Cold Soup

Cold Soup: Competition, crypto, and Doug North

Our weekly roundup of links, events, and stories from the interwebs. Served cold, but appetising all the same.

First up, Centre for Independent Studies research fellow Partick Carvalho makes the case that competition reform is our best bet to lift the economy but warns that the road to competitive markets might be forestalled because “vested interests can always work to delay, dilute or misinform” the public conversation on the avails of pro-market reform.

This week Darcy made a similar point about compensating losers from efficiency-enhancing policy reform with respect to ride-sharing services, which echos recommendation 10 of the Harper Competition Policy Review (see here too on taxi regulation). In the past Darcy has written about planning and zoning, as per recommendation 9 of the Harper Review, too.

In fact he and Chris Berg of the Institute for Public Affairs have had their report on how the sharing economy revolution is threatened by over-regulation featured in The Australian this week. They argue that we should take very seriously the success of online reputation and ratings as a self-governance alternative to the ever-growing raft of government-imposed regulations:

“It is not controversial to suggest that government solutions are often a slow, expensive and ­inflexible alternative,” Allen and Berg say. “It may be a sub-optimal way to regulate the behaviour of individuals.”

Despite the threat, the people have said yes to the sharing economy and it’s booming. But could platform companies such as Uber prove to be the sharing economy’s biggest threat? Neal Gorenflo over at Evonomics says the choice before us is between platform coops and Death Star platforms:

And just what is a Death Star platform? Bill Johnson of StructureC3 referred to Uber and Airbnb as Death Star platforms in a recent chat. The label struck me as surprisingly apt: it reflects the raw ambition and focused power of these platforms, particularly Uber.

Platform coops are the alternative to Death Stars. As Lisa Gansky urged, these platforms share value with the people who make them valuable. Platform coops combine a cooperative business structure with an online platform to deliver a real-world service. What if Uber was owned and governed by its drivers? What if Airbnb was owned and governed by its hosts? That’s what an emerging movement is exploring for the entire sharing economy in an upcoming conference, Platform Cooperativism.

We at Meso Soup tend to think that so long as there is freedom of entry and exit and genuine competitive, entrepreneurial rivalry between Death Star platforms and platform coops—that is, so long as we eliminate special interest rent-seeking (e.g. unions, lobbies, and industry groups) from the process of market competition and institutional change—then the “epic choice” can be resolved efficiently. Coase theorem 101.

As it turns out, Professor Judith Sloan, one of Australia’s best-known economists (University of Melbourne, Lowy Institute, The Australian, Catallaxy Files, etc.) has also been speaking about this very challenge to beat vested interests ($) in innovation policy reform and the many great ways to waste money in innovation boondoggles (ungated version here):

Most people will be counting the number of sleeps until Christmas. I’m counting the number of sleeps until the innovation statement. I am expecting Father Innovation to have a sack full of taxpayer- funded goodies.

One such innovation boondoggle is likely to be the National Innovation Agendaset to be released next week. Keep an eye out for a flurry of filthy rent-seekers clammering over their take of the fiscal commons. For science!

The cynicism over government planning of innovation—as if the resources for innovation could be simply allocated by central authorities—stems from the simple fact that we aren’t entirely sure when entrepreneurship is, really. Leading Austrian innovation economist Per Bylund outlines just what entrepreneurship education can (and can’t) do, here. In his view, entrepreneurship, which is the process of transforming invention into innovation, “requires alertness to trends in the market place and especially the ability to imagine the future.”

This is a kind of KirznerianShacklean hybrid concept of entrepreneurship and the creation of novelty. And it generates great doubts over the efficacy of government planning in a creative world. Given creative entrepreneurship, it may not be helpful to ask which institutional arrangements are best, instead we must think beyond the design of optimal institutions: we must be against design. Put simply, the innovation problem may be not how to allocate innovation resources within a national innovation system, but rather how to cultivate the formation of groups of nascent entrepreneurs in ‘innovations commons’ (as per Potts and Allen) or ‘contribution goods clubs’ (as per Kealey and Ricketts).

