Updated: Apr 2, 2021
Is blockchain capitalist or socialist? Libertarian or collectivist? Leftwing or rightwing? The answers to the above questions are neither or both, as we shall find out in this article, scraping through the past 2500 odd years of human thoughts in shaping societies, culture, commerce, and thereby relating it to the root paradigm that this technological phenomenon is set to solve for us.
Like most facts of life which have a potential to challenge the status quo, in the case of blockchain too, we often find confirmation-bias playing a detrimental role in shaping our understanding of this technology. We often relate this subject in a way how we want to see it. If we want to shun its existence, it’s so far difficult to convince us of the potential this has in bringing a paradigm shift in the way how we today engage in administering commerce. The better informed would see it as an opportunity for transparency, privacy, freedom, security or even as an opportunity for social good on a mass scale. However, it usually takes people a while to step beyond these categories and realize that the revolution of decentralization is much bigger than all of those.
Blockchain movement is no doubt, all about decentralization. Most projects in blockchain deal with creation of networks of systems, people, and companies across jurisdictions, and economically incentivize them to act honestly. in other words when people participating in these projects across networks work for their own good, they are also contributing towards the good of the network. In a way decentralized organizations sidestep corruption and dishonesty by making honesty worthwhile for each member, so that members participate for the collective good of the network.
As humans we have tried to create collective networks before, however, throughout history, in the absence of an unbiased technology extending a lending hand to incentivize people in being honest, we have so far in most cases resorted to fear, coercion and force to bring in trust and honesty within our networked systems. Without an exception, any form of social construct has its building blocks in either the state's over indulgence in manufacturing trust or it being extended to private institutions to manufacture trust, both leading to inefficiencies in the system which have turned out to be costly to the common man, which is against the spirit of blockchain. But before we delve deep into the spirit of blockchain lets touch on the spirit of socialism and capitalism as we have set ourselves to answer if blockchain is in any way focusing on solving any particular capitalistic problem or a socialistic issue.
In 1945 Franklin Roosevelt, Winston Churchill and Joseph Stalin met in Yalta. This Conference was the 1st meeting of the three World War II allies to decide the fate of Europe post the war. It’s believed that during the conference, Churchill had remarked to Stalin as how forced collectivization must have costed millions of lives in Russia, to which Stalin had answered '10 million'. Stalin's policy aimed to integrate individual landholdings and labor into collectively-controlled and state-controlled farms is considered till date as one of the darkest periods of socialism as a result of which till date most of our lessons in history continues to paint a negative picture of Stalin, resulting in all conservative and libertarian thinkers bracketing every socialist person and idea into an evil Stalinist category.
Though what about the capitalist thinkers? There could be arguments against them too when it comes to enforcement in dealing with collectivism. "I am strongly in favor of using poisoned gas against uncivilized tribes. The objections to the use of gas is unreasonable because gas is a more merciful weapon than the high explosive shells, and compels an enemy to accept a decision with less loss of life than any other agency of war". This quote is believed to be from Churchill in dealing with imposing decisions on collective networks.
Let’s be clear that the point here is not to derogate either socialistic or capitalistic thinking by picking facts from history, but rather to emphasize, that our attempt to bracket everything and everyone in extreme categories in order to understand the world is not correct. Categorization sits at the center of much of psychology as its the driving force behind much of our cognitive biases leading to shortcuts in our thinking. We mostly pigeon-hole, we polarize, we stereotype when we are dealing with broader societal issues, law, politics and even economics. We place capitalists or socialists on the extreme ends as pro regulation or pro liberty respectively.
There is a growing view as how blockchain is re-defining world commerce which capitalism has shaped for us so far. Therefore, as we continue on this topic, let’s take a deeper look at its history and some issues which it has brought in its way. However being clear that when we talk of capitalism in this article, we are mostly (or only) referring to laisse-fair capitalism, the free market economy.
Though Capitalism as a term was coined by Karl Marx in Das Kapital (1907), referring to the institutional economic system of giving and attaining private property rights under the rule of law, however a direct link between conflict and capitalism has been there throughout history and its seeds were sown much earlier. Back in 17th century when the monarchy in England realized that they wanted to raise money for war, and taxes were turning out to be insufficient, they started selling licenses for the production of goods and services in practically most industrial areas like coal, bricks, electricity, shipping, postal, defense etc, which were otherwise under state control. This resulted in the creation of license driven monopolistic economic units in all of these sectors. While one purpose was achieved, which was to fund war, however what the monarchy had failed to foresee was the impact that this would cause in the society and culture of not only England but as well the world over as Britain started colonization. As the monarchy gave economic power to a selected few landlords and wealthy individuals who could afford to pay for the licenses, they also attained political power as their status in society began to rise. As a result of which competition stifled, prices got dictated, productivity fell in many cases, and as well political power began to centralize in commerce than in governments. In a span of 3 decades from then, capitalism was able to dictate over established governments and in many cases challenge the cultural norms which were there in place to govern societies. All this has led capitalism, over a long period of time, to be an also a cultural construct as much as it’s an economic one.
Throughout 18th, 19th and 20th century, (season 1 of capitalism), capitalism spread like an unstoppable ideology even though it was challenged by Marxism, Socialism fascism etc. However, none were capable of providing an ideological alternative to this (thought to be) de-facto method of spreading prosperity and accumulation of wealth. For example Marx was concerned with the social dynamics of wealth accumulation as an institutional stack, that he proposed could be altered by political revolution, though he wouldn’t have imagined that this institutional stack could also be altered by technology, as today when free market capitalism is being disrupted, it’s not by a social revolution, but rather by a technological disruption which we are referring to as blockchain.
