With Darcy W E Allen, Kiersten Jowett, Mikayla Novak, and Jason Potts. Forthcoming in Cosmos + Taxis
Abstract: We explore the connection between new decentralised data infrastructure and the spatial organisation of cities. Recent advances in digital technologies for data generation, storage and coordination (e.g. blockchain-based supply chains and proof-of-location services) enables more granulated, decentralised and tradeable data about city life. We propose that this new digital infrastructure for information in cities shifts the organisation and planning of city life downwards and opens new opportunities for entrepreneurial discovery. Compared to centralised governance of smart cities, crypto-cities are more emergent orderings. This paper introduces this research agenda on the boundaries of spatial economics, the economics of cities, information economics, institutional economics and technological change.
With Darcy Allen. Published in The Journal of the British Blockchain Association, 31 March 2020
Abstract: Understanding the complexities of blockchain governance is urgent. The aim of this paper is to draw on other theories of governance to provide insight into the design of blockchain governance mechanisms. We define blockchain governance as the process by which stakeholders (those who are affected by and can affect the network) exercise bargaining powers over the network. Major considerations include the definition of stakeholders, how the consensus mechanism distributes endogenous bargaining power between those stakeholders, the interaction of exogenous governance mechanisms and institutional frameworks, and the needs for bootstrapping networks. We propose that on-chain governance models can only be partially utilised because of the existence of implicit contracts that embed expectations of return among diverse stakeholders.
It is unusual for the World Economic Forum’s Davos conference, held every year at the end of January, to be genuinely significant. But it seems this one was. Davos 2020 made clear that we are now living through a monetary reform era comparable to the great monetary events of the twentieth century.
The end of the gold standard, the creation of the Bretton Woods system in 1944, and that system’s collapse in the 1970s all brought about massive, structural economic changes. Our new age – the age of digital money competition – is likely to be just as disruptive.
At Davos the World Economic Forum announced a global
consortium for the cross-border governance of digital currencies (including the
class of cryptocurrencies stabilised against fiat money known as ‘stablecoins’)
and a toolkit for the world’s central banks to establish their own digital
central bank currencies.
The details of these Davos initiatives are less important
than what they symbolise. Central banks have been experimenting with fully
digital currencies for at least half a decade, ever since Bitcoin received its
first big waves of press. But their experiments are suddenly urgent, for both
commercial and geopolitical reasons.
On the one side, the Facebook-led Libra digital currency
project offers a vision of corporate-sponsored non-state private money. On the
other side, China is fast-tracking the development of a fully digital yuan,
with a barely disguised goal to challenge the American dollar’s domination
through technological innovation. Both projects create enormous problems for
the rest of the world’s central banks – let alone finance regulators and foreign
Libra has been faced with a concerted hostile attack from
central banks and regulators – an attack that begun literally the day it was
announced in June last year. Many of the Libra consortium have been pressured
into withdrawing from the project.
Mastercard, Stripe and Visa withdrew after they received a
letter from US Senators in October declaring that if they stayed in Libra they
could “expect a high level of scrutiny from regulators not only on
Libra-related payment activities, but on all payment activities”. The Bank of
France chief declared last week that “Currency cannot be private, money is a
public good of sovereignty”, and the French finance minister has warned
that Libra is not welcome in Europe.
This mafia-like behaviour from American and European
regulators is short-sighted – astonishingly so. Whether Libra ends up being a
successful global corporate currency or not, it represents a powerful and
competitive counterbalance to the Chinese digital yuan.
Details have been dribbling out about the digital yuan since
it was revealed in August last year. Its key feature is that it is fully
centralised. The People’s Bank of China will have complete visibility over over
financial flows, including the ability to control transactions tied to an
individual consumer’s identity. This offers China the digital infrastructure
for a type of financial repression that is without historical parallel.
And adoption is basically assured. The Chinese government
can coerce financial institutions to adopt the digital yuan, if necessary, and can
exploit the remarkably strong hold that digital payments like WeChat Pay and
AliPay have on Chinese commerce.