Speaking of which, Jason Potts and Darcy Allen will be giving a talk on precisely this—the formation of innovating entrepreneurial groups—at the Sydney Blockchain Workshop. Their thesis is that innovation in bitcoin and blockchain applications and start-ups is characterised by high uncertainty, distributed knowledge of market opportunities, and requires cooperation at the individual-entrepreneur level (not intervention at the industry level) to foster innovation. Jason will also be talking about alternative economies and reputation-based systems on blockchains: the possibility that firms on a market and the price mechanism could one day be replaced by patches on a commons and the reputation mechanism. An alternative spontaneous order built about contribution and reputation and not price and profit—fascinating!

A couple of calls for papers:

Ledger, a new peer-reviewed scholarly journal that publishes full-length original research articles on the subjects of cryptocurrency and blockchain technology, has the call for papers for its inaugural issue ending 31 December. You want to get in on this at the ground floor, it’s sure to be an influential journal.

The Australian Journal of Telecommunications and the Digital Economy (ajTDE) will have a special issue on ‘blockchain technologies e.g. bitcoin’ in March 2016—the call for papers has a 15 February 2016 deadline.

While we are talking about bitcoin, blockchains, and crypto, did you ever wonder how the online black market (and first modern darknet market) Silk Road was able to regulate self-enforcing exchange? In this paper from a recent issue of the Journal of Institutional Economics, the authors find that reputation and ratings mechanisms facilitated the formation of spontaneous order in the emergent marketplace. This is a big finding since traditionally we expect states to lay the foundation for private exchange by providing market-supporting public goods. Yet in the cryptoeconomy, states need not apply! We need many more such explorations in the positive political economy of cryptoanarchy, but that’s another story…

Black markets, darknet markets… it makes you wonder: is bitcoin only valuable to crooks and tax cheats? Kenyon College monetary economist William Luther argues that most bitcoin users “want to purchase legal goods and services and remit funds as cheaply and conveniently as possible,” and therefore “to the extent that bitcoin is more effective than traditional payment mechanisms for making some transactions, it lowers transaction costs, encouraging production and exchange.” The upshot: bitcoin has a positive social value.

The other upshot of cryptocurrencies—which is surely a massive positive social value—is that they provide a vehicle for ‘cryptosecession.’ As I put it in this working paper, the threat of secession elicits a competitive dynamic between incumbent states and potential new virtual ‘cryptostates’ whereby:

fiscal exploitation is reduced and eventually eliminated as the capability of citizens to move to non-territorial jurisdictions increases. When interpreted as a model of cryptosecession, it shows how the balance of citizen opacity and government legibility determines the balance of fiscal exploitation versus equivalence.

Essentially, the more economic activity we can excise from incumbent states and shift to a nascent cryptoeconomy, the less government inefficiency and unresponsiveness we have to put up with. Darcy makes a similar (if more tame!) point that Bitcoin could be the future for limited governments and free markets, in this piece in the IPA Review.

It’s probably a good thing that crypto limits the taxing proclivity of governments, since too much of Australia’s welfare spending is to upper and middle class households. You can watch the IPA’s Mikayla Novak explain in this new video.

Tax churn is one thing, systematic fiscal predation is another. Sometimes it seems that developed economies are devolving into limited access orders, in which the politically expedient are granted privileged control over parts of the fiscal commons, and the attendant shares of economic rents. While it’s something of a stretch, I bring this up because 1993 Nobel Prize winning new institutional economist Douglass North (and theorist of open vs. limited access orders) passed away last week. There are many great tributes to North, including from former student and colleague John Nye, and Yoram Barzel, a giant of political economy in his own right. To match our theme of uncertainty, innovation, and discovery, here’s a great North notable quotable:

The perpetuation of open-access societies like the United States in a world of continuous novel change raises a fundamental institutional dilemma at the heart of the issue of economic development and of successful dynamic change. By uncertainty, we mean that we do not know what is going to happen in the future, and that condition characterizes the world we have been creating. How can our minds make sense of new and novel conditions that are continually occurring? The answer that in fact has proven successful in the case of the United States and other open-access societies is the creation of an institutional structure that maximizes trials and eliminates errors and, therefore, maximizes the potential for achieving a successful outcome—a condition first prescribed by Friedrich Hayek many years ago and still the prescription for an adaptively efficient society. Such an institutional structure is derived from an underlying belief system that recognizes the tentative nature of our understanding of the world around us.

And so we return to competitive rivalry, permissionless innovation, and discovery procedures.

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