December 7, 2021

Decentralized Cryptocurrency Systems and Hayek’s Unplanned Economy

“Pure free market money is emerging upon the world to compete from a position of zero against a Goliath establishment. If it wins, the debate is settled. With luck, but thankfully without the permission of any planner, we all get to witness Hayek’s ideal of decentralization bear out across financial markets in all of the years ahead.” ~ Erik Voorhees

In the 1940’s, Friedrich A. Hayek made a name for himself speaking out against the tendency toward economic planning which he saw developing in Britain. Hayek recognized that this socialist tendency wasn’t so much the opposite of Fascism, but rather a precursor to it.

At this time, such concerns weren’t merely academic. Nazi Germany had engulfed Europe in violence and chaos, and Hayek saw what most others didn’t: that Nazism had been an outcome of a multiyear process of centralization, nurtured by the impetus toward “planning.” Planning for the greater good, planning for efficiency, planning for justice, fairness, equality, and all other manner of altruistic ideals.

When reading his most famous text, The Road to Serfdom, written during the most devastating period of the war, one perceives the desperation in Hayek’s plea. He is saying to his countrymen: Do not unwittingly take that same path so recently trodden by your enemy!

Hayek argued that Britain and much of the Western world had been marginalizing certain classically liberal principles, in favor of what he phrased the “veneration for the state, and the enthusiasm for the ‘organization’ of everything.”

Hayek’s brilliance was in demonstrating clearly the causal—if not inevitable— relationship between well-intentioned economic planning, and a resulting deprivation of human flourishing. But this runs counter to common sense.

It is obvious and natural—specifically for well-educated intellectuals—to believe that thoughtful planning in society should lead to greater outcomes. Planning is important. And shouldn’t planning be most important at the largest scale? Isn’t that the whole point of government, to plan society for us?

Hayek’s insight—shared widely among the Austrian economists—was that as complexity increases, it becomes implausible for all the relevant information on which a rational plan is based to be known by any one party, especially by the party responsible for the planning.

“This is not a dispute,” writes Hayek, “about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.”

By setting up this dichotomy, Hayek reminds us that the opposite of central planning isn’t having no plans at all, but rather is simply decentralized planning, aka “market competition.”

Our choice thus is between central organization by the State, and distributed organization through competition of individuals and firms.

Hayek argues passionately that to the extent society veers toward central planning, and away from competition, it necessarily must curtail and constrain liberty and flourishing.

Individual liberty, Hayek rightly argued, was the defining attribute of Western society most under threat by socialism generally, and at the time, Nazism specifically.

Thus, a planned economy marches toward Serfdom. That was his point. So after that horrible war, where did we all march to?

Let’s look at modern society today, roughly 80 years after Hayek’s plea. On the surface, our economy appears fairly “unplanned.” Indeed, most Americans and Europeans believe their economies are market economies, and most of the complaints allege too much capitalism is the problem.

How many times have we seen armchair activists smugly invoke the McDonald’s logo as proof that free-market capitalism is here and it doesn’t taste that great?

Such people strongly believe more central planning is needed. Greater regulation is always their answer.

But for those of us who are familiar with Hayek’s work and Austrian economics generally, and who care about monetary systems in this context, we’re skeptical that what we have today is any kind of open market… for money itself is not only heavily regulated, but centrally planned by certain monopoly institutions.

So is our economy primarily planned or unplanned? And to what extent does the cryptocurrency phenomenon stand apart from that status quo?

Here’s a thesis I’d like to propose: the central planners have largely let the branches of the economic tree grow freely, because they’ve found the far more essential trunk, which is money itself. They spend their days designing and manipulating the roots of the system, rather than the branches, all while society observes the fluttering leaves, believing it to be market capitalism.

Consider that every trade in society involves two goods, and one of the two is always money. Money is thus half of all trade, and yet there is essentially zero competition in the realm of money. How can this be?

Either our market economy has for some reason tolerated its most important good being centrally planned, or the more Occam’s razor answer: that it’s not actually a market economy after all.

In Hayek’s day, let’s remember that money was gold.

As such, the scope of central planning over money was limited. There was just not that much to plan. Gold was a commodity, it could not be created or destroyed at whim, and before the financialization of modern society, those in charge of money systems were more like mechanics than they were sorcerers. While they had some latitude for creativity, they remained ultimately constrained by metal.

But then Bretton Woods happened. Many of Hayek’s contemporaries were there, but not Hayek. A meeting of planners doesn’t tend to invite many critics of planning. Here, some men in a hotel, under the noble banner of public interest and global stability, veered the world a little further away from the messy competition of markets. Money, the controllers agreed, was something that needed to be controlled.

And money has been increasingly controlled and conjured by central planners ever since. By the early 1970’s, even gold itself was dispensed with as it impeded that planning.

No longer mere mechanics, the central money planners have become sorcerers. And here is where the insidious serfdom forewarned by Hayek has crept in.

For in the process of increased centralized planning over money systems, we find ourselves in a situation today in which the entire global economy rests on the words of one man and his meeting minutes. The Federal Reserve is the ultimate planner, and through its plans for money, it becomes the indirect planner of a great swath of human affairs.

And all of us became unwittingly trapped in that system, lured in by the perpetually misguided trust we place in politicians.

We can perhaps agree that part of The Road to Serfdom’s success was the title itself. It’s visceral.

Serfdom conveys, to the contemporary mind, a dark age of docile obedience. It conveys an extortionate institutional hierarchy. It conveys an ignorance by the common man of the injustice of his surroundings. It conveys an abject rejection of the principle that all men and women ought to be equal under the law, that no person should have special legal privilege over another.

