In this series on Bitcoin and money, Crypto Briefing takes a deep dive into the complexities of the modern monetary system and how Bitcoin, as the ultimate hard money, can serve as a solution to many of its problems.
In Part Five of the series we shift our focus slightly to question why decentralization is such an important part of the Bitcoin debate – especially when centralization continues to appear as an economic theme in political systems.
The full nine-part series will be available here.
Bitcoin and Money – Recap
From the history of money to Bitcoin as ‘digital gold’ and global economics, with a brief visit to the banking system, we’ve already seen that Bitcoin delivers the qualities of hard money – while avoiding some its pitfalls. Today that will become even more clear.
Communism Versus Capitalism
In our examination of modern monetary systems and economies, it’s worth taking some time to examine the most prominent approaches, at least in the last century, to solving the problems of economic incentives.
Capitalism and communism stand in stark contrast to each other as the most clear examples of the extremes of the economic spectrum; from a decentralized system of free trade to one that is deeply centralized, being directly controlled by a collection of governing powers.
The two contrasting systems have sought to solve economic problems of the modern world. Both have failed in a number of ways.
Note that in this essay, the goal is to limit the scope of our investigation into the degree of centralization: there are plenty of other pros and cons to communism and capitalism outside the scope of this inquiry: and we are specifically limiting our thesis to the results of communism and deregulated capitalism, rather than the theoretical strengths or weaknesses.
True free-market or capitalist economies should ideally operate in a decentralized manner, with no central force controlling the movement between money, goods, and services. The “invisible hand,” as Adam Smith described it, allows supply and demand dynamics to move the agreed-upon value of any given product or service.
Products and services are naturally provided through the profit motive without the need for a central orchestrator. Competition and a constant striving for innovation and improvement is incentivized by this profit-motive — merchants enjoy greater success if people choose their superior products or services. Poorly made products and shoddy services fail, thus continuing the natural evolution of improvement and innovation in an economic “survival of the fittest” scenario.
While successful businesses flourish and lousy companies fail, the consumer benefits most in this system, receiving a better product or service at a better price. This, of course, is an idealized scenario of how capitalism should work.
Centralized economies, like those that operate under communism, take a different approach to providing for needs and wants. In a centralized economic system, a few members of the population decide what is important to have available in society and then determine what must be produced at a given cost and subsequent set price, which is then passed on to consumers.
There is little in the way of competition, but everyone, ideally, has access to a given product at a relatively cheap price since it is produced in quantities dictated by the powers-that-be. Suppliers are paid according to what is deemed fair or appropriate given production costs, or are simply controlled directly by the central parties at the shared expense of the population.
In a ‘working’ communist model, all needs would be prioritized and provided while frivolous wants and greedy motivations would take a backseat. Economic and social inequality would disappear. Theoretically.
Of course, systems that are centralized-by-design exhibit some pretty obvious problems. Firstly, if the powers-that-be miscalculate the need for a given product, there can be a problem ensuring a sufficient supply for the needs or wants of a population.
Secondly, in a centralized economy, the desire to compete to be better in order to be more profitable does not exist. Participants are not motivated to be efficient or to make enough of a product, for example, or even to try to make a better product for consumers to enjoy, since the reward is the same, regardless of performance.
The Bread Supply System
A humorous anecdote about life in England from the perspective of a central economist illustrates this problem. Gorbachev, the last president of the Communist-era Soviet Union, had sent an aide to London, who had made a stunning observation. There was not a single breadline to be found anywhere in the city!
Back in the Soviet Union, central agencies had been working away at trying to solve this problem; how to create a more efficient “bread supply system.” The official was amazed to see the efficiency of London’s system. Gorbachev’s aide exclaimed, “Please take me to meet the person in charge of supplying bread to London. I must learn his secret.”
Of course, there was nobody in charge of London’s bread supply system. Or, everybody was in charge, more accurately. This is the greatest advantage of a decentralized system, or a free market. Bread, among many other things, is supplied by market demands. It is not controlled by any one central agency, and that is precisely why this system works so well.
In a nutshell, the communist approach centralizes decisions for production rather than allowing for free market decisions to direct the market. In this scenario, it’s imagined that the government knows best; making better decisions than the often irrational priorities the larger population would instead choose.
Capitalism, on the other hand, is, at least ideally, decentralized. This economic model allows decisions to be made organically, based on supply and demand rather than being determined by some collection of leaders.
In this scenario, the market knows best, not the government.
So, capitalism seems like a clear winner when comparing the two major economic models. There is a pretty major problem here, however.
Capitalism, in its ideal form, does not seem to exist anywhere in the world.
And, at least in its current form in modern capitalist economies, it is deeply flawed. Capitalist economies, as they stand now, are not as decentralized as one might hope or imagine. In reality, many are deeply centralized.