Let us hope there are some serious strategists thinking
about what happens if this digital currency becomes part of China’s foreign
policy toolkit – what the consequences of yuan-isation will be for those
countries torn between the Chinese and American spheres of influence.
This is the context in which the many of the world’s central
bankers came to Davos to spruik their own digital currencies. More than 50
central banks surveyed by the Bank of International Settlements are working on
some form of digital currency, and half a dozen have moved to the pilot project
stage. Our Reserve Bank told a Senate committee in January that it too has been
secretly working on an all-digital Australian dollar.
And of course in the background to this monetary competition
between the corporate sector and the government sector is the slowly growing adoption
of fully decentralised cryptocurrencies – the decade-old technology that first
sparked these waves of monetary innovation.
The global monetary system of 2020s will be a regulatory and
financial contest between these three forms of all-digital money: central bank
digital currencies, corporate digital currencies, and cryptocurrencies. The
contest has profound significance for the ability for governments to control
capital flows across international borders, for financial privacy, for tax collection,
and obviously monetary policy.
China has the authoritarian power to force adoption of its central
bank digital currency. Countries like Australia do not. So it is not obvious
which form of money will eventually dominate.
National governments have had nearly absolute control over
national currencies for at least a hundred years, in some cases much longer.
The end of the Bretton Woods system in the 1970s incited a
generation of economic reform, as domestic policymakers discovered that Bretton
Woods had been propping up all sorts of regulatory controls, trade barriers and
even labour restrictions.
We’re about to discover what centuries of state monopoly over money has propped up.
Abstract: Identity is an input into economic exchange and contracting. The modern industrial economy has relies on cheap political identity to create trust and lower transaction costs. Market economies, however, have different identity needs than an administrative state. Economic efficiency in a digital economy requires high-quality economic identity to facilitate co-production of value on platforms, and to enable market competition through product-quality discrimination. Blockchain technologies and related advances are bringing innovation to economic identity technology. In this paper we explore state-produced identity and market-produced identity, the dynamics that exist in their demand and supply, how these categories are being shaped by technological change, the implications for privacy and secrecy, and the role of the state in market-produced identity.
With Darcy WE Allen, Sinclair Davidson and Jason Potts. Forthcoming in the Review of Austrian Economics
Abstract: Investment is a function of expected profit, which involves calculation of the cost of trust. Blockchain technology is a new institutional technology (Davidson et al 2018) that industrialises trust (Berg et al 2018). We therefore expect that the adoption of blockchain technology into the economy will affect investment and capital structure. Using a broad Austrian economic approach, we examine how blockchain technology will affect the cost of trust, patterns of investment, and economic institutions.
With Sinclair Davidson and Jason Potts. Published in Frontiers in Blockchain, 2020. doi: 10.3389/fbloc.2020.00002
Abstract: Blockchain technology is the distributed, decentralised ledger technology underlying Bitcoin and other cryptocurrencies. We apply Oliver Williamson’s transactions cost analysis to the blockchain consensus mechanism. Blockchains reduce the costs of opportunism but are not ‘trustless’. We show that blockchains are trust machines. Blockchains are platforms for three-sided bargaining that convert energy-intensive computation into economically-valuable trust.
Robodebt – the automated Centrelink debt issuance program that was found invalid by a federal court last month – is not just an embarrassment for the government. It is the first truly twenty-first century administrative policy debacle.
Australian governments and regulators increasingly want to automate public administrative processes and regulatory compliance, taking advantage of new generations of technologies like artificial intelligence and blockchain to provide better services and controls with lower bureaucratic costs. There are good reasons for this. But our would-be reformers will need to study how robodebt went wrong if they want to get automation right.
