GDP

The End of Capitalism or Capitalism by Design?

There was an interesting article [1] in The Observer this weekend by Paul Mason, the Economics editor for Channel 4, and author of a new book called Postcapitalism: A Guide to our Future. The article argues (as I assume the book does) that information can form the productive core of a world beyond capitalism – a freer, networked, more idea-driven world. A world where openness and collaboration will be key.  To get to that world Mason points to both the creative and productive aspects of design thinking. Towards the end of the article he summarises:

“The power of imagination will become critical. In an information society, no thought, debate or dream is wasted – whether conceived in a tent camp, prison cell or the table football space of a startup company.

“As with virtual manufacturing, in the transition to postcapitalism the work done at the design stage can reduce mistakes in the implementation stage. And the design of the postcapitalist world, as with software, can be modular. Different people can work on it in different places, at different speeds, with relative autonomy from each other.”

He ends:

“We need more than just a bunch of utopian dreams and small-scale horizontal projects. We need a project based on reason, evidence and testable designs, that cuts with the grain of history and is sustainable by the planet. And we need to get on with it.”

On a first reading I nodded my head, connecting with what was said – the value of ideas from areas least expected, the need for imagination, the intrinsic relevance of design, and particularly the open-source nature of the postcapitalism project.

But rewind a bit and read about that modular design process again and it all begins to sound a bit, well, 1970s.  Right down to the ‘post’ prefix of the book title.

In previous posts I’ve talked about the economics of intangible goods, about open-source design processes and about how design thinking can be appropriated for good or bad.  Mason’s article does kind of add all those things up in a thought-provoking way, but I’m just wondering, now that governments around the world are on to design in a big way [2], if Postcapitalism might just be Capitalism by Design.

 

[1] Mason, P (2015) The End of Capitalism has Begun, The Observer, Sunday 19th July.

[2] See, for example, a recent gathering of government policy labs which use methods of design to develop policy.

Nakamoto’s Last Theorem

A couple of weekends ago I was at the Latitude festival and happened on a rather good talk by Sunday Times journalist Andrew Smith. The talk was a cross-legged affair, in a shed, in the woods and was about the inventor of Bitcoin, Satoshi Nakamoto. Nakamoto, it turns out, is a bit of mystery. He, if indeed it is a ‘he’ solved a mathematical cryptographic problem that the rest of the world couldn’t, as a necessary condition for inventing a peer-to-peer currency. The neat thing about a peer-to-peer currency is that it doesn’t need a central repository to guarantee its value. That’s bad news for governments and banks everywhere if it becomes mainstream, and potentially destabilising/energising for national economies.

But Nakamoto has disappeared. After introducing the currency, and impressing the pants off mathematicians everywhere, he dropped off the radar and hasn’t been seen since. A bit like Pierre de Fermat and his famous last theorem or Keyser Soze from The Usual Suspects. The ‘disappearing genius’ is a good, human-interest angle for journalists and Smith is now on something of a detective trail fueled by potential conspiracy at every turn. Part of that trail is in looking at the fragments that Nakamoto left behind and talking to the people that interacted with him online, another part is trying to figure out the characteristics of the person by looking at the qualities of the ‘thing’ he created. That second part is a bit like the so-called ‘argument from design’ – inferring the nature of God by looking at the world she created – a tenuous exercise at best, as David Hume showed in his Dialogues on Natural Religion, but a fun game all the same.

Shed of Stories

Shed of Stories

I’ve been following Bitcoin in the news for a while now, without ever really understanding what it is exactly, never having used it. The talk, however, brought home design aspects to the currency, and implications for its use, that I found intriguing. One comment that Smith reports Nakamoto as saying, on one of the discussion lists he was part of was that, in figuring out his currency:

“much more of the work was designing rather than coding.”

That’s an interesting comment to me. It sort of implies that there was a ‘hard’ problem to solve, followed by a lot of design problems: working out how Bitcoins could be ‘manufactured’, used, kept secure, and how they might capture the imagination of people.

For what it’s worth, here’s how I think Bitcoin works. A Bitcoin is basically a number, though not any old number. It’s a number worked out by a computational process that allows anyone to ‘mine’ Bitcoins. Early on in the currency it really was anyone (with a computer and the right software) that could mine Bitcoins, and many did. But Bitcoins are finite, like the total amount of gold in the world, so they get progressively harder to mine. The analogy that works for me is of prime numbers – numbers divisible only by 1 and themselves. The first few are easy to work out: 2, 3, 5, 7, 11, 13, 17, 19, 23, 29, 31, 37 but as you get higher and higher, the numbers get harder and harder to ‘mine’, to the extent that it is only since the invention of the computer that we’ve been able to ‘discover’ large prime numbers. The latest, discovered in April 2014 (Wikipedia is a wonderful thing), has 17,425,170 digits to it. And that’s the crux of it; to mine Bitcoins now, you need extensive computing power. There are server farms now set up in the cold half of the northern hemisphere with the sole purpose of mining Bitcoins. That’s a lot of energy, but then mining for gold takes a lot of energy too.

