrage opportunities would exist according to the time-value view). This argument extends further to non-metal earth-mined extracts like rubies, emeralds, diamonds, and sapphires. Their ultimate value derives from different post-processing including cutting and polishing, but they still could be used to check Gilder’s time-determines-value proposition.

It is more sensible to trace the evolution of gold as a value store, and of coinage. Since ancient times, it was prized for its ‘decorative’ qualities and traded. In terms of modern economic use, Adam Smith is still the canonical reference: as innovation resulted in the specialization and division of labor, a common means of exchange was needed. A livestock breeder of the time could not sell less than one (live) horse, yet if what he needed was some grain, meat, and vegetables to feed his household, bartering an entire horse for those goods would likely deliver an amount to him that his family could not consume before some of it spoiled. Money provided fungibility across asset types.

A farmer of the time would often bring in his harvest at a certain time of the year, and had to sell it for a value-bearing asset of exchange that would endure through time so that he could draw periodically from his profits to buy what he needed throughout the year until his next harvest. Money provided a durable store of value through time.

The use of metal coins derived from the fact that, yes it took some doing to get a purse of them together from base ground extraction through refining. But scarcity (supply and demand) as well as perception of gold as a luxe/valuable commodity probably always had more to do with its value than the time it took to produce it.

Another thing George says is that, because blockchain currencies preserve the history of their exchanges though time in their ever-aggregating ledgers, they are information-bearing, which inherently has something to do with the creation of the real value that they measure. The only information monetary transaction have ever conveyed is (usually spot) price. In each transactional exchange, neither party generally has any idea who previously held the cash being handed-over, nor do they have any particular reason to care. Carrying back-traceable ledgers of this handoff history of any money adds nothing to its use in new transactions. And that is the only basic purpose of money – as a medium for buying and selling.

Both of these notions (the time-to-produce value of money, and transaction ledgers) are actually dangerously exploitable by the central power-holder far bigger than Google, big Pharma, or the banking system and the only one possessing the capability (enactment and enforcement of laws) to forcefully coerce its counter parties (citizens and businesses) to abide by its will: government. Government can and quite likely will assert at some point that all money will be electronic, but under a single e-currency regime that it has under its domain. It can do this, as well as make all other e-monies illegal, with an act or declaration of law.

Roosevelt made gold illegal overnite by executive order. Americans had less than a month to hand it over in exchange for big government’s decreed redemption value, or face penalties of up to a decade in prison for hoarding it for safe keeping.

With all money electronically ‘on the grid’, no transaction in black or white markets avoids taxation, and government can skim savings carte blanche when it decides to. Such a power is nearly irresistible for a government – especially one that is bankrupt and desperate to keep itself functioning like ours is becoming now. This is nothing new. All great civilizations since Rome have collapsed, not from being conquered from without, but by government profligacy. And in the final days, they all go from playing friend and provider to their citizens over to plundering and asset-stripping them.

Satoshi’s bitcoin requires miners to play the equivalent of a video game for a certain amount of time in order for them to produce a unit of monetary value. Even if this time-value notion were some proven principle and even though this does prevent the instantaneous generation of pure electronic fiat money, so what ?: In the hands of government and with some tweaking of the code, Satoshi’s time caveat can be removed, enabling government to instantly ‘print money’ at rates and in quantities that dwarf what they have done over the past decade.

And the traceability of bitcoin money is a dangerous power in the hands of government. Anonymous donations and contributions to libertarian groups or grassroots organizations may become a thing of the past if government gives itself the power to audit ledgers for purported purposes like ‘pursuing fraud, money laundering, and funding for terrorists and drug gangs’.

In light of such things as the weaponization of Lois Lerner’s IRS against conservative nonprofit groups it is easy to conceive how government could utilize such a capability. And the selective censorship and thought-suppression now by Google, Facebook, etc. may have not received more outcry from governing officials for good reasons. All the personal data that Google aggregates on the proclivities and actions of individual US citizens it also shares with the NSA, which re-saves it in their own data center in Utah.

George’s book is very provocative and hopeful, and I certainly hope the re-empowerment of private entrepreneurs and the restoration of personal privacy that he envisions happens. But in his sanguinity about e-currencies he perhaps hasn’t looked at all the portents thoroughly enough. Radiation and nuclear technology enabled X-rays as well as atom bombs. A technology by itself has never been a savior/advancer of human welfare and freedom. Its usages have to be bounded and safeguarded by a let of legal strictures preventing its exploitative use against people, particularly by powerful agents. And it must gain adoption and support in a society which on the whole cherishes virtues like freedom.