The robodebt program (officially described as a new online compliance intervention system) was established in 2016 to automate the monitoring and enforcement of welfare fraud. Robodebt compared an individual’s historical Centrelink payments with their averaged historical income (according to tax returns held by the Australian Taxation Office). If the Centrelink recipient had earned more money than they were entitled to under Centrelink rules, then the system automatically issued a debt notice.
That was how it was supposed to work. In practice robodebt was poorly designed, sending out notices when no debt actually existed. Around 20 per cent of debts issued were eventually waived or reduced. The fact that those who bore the brunt of these errors had limited financial resources to contest their debts contributed to robodebt’s cruelty. In November, the federal court declared that debts calculated using the income average approach had not been validly made, and the government has now abandoned the approach.
Automation in government has a lot of promise, and a lot of advocates. Urban planners are increasingly using AI to predict and affect transport flows. The Australian Senate is inquiring into the use of technology for regulatory compliance (‘regtech’) particularly in the finance sector. Some regulatory frameworks are so byzantine that regulated firms have to use frontier technologies just to meet bare compliance rules: Australia’s adoption of the Basel II capital accords led to major changes in IT systems. And the open banking standards being developed by CSIRO’s Data61 promise deeper technological integration between private and public sectors.
Regulatory compliance costs can be incredibly high. The Institute of Public Affairs has estimated that red tape costs the economy around 11 per cent of GDP in foregone output. The cost of public administration to the taxpayer is considerably more. Anything that lowers these costs is desirable.
But robodebt shows us how attempts to reduce the cost of administration and regulatory compliance can be harmful when done incompetently. The reason is built into the modern philosophy of government.
Economists distinguish between administrative regimes governed by discretion and those governed by rules. The prototypical example here is monetary policy. Rules-based monetary policies, where central banks are required to meet targets fixed in advance, are less flexible (as the RBA, which has consistently failed to meet its inflation target is keenly aware) but at the same time provide a lot more certainty to the economy. And while discretionary regimes are flexible, they also vest a lot of power in unelected bureaucrats and regulators, which comes at the cost of democratic legitimacy.
Automation in government is possible when we have clear rules that can be automated. If we are going to build administrative and compliance processes into code, we need to be very specific about what those processes actually are. But since the sharp growth of the regulatory state in the 1980s governments have increasingly relied less on rules and more on discretion. ASIC’s shrinks-in-the-boardroom approach to corporate governance is almost a parody of the discretionary style.
The program of automating public administration is therefore a massive task of converting – or at least adapting – decades of built up discretionary systems into rules-based ones. This was where robodebt fell over. Before robodebt, individual human bureaucrats had to manually process welfare compliance, which gave them some discretion to second-guess whether debt notices should be sent. Automating the process removed that discretion.
The move from discretion to rules is, to be clear, a task very much worth doing. Discretionary administration feeds economic uncertainty, and ultimately lowers economic growth. We have a historically unique opportunity to reduce the regulatory burden and reassert democratic control over the non-democratic regulatory empires that have been building up.
Of course, public administration-by-algorithm is only as effective (or fair, or just, or efficient) as those who write the algorithm build it to be. There’s a lot of discussion at the moment in technology circles about AI bias. But biased or counterproductive administrative systems are not a new problem. Even the best-intentioned regulations can be harmful if poorly designed, or if bureaucrats decide to use discretion in their interest rather than the public interest.
Robodebt failed because of an incompetent attempt to change a discretionary system to a rules-based system, which was then compounded by political disregard for the effect of policy on welfare recipients. But robodebt is also a warning for the rest of government. The benefits of technology for public administration won’t be quickly or easily realised.
Because when we talk about public sector automation, we’re not just talking about a technical upgrade. We’re talking about an overhaul of the regulatory state itself.
