The Problem with Centralized Economies

Our current political-legal-economic infrastructure is highly centralized and still relatively autocratic.

National governments are the only entity with the power to create laws and issue currencies, banks control the money supply and flow of capital and large corporations have a near monopoly on the production and sale of most goods and services.

Governments, Banks and Corporations Have a Monopoly on the Economy

Unlike many in the crypto space, I don’t hate this system. In fact, I think that it has served us remarkably well and has undoubtedly been a key driver of prosperity over the few centuries. Governments provide security and help establish trust through laws and regulation, the international financial sector facilitates growth via trade and the international flow of investment capital and corporations help coordinate the production and distribution of goods and services.

But, like any centralized system, our current infrastructure has its issues. It’s bloated, byzantine and draconian and – worst of all – it consolidates power in the hands of the few. This leads to numerous problems including:

• Expensive and Inefficient: Governments, banks and large corporations are highly inefficient. Hierarchical layers slow communication and new ideas must often pass-through multiple rounds of approval before being implemented. To make matters worse, armies of bankers, lawyers, accountants, executives and bureaucrats are required to maintain the system, costing an estimated $7 trillion a year in the US (or 35% of GDP)
• Potential for Corruption: Even the best centralized economies are notoriously opaque. We aren’t privy to many of the internal decisions of our government, corporations are only required to share certain types of information on an intermittent basis and – as the financial crisis of 2008 proved – even the banks and regulators had little idea what was sitting on the balance sheets of our largest financial institutions. At best, this opacity is a recipe for negligence, at worst, it is a breeding ground for corruption

• Seizure: In our current system, it’s debatable whether you really own your assets. Many governments can arbitrarily revoke citizenship, corporations can take your digital goods and banks can freeze and even seize your assets at will. While this may seem far-fetched, consider that in 2013, the Government of Cyprus seized 47.5% of all bank accounts over €100,000 to bail-out its failing banking system

• Limited Access: The economic agents of nation-states are the ultimate gatekeepers. Gaining citizenship to many countries is often impossible and banks can decide whether they want you as a customer. While the latter is generally not a problem in the developed world, this is a huge issue in growing economies. Today, nearly 1.7 billion people remain unbanked simply because they aren’t profitable enough to be considered by global financial institutions

• Limited Privacy: Our current system offers citizens very little privacy. Governments require extensive documentation, banks must collect detailed personal information to adhere to KYC, AML and CFT regulations and companies such as Facebook own all the data you post. While in some cases this produces comical effects (such as a man learning from Facebook that he was going to be a father before his wife told him), it has also produced dystopian ones (such as Facebook illegally sharing user vast amounts of private user data with third parties in the Cambridge Analytica scandal)

• Censorship: While many modern democracies have codified freedom of speech, this unfortunately doesn’t always apply to private institutions. Companies such as Twitter have full discretion over who can access its site and whom they can ban. To date, they have banned hundreds of thousands of people, including several high-profile users. This problem also isn’t limited to social media, as Apple recently banned Epic Games, the creator of the multi-billion dollar game Fortnite, from its App Store after a revenue dispute

• Hidden Taxes: In addition to the taxes we pay to the federal government, citizens of many developed nation states are also subject to a variety of “hidden taxes”. For instance, banks often charge enormous fees on credit card transactions and international money transfers, and “Big Tech” often takes a large cut of revenues earned by artists and entrepreneurs. For instance, Spotify garners 30% of the revenues from a song, and Apple often charges a 30% “tax” on every sale made through their App Store

• Lack of Interoperability: Many players in the economic ecosystem of modern nation-states operate as “walled gardens”, limiting the interoperability between financial institutions and technology companies (i.e. an app built for Apple’s App Store will rarely work on Google). This makes it difficult to even transfer assets between entities let alone share and collaborate on new technologies and products

Together, these concerns represent a major problem. Not only do they limit growth, but they also continue to drive inequality.

So why do we tolerate these inefficiencies? Well, we don’t really have a choice due to what is known as the Byzantine General’s Problem. While I’m oversimplifying a bit, this concept basically states that large groups of humans can’t trust one another or coordinate across vast distances without using centralized third parties (such as governments, banks or corporations) to establish trust. For example, when a stranger sends you money online, you must rely on your bank to ensure that 1) they are whom they say they are and 2) they have the money they say they have and 3) they actually send it.