Capitalism enters stage two
With the onset of 20th century (season 2 of capitalism), a lot started to change, and once again because of conflict. In the early 80s following the outbreak of Iraq-Iran war and subsequent oil embargo, the economies of developed nations began to suffer, industries started grinding to a halt and unemployment started rising. The then national leaders of US and UK – Ronald Reagan and Margaret Thatcher soon realized that they had to do something radically different to spur economic growth and thereby stay in power, which led to something very interesting. They started privatizing industries, essentially the same thing what the British monarchy had done 3 centuries back. They started taking economic power away from the democratically elected state and giving it to Wall Street and Paternoster Square. Though this time around they did something additional too, and that was to do with relaxation of regulations allowing banks to lend more money. The objective being very simple - that if people were not able to work enough to earn during difficult times, they could instead borrow money to maintain the same living standard with a hope that when times get better they could return what was borrowed. Seemed logical, but once again this had massive effect on the culture construct of societies. Previously capitalism had empowered societies by providing them more opportunities, and thereby allowing them to earn prosperity with hard work. But this time, in season two prosperity could be earned by more debt in hope of a better future. Over the next 30 years, the culture of debt got intertwined with capitalism leading to a few interesting phenomenon’s – banking deregulation, increase in private and public debt, plus something more disturbing in the form of capital accumulation in the hands of few entities and individuals. The privileged being those who provided debt and not so privileged were those who bought debt in the hope of future prosperity. There is a growing opinion that the effect of debt in capitalistic economies is one of the primary reason of inequalities in nations and societies today. This point can be argued for and against, depending on whether we are using a short term or a long-term lens, however if we were to go by long term data then there are ample evidences to prove this point that capital accumulation is in favor of the lenders.
How did this happen? How did we go from using capitalism being a means of generating prosperity to means of creating a self-imposed prison in which an increasing number of people, organizations and governments find themselves locked in unsustainable amount of debt? There are two reasons for this.
Absence of CLARITY. Clarity because, while today in the open source world, where we have increased access to knowledge and information of everything else, however its believed that there is very little knowledge and low transparency to the activities of financial institutions. That’s why, every time there is a financial crisis staring at our face, it’s always a shocking surprise as how things could have gone so wrong.
Lack of TRUST. Trust is arguably the primary currency of business, and in economic theory its usually understood as being exogenously provided. It is the foundational resource of any economy, and network of institutions plus people who can simulate trust can facilitate extensive economic cooperation and therefore create value. While most businesses have to rest on trust between multiple counterparties, practically it becomes impossible to attain the same in a complex commercial ecosystem, and therefore trust gets manufactured in the way how we outsource them to intermediaries who we call as central counterparties, clearing houses, etc. relying on contracts executed between organizations and supported by government institutions that frame the rule of law.
So, if we have to get capitalism working for societies again, we have to get back the balance between trust plus clarity, and blockchain is the technology that is helping us attain this balance. In other words, while in capitalistic culture, we have outsourced trust at the expense of clarity, using blockchain as an institutional technology we are now able to lowers the cost of trust by not sacrificing clarity.
So how advent of blockchain is redefining the constructs of capitalism and socialism, both?
While it’s interesting to note that both, socialism and capitalism have their genesis laid on fundamentals, which were to control abusive systems that denied common people life, liberty and property, however history has it that both systems, through different paths, have only led to oligarchy. That is domination by elites in the form of individuals and entities on whom commoners today depend to solve the problem of trust by centralizing power.
It’s the power of the elitist and the inefficiencies related to that power in the form of absence of clarity, plus lack of trust (causing financial collapses time and again) in the end, that led Satoshi Nakamoto to create the first use case using the blockchain framework. Though what he created can neither be wrapped with capitalistic thinking nor socialistic ideology.
In capitalism the means of value creation is owned by private individuals (and not by the state) for profit and that’s true for decentralized economy too.
In socialism the means of value creation are ideally owned by the people who from the networks, and that’s also true of the decentralized economy that blockchain is set to create.
Therefore, a decentralized network when aptly constituted will be equally in favor of both schools of thought. Neither limited to capitalist experiments devolved into a tiny ring on individual elites, nor like socialistic experiments devolve into state control. Its bigger than both, and the question therefore is blockchain solving a capitalistic problem or a socialistic issue is a false dilemma.
Blockchain effects industries and it effects every single industry. Most have a view that no matter what technology we use today in the form of cloud, AI, AR, VR, mobile, it just doesn’t feel like we are changing the foundational model of commerce. It’s just like we are layering new technologies on top of outdated version so that we can get incrementally better but not exceptionally different because the fundamentals of the model within which is embedded the current premise and the interlocking of clarity and trust remains the same. Most of it is vertical innovation, which is innovation that helps us better our existing products and services with the use of technology and thereby bring in incremental values to business in terms of lowering of cost with more optimal use of resources and increase revenue by effective product and services differentiation.
Whereas blockchain technology for the first time has ushered in the scope of horizontal innovation, providing the much needed institutional foundations for a new type of capitalist economy in which the basic economic tenets of counterparty risk management, transfer of ownership or rights, settlements, contracting, and dispute resolution, get built into a technology framework without the need to rely on central counterparties for manufacturing that trust at the cost of clarity.
While its fairly known as what real socio economic paradigm blockchain fixes, the other important questions which are yet to be sorted by the industry are what kind of policies will such an economy require? The gaps are profound, and post blockchain capitalistic economy will require new regulatory and policy settings which are being drafted as we try to sync in this revolution in the making.