With Sinclair Davidson and Jason Potts. Published in Frontiers in Blockchain (2019)
Abstract: In the late 1980s and early 1990s the electronic markets hypothesis offered a prediction about effect of information technology on industrial organisation, and many business writers forecast significant changes to the shape and nature of the firm. However, these changes did not come to pass. This paper provides an economic analysis of why, using the transaction cost economic framework of Ronald Coase and Oliver Williamson. Non-hierarchical corporate organisation struggled against contracting problems in the presence of possible opportunistic behaviour. Technologies of trust offer an institutional mechanism that acts on the margin of trust, suppressing opportunism. The paper concludes that blockchain technology provides an economic infrastructure for the coordination of economic activity and the possible realisation of the electronic markets hypothesis.
Attorney-General Christian Porter wants social media platforms like Twitter and Facebook to be legally liable for defamatory comments made by their users.
Right now, the common law can distinguish between the legal liability of active publishers of information (like newspapers and broadcasters) and the passive platform operators that allow users to publish information themselves. Courts decide where this distinction is drawn according the unique facts of each case.
But in a speech to the National Press Club on Wednesday, the Attorney-General declared he wants to eliminate the distinction altogether: “Online platforms should be held to essentially the same standards as other publishers.”
The Attorney-General’s proposal is fundamentally confused. Removing the distinction between digital platforms and newspapers would have a devastating effect on both those platforms and our ability to communicate with each other.
The proposal is bad on its merits. But even besides that, the conservative government needs to understand how destructive it would be to the conservative movement online.
Let’s start with the legal principles. It makes sense that newspapers and broadcasters are liable for what they publish. They actively commission and produce the content that appears on their services. They read it, edit it, arrange and curate it. They pay for it. Newspapers and broadcasters have not only an editorial voice, but complete editorial control. Indeed, it is this close supervision of what they publish that gives them strength in the marketplace of ideas.
Social media platforms do nothing of the sort. Not only do they not commission the content that appears on our newsfeeds (let alone read, factcheck, or edit that content), they don’t typically confirm that their users are even real people – not, say, bots or foreign impersonators. They merely provide a platform for us to communicate with each other. Social media has facilitated a massive, global conversation. But it has no editorial voice.
In the United States a parallel debate is going on among Republicans about whether Section 230 of the Communications Decency Act – which explicitly prevents courts from treating ‘interactive computer services’ as publishers or speakers for the purpose of legal liability – should be abolished.
Section 230 has variously been described by scholars and commentators as “the 26 words that created the internet” or the “the internet’s first amendment”. The internet law professor Jeff Kosseff writes that eliminating this provision would “turn the internet into a closed, one-way street”. Attorney-General Porter’s proposal would have the same effect.
If social media platforms have to bear legal responsibility for what their users say, they will assume editorial responsibility for it. That means editing, deleting, and blocking all content that could be even the least bit legally questionable.
Newspapers and broadcasters sometimes take calculated risks with what they print, if they believe that the information they reveal is in the public interest. But why would a technological company – a company that lacks an editorial voice or the journalistic vision – be anything but hypercautious? Why wouldn’t it delete anything and everything with even the slightest risk?
And here is where the practical politics comes in. Even if the Attorney-General’s proposal was a good idea in principle, this policy would be particularly devastating for the conservative movement that supports his government. Indeed, it is hard to imagine a legislative proposal that would more effectively, and immediately, cut down the Australian conservative movement online.
After all, what side of politics benefits most from the political diversity and openness of the modern internet? What side of politics has relied most on the internet’s ability to bypass traditional media gateways? It is difficult to imagine the conservative political surge in recent years without social media – without Facebook, Twitter, YouTube, and all those podcast platforms.
If conservatives are concerned about social media networks “censoring” conservative content on their services now, well, making them liable for everything conservatives say would supercharge that.
And why would this policy stop at defamation laws? Why wouldn’t it also apply to liabilities around, say, Section 18C of the Racial Discrimination Act? Or our sedition laws? We are looking at a future where technology companies in California (companies that many conservatives believe are stacked with culturally left employees) could be required to second-guess how the most left-wing judges in Australia might enforce this country’s draconian anti-speech restrictions.