So basically you get a number when you mine a Bitcoin and when you exchange your Bitcoin for goods, services, or other currency there is a process that checks both that you have a valid Bitcoin – in our analogy you really do have a prime number – and that you have not already spent your Bitcoin.

That may, or may not, be a good explanation but it’s about as far as I can go. If you want more detail I’d recommend you read Andrew’s book as a starting point. What I’m really interested in though are two things. First, the process of design leading to Bitcoin and second, the potential disruptive implications of Bitcoin. The two, of course, are linked through the enigma that is Satoshi Nakamoto.

What I like first is the use of gold as a metaphor for Bitcoin. Gold instantly tunes you in to the kind of currency you’re dealing with; one set up with olde world values. Gold coins, mining, ingots stored in safes, buried treasure, mediaeval tradesmen shaking out ducats from leather pouches. Gold fires the imagination; intuitively you seem to know what you’re dealing with – it gets its value, unlike pound notes or euros, from its scarcity. That must have taken some thinking out by Nakamoto, to keep that metaphor in mind while doing the serious coding.

The serious coding, the ‘hard’ problem mainly seems to have involved making Bitcoin hack-proof. All currency is based on trust and once that trust is breached you don’t have a currency any more. If false Bitcoins can be mined as valid Bitcoins then trust in the currency breaks down.  But Nakamoto appears to have covered the bases through the architecture of his software, having a central (and simple) core, which can deflect any potential attack to satellite components; a solution which has been acknowledged by mathematicians as an elegant one. I’ll spare you the details because, to be frank, I don’t know them. What I do know is that making Bitcoin secure involved imagining how possible threats might emerge, and what to do about them. That is, how does the product respond to misuse? A classic design problem.

Of course Bitcoin must also be efficient and easy to use – no point in waiting a week for a transaction to be confirmed. Again, Nakamoto must have imagined potential use scenarios at the point of exchange. How is validity checked? How long does it take the purchaser to know that they have a real Bitcoin? How easy is it to make an exchange even? These are all potential barriers to the take up of a new system, and design problems that Nakamoto systematically solved. Nakamoto looks more and more like a very good designer.

There is more to good design than just the design, though. Good design sets the mind thinking about new directions, consequences, and effects. A good design, like a character in a novel for an author, takes on a life of its own and is able to show the designer the possible implications of the thing as it relates to a broader vision of society. Bitcoin is more than just good code, it is a way of thinking about the fundamentals of what money is and does.

That is where the (potential) disruption comes in. We have got used to our pound notes, dollars, and euros. Money is regulated by central banks and managed for us by high street banks. The whole financial system pretty much runs on transaction charges. Like a casino – and the gaming analogy is apposite – the house always wins. And, as the recent financial crisis has shown, if a bank loses it still (almost always) wins – the government can provide a bail out, say ‘don’t do it again’, and print more money as a sticking plaster. Because money, in this form, and unlike gold, is, in theory if not in practice, infinite.

So, if you can create a stable financial system without banks, that would be a big thing; a way of reshaping the whole financial system and perhaps stopping the wealthy, at least those in finance, from getting wealthier. And all from a number. The interesting thing is that it’s not clear what politics Bitcoin has, though it appears to have come about with political aims. Smashing the system seems like good old socialism, while creating new financial models sounds like rampant capitalism. That seems like an indicator, to me, that it is a potential way forward, and if it is, it has been cleverly thought through.

Bitcoin, though, has not received a good press. Silkroad, a website for buying illicit goods – the Amazon of the dark side if you like – uses Bitcoin as its currency because (another key thing) it preserves the anonymity of the people carrying out transactions. As a result the exchange value of Bitcoin has fluctuated widely from almost nothing (bad press) to something huge (good press). But it abides, and therein lies the challenge to existing financial frameworks. While crypto-currencies like Bitcoin remain, a possible future also remains. So if anything, Bitcoin looks like material for a new architecture, although that architecture remains largely to be constructed. There are interesting applications emerging though. Transactions too small for transaction charges to be feasible, so-called micro-payments, is one area of potential growth; for small chunks of web content, for example. Emerging economies are another area of Bitcoin development, where currencies, banks, and financial services tend to already to be unstable.