Today’s monetary situation, explained in detail in previous chapters, examined the issue of negative interest rates. As previously explained, interest rates are heavily controlled and manipulated by central banks. This severely limits the capacity for any economy to achieve decentralization. The problem is exacerbated by the current trend toward negative interest rates, which is gaining momentum.
The most obvious issue with negative interest rates is the concentration of wealth into an ever-shrinking portion of the population, which can then exercise undue influence on the much larger remaining population. This causes centralization to merely move locations rather than be dissipated throughout the economy.
Instead of a central governing power, for example, the central power might end up being a few overly influential corporations, sometimes referred to as a corpocracy, or a few elite members of society who hold the vast majority of wealth, referred to as an oligarchy.
In the current economic system in the United States, for example, a few individuals — Jeff Bezos, Bill Gates, and Warren Buffet — together control more wealth than the total combined wealth of the poorest 50% of all Americans.
Such an imbalance is not exemplary of capitalism in its ideal form. It’s centralization run amok.
In fact, these individuals have found their success mostly due to their abilities to corner markets with dominant monopolies that mercilessly crush competition. The Jeff Bezos-owned Amazon corporation has annihilated its competition, first in the realm of books, but expanding since then to offer a broad range of products and web services.
Brick-and-mortar shops and ma-and-pa businesses have collapsed when faced with the might of Amazon. It is simply impossible to compete against such a dominant force when operating on comparatively higher margins. Add to this the company’s practice of pitting itself against third-party retailers on its own website, and it becomes clear that the resultant lack of competition is not good for consumers, small businesses, or society in general.
Warren Buffett famously favors monopolies, pointing to it as his formula for success. He is, in fact, openly anti-competitive. Buffett likens owning a monopoly to owning an unregulated toll bridge, where the owner can charge what he wishes.
Buffett is quoted as saying, “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. If you’ve got a good enough business, if you have a monopoly newspaper or if you have a network television station, your idiot nephew could run it.”
Buffett is not a fan of Bitcoin.
Clearly, monopolies can be great for investors who happen to own the right businesses. However, they offer little to no benefit to the rest of society. Bill Gates faced numerous anti-trust lawsuits as the founder and chairman of Microsoft. His efforts to squash competition against Windows largely succeeded despite some regulatory efforts to limit his control of the market.
This monopolistic practice clearly limited the buying options of consumers and may well have hindered potential improvements and innovations that might have otherwise been made available by competitors.
Remember, these three individuals possess more wealth than half of the American population, or over 165 million people.
Massive Wealth Concentration
This problem of wealth becoming concentrated among a few elites is worsened in a negative interest rate environment, a monetary trend we are witnessing taking place right now around the world.
Borrowers at the top can access money for free while the remainder of the population loses value in their money and must borrow at higher costs as the currency filters down. In such a situation, capitalism, in its true sense, becomes impossible.
Without the ability to compete and without a long-term reward for deferring gratification, no reason for saving for the future or building wealth exists. This contributes to the corruption and centralization of markets in our current economic condition.
Ultimately, both extremes — unfettered capitalism and communism — end in the same place: centralization.
The center may be in a different entity, such as a government, or corporations, or a few wealthy elites, but it is centralized nonetheless.
Unfettered capitalism results in a lack of competition and an economy dominated by monopolies or in many cases, duopolies, where only two major companies compete, or more often, collude in a given market. Crony capitalism, corpocracies, and oligarchies merely move the center to a different location than communism does, rather than offering a truly decentralized economic solution.
Money Is Centralized In All Current Economies
Due to the centralized nature of modern monetary systems, all economies — capitalist or communist — will tend to gather around a point of centralization. Like a black hole, inexorably pulling in all surrounding matter, the gravity of centralized money draws in wealth from the fringes toward an ever-denser point that must eventually collapse under its own severely imbalanced weight.
Monetary controls, like those exercised by central banks who manipulate interest rates, must be eliminated for a truly free market to exist.
Unfettered monopolization and corruption is a direct result of the current monetary system, whereby the production of money is centrally controlled and distributed. Therefore, money itself must be decentralized and removed from the direct control of central parties.
A decentralized economy is, like London’s bread supply system, not controlled by a select few entities. It is controlled organically by everyone who participates in production and trade. For such a fundamental transformation to current economic structures take place, a paradigm shift in the nature of money itself must take root and spread.
Bitcoin can facilitate such a shift… so long as it remains decentralized, Bitcoin can not only serve as the instrument of transaction, or the store of value – but also as the means by which the pitfalls of centralization can be avoided.
In Part Six of this series, to be published tomorrow, we will take a closer look at HOW Bitcoin can achieve these objectives – and what specific characteristics allow it to encourage participation in the global economy, without facilitating the centralization that ultimately leads to mass economic disempowerment.