We have a clear disdain for the serfdom from long ago… and yet how different are we, those of us who toil under the modern banking system?

The medieval lord had his castle. The modern lord has his bank.

And in the same way that the medieval serf didn’t tend to question or confront his lord, nor does the modern citizen tend to question or confront his money.

The serfdom Hayek warned of arrived through the gradual imposition of centrally planned money.

But then Bitcoin happened.

“I don’t believe we shall ever have a good money again,” Hayek once wrote, “before we take the thing out of the hands of government – that is, we can’t take them violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.”

Hayek wanted to see society embrace decentralized order, not just because it was more efficient, but because it was the best guarantor of human flourishing. It is a poetic tribute that Satoshi’s design for Bitcoin solved this exact problem of decentralized order in the realm of money —the exact realm under which we’d all become serfs under a regime of fiat.

Bitcoin solved something known as the Byzantine Generals Problem, which had been a longstanding challenge in computer science. How do you get multiple parties to agree on something to avoid failure, when some of the parties can’t be trusted?

Before Bitcoin, value systems, such as the money system itself, had to be centralized at scale, because disparate computers couldn’t trust each other unless there was an overseeing authority—a lord to use our serfdom analogy.

So prior to Bitcoin’s creation in 2009, one could argue that Hayek’s appeal to decentralized competition was irrelevant. Money in our modern age had to be centrally planned.

And if money was centrally planned, how could a proper market ever form? Capitalism cannot be said to exist upon a foundation of fiat.

Thankfully, by enabling money itself to be used at scale and distance without central coordination, Satoshi made Hayek’s “unplanned economy” feasible in a modern context. Blockchains generally became a new tool for economic coordination among strangers at a distance.

And the coordination and economic boom that occurred in the wake of this new technology has been as inspiring as it has been overwhelming.

Amid the volatility, the periodic disasters, and the silly dog memes, people often miss just how profound cryptocurrency as a social and economic phenomenon has become.

This is a phenomenon where $1.5trillion of wealth has been created in just over a decade.

Where any human on earth can transfer value to any other human instantly and nobody can interfere or stop it.

Where value of any amount can be hidden in one’s brain and reinstantiated thousands of miles from where it was created.

Where lending and exchange markets have formed to trade billions of dollars of value a day, and yet which have no office, no CEO, and are run by no company.

Here, there are thousands of hyper-competing value systems experimenting with game theory and advancing the state of cryptography itself.

And all this without a single goddamn government license relevant among any of it. The ultimate antithesis of every central planner, Bitcoin has been easily the best performing financial asset in existence since it first trolled the British chancellor and his bank bailouts with its genesis block over a decade ago.

Crypto is, by any honest observation, the greatest example of rapid spontaneous order within a capitalist context in all human history.

It would surely bring Hayek to tears.

And this rapid order would have been entirely predictable to Hayek, who said

“Wherever the barriers to the free exercise of human ingenuity were removed, man became rapidly able to satisfy ever-widening ranges of desire.”

That is exactly what is happening within the cryptocurrency industry as we speak.

Hayek continues:

Only since industrial freedom opened the path to the free use of new knowledge, only since everything could be tried – if somebody could be found to back it at his own risk – has science made the great strides which in the last 150 years have changed the face of the world.

In crypto, right now, everything can be tried, and there are plenty of people willing to back these experiments at their own risk. Hayek adored competition. And in crypto, competition is universal, it is intense, it is ruthless, and yet… it is peaceful.

Crypto is flourishing without a central plan of any kind. Hayek would certainly argue that it is flourishing precisely because there is no central plan of any kind.

It is a space where unbridled capitalism is on full display. To planners, this is repulsive, and they are quick to highlight the volatility and the periodic disasters that befall crypto investors.

And there have been many disasters. There have been many frauds, many scams, many mistakes. I do not wish to belittle or excuse these things, but they are emblematic of any great frontier of human experience, that very important realm far beyond a central planner’s horizon.

It is often hard to find pure examples of ideologies in the real world. Is America capitalist? Is China communist? Both not really. Has central planning or open markets worked better for Nigeria or Mexico or the Soviet Union? The data is muddy and a smart mind can weave nearly any narrative from it.

In crypto, however, we have one of the best examples of an ecosystem that is close to a pure expression of ideology: in this case, the ideology of borderless market competition. No state can interfere with it on a technical level, and it’s evolving so fast that even on a legal or political level the State is unable to effectively govern it.

It is one of the most fascinating things happening in the world today.

Crypto generally, and Bitcoin specifically, offer us an empirical demonstration of a money and financial system unplanned by any government. At its opposite, we have fiat currency and the banking system, the ultimate fatal conceit of central planning.

Unlike in Hayek’s day, we don’t have to debate about the superiority of one of these systems over the other. Pure free market money is emerging upon the world to compete from a position of zero against a Goliath establishment. If it wins, the debate is settled.

With luck, but thankfully without the permission of any planner, we all get to witness Hayek’s ideal of decentralization bear out across financial markets in all of the years ahead.

Note: These remarks were originally prepared for the Cryptocurrency and Hayek Conference hosted jointly by the Mercatus Center at George Mason University and Coin Center. A recording of the presentation is available here.

This article, Decentralized Cryptocurrency Systems and Hayek’s Unplanned Economy, was originally published by the American Institute for Economic Research and appears here with permission. Please support their efforts.