The Coalition government should also reflect on how some of its most recent legislative programs have backfired on conservatives. The Foreign Influence Transparency Scheme, passed in 2018 in order to tackle Chinese interference in Australian politics, is now being used to target the organiser of the Australian Conservative Political Action Conference, Andrew Cooper, and even Tony Abbott.
The Attorney-General is right that defamation law needs reform. Australia’s defamation framework is heavy-handed and disproportionately favours private reputation over the public need to discuss significant issues. But removing the courts’ ability to determine liability for defamation – and instead deputising the world’s technology companies to enforce what they imagine it could be – would be a catastrophic mistake.
If we are going to realise the environmental vision of the circular economy, we need to first think of it as an entrepreneurial economy.
In PIG 05049 the artist Christien Meindertsma shows how the parts of a slaughtered pig get reused downstream. For instance, gelatine derived from the skin ends up in wine, acids from bone fat end up in paint, and pig hair ends up in fertiliser.
The farmer sells what they can to retailers and sells the rest to other businesses, who then process and resell the what they can’t use to other users and businesses, who then process and resell the other parts … anyway you get it the point.
In a world of perfect information and zero-transaction costs this use and reuse would be trivial. The near infinite uses of pig parts would be immediately apparent to everyone in the economy and every part of the pig would be reallocated efficiently.
But of course we don’t live in a world of perfect information. All these reallocations have to be discovered by entrepreneurs and innovators.
PIG 05049 is a story of how resources move through the economy in surprising ways, as entrepreneurs reduce waste in the pursuit of profit.
But a circular economy makes stronger demands on us. The circular economy aspires not simply to minimise waste, but for goods to be “reused, repaired and recycled” after their first users no longer need them.
The circular economy imagines a world in which material goods are recovered, endlessly, and thus the environmental impact of the materials that we rely on for our prosperity is radically reduced.
It’s a powerful vision. But it is a hard vision to realise because transaction costs are not zero. Obviously, as goods travel through their life cycle they deteriorate. Goods get worn out, they rust, they fall apart.
But just as critical is the fact that information about the goods deteriorates as well. Product manuals get lost. Producers go out of business. Critical parts get separated. What the goods are made from is forgotten.
This information loss is a huge problem for the circular economy — it is very extremely expensive to reuse goods when we have lost information about what they are made of and how they work. This information entropy makes it hard for entrepreneurs and innovators to close the loop.
In some previous work we’ve described a hypothetical “perfect ledger” where information is infinitely accessible, immediately retrievable, completely immutable, perfectly correspondent to reality, and permanently available. The perfect ledger is a thought experiment. It’s a thought experiment like an economy with perfect information or zero transaction costs that allows us to see how our imperfect world differs from an imaginary ideal.
And in a world of perfect ledgers, the circular economy’s information loop is completely closed. There is no information entropy — we never forget, so we can always reuse.
Blockchain technology of course is not a perfect ledger. But on many of the relevant margins, it offers a drastically improved way of managing information about goods as they travel through their lifecycle.
Information can be stored on a distributed ledger in a way that is resistant not only to later amendment, but that persists when it a good is passed from hand to hand, or travels across a political border, or when it is discontinued and forgotten by its designer, or when its original manufacturer goes out of business.
The information about the goods we have sitting on our desk, scattered around our homes and workplaces, built into our buildings, and powering our vehicles is being unpredictably but relentlessly lost. This is the blockchain opportunity for the circular economy. Blockchains can secure more information, better, more permanently and more accessibly about goods, so that they can be more efficiently reused.
And in conjunction with similar technological developments that reduce search costs — that is, that allow innovators to identify underutilised goods in the economy that could be bought and repurposed — the owners of goods will have increased incentivises to store and protect their property, if only to maximise the sale price.
The circular economy is often thought as a problem for governments to bring about. But if the circular economy is to be realised, we need to rethink the problem of waste and reuse as an environmental problem caused by an information problem.