You might think that such a fascinating subject would attract a reasonable crowd at a festival like Latitude. Well, see the photo above, I could have counted the audience on both hands.

What’s Real in the Real World? or The Economics of Intangibility

Three articles in close succession caught my eye last week. The first article was on the discipline of Economics and how students are demanding that the subject be taught differently, following the financial crises of 2008. Their claim is that their subject, ignorant of the increasing disparities in wealth distribution, is out of touch with the realities of the modern, networked, conflicted, and frankly greedy world.

“The real world should be brought back into the classroom” they argue, “as well as debate and a pluralism of theories and methods. This will help renew the discipline and ultimately create a space in which solutions to society’s problems can be generated.”

The intellectual space that the new Economics creates, they argue, could prepare the ground for real change. The students want interaction and engagement between disciplines; they want up-to-date and relevant. No more Nash equilibriums and neo-liberalism for them then; beautiful minds or not.

That economics is out of date is ably illustrated in the second article about Gerd Gigerenzer, whose work on the limitations of human rationality followed that of Herbert Simon. Sorry, Nobel prize winning economist Herbert Simon. The problem of many of his peers, Gigerenzer notes, is that they:

“begin from the assumption that various ‘rational’ approaches to decision-making must be the most effective ones. Then, when they discover that is not how people operate, they define that as making a mistake: “When they find that we judge differently, they blame us, instead of their models!” ”

Oh dear, another black mark for models, this time in Psychology! No students revolting their yet though.

Gigerenzer illustrates this with reference to Goldman Sach’s executives blaming their firm’s 2008 collapse on a ‘25-sigma event’ – something as likely as winning the national lottery 21 times in a row; i.e. something very, very, very, very (keep adding ‘very’s ad infinitum) unlikely.

Certainly not the type of event that would happen, as the aforementioned executives subsequently claimed, five times in five days.

The outdated models of the economists, coupled with the outdated models of the psychologists, have produced a quicksand unfit to generate any type of solution on. A fine old intellectual mess, in other words.

Which brings me to the third article about how to value intangible assets. The article begins:

“The link between economic growth and building things – preferably big things – is irresistible to politicians, but it makes it easy to ignore the less camera-friendly assets, from brands to intellectual property that make a modern economy hum. Spending on intangible things such as intellectual property, brands, software and design now outstrips spending on buildings and machinery in Britain.”

Is it now politicians, with their GDP obsession, who have got their models of growth (possibly given to them by the economists) all in a muddle? Most likely (with a probability far from a 25-Sigma event).

The ‘problem’ that is now slowly being solved is how to accurately value intangible assets, like Intellectual Property.

It is an algorithm that comes to the rescue, not us infallible humans (aren’t alogorithms created by humans? – ed.). Software called Yongle searches worldwide patent databases to work out if an idea is a novel one. Once this novelty is determined the idea can be valued economically. That means that not only can a market in intangible assets start achieving steady growth, but also that a truer picture of what actually keeps the economy ticking along can be gained.

This all sounds suspiciously like another way of making money to me, and I think that is what the students were objecting to in the first place. There are things that are happening now that can’t be valued because they are about the value system itself, not a value in a system of value.

I shall leave Robert F. Kennedy to elegantly express the problem in his 1968 address to the University of Kansas (16:20 – 18:10):

“Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product … if we should judge America by that – counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.

“Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.”

The first paragraph has a similar structure to the last paragraphs of James Joyce’s short story The Dead, but it is the second paragraph of the Kennedy speech which strikes the stirring chord.  To me it is about better education.  How can we appreciate the qualities of life that Kennedy refers to except through better education? The students seem to realise this, and perhaps they are right; it’s time for academics to catch up with the real world.

In 1968 a certain Nobel prize winning economist called Milton Friedman was also giving an address. This time a presidential address to the American Economics Association titled: ‘The Role of Monetary Policy’ in which he concluded:

“By setting itself a steady course and keeping to it, the monetary authority could make a major contribution to promoting economic stability. By making that course one of steady but moderate growth in the quantity of money, it would make a major contribution to avoidance of either inflation or deflation of prices. Other forces would still affect the economy, require change and adjustment, and disturb the even tenor of our ways. But steady monetary growth would provide a monetary climate favorable to the effective operation of those basic forces of enterprise, ingenuity, invention, hard work, and thrift that are the true springs of economic growth. That is the most that we can ask from monetary policy at our present stage of knowledge. But that much-and it is a great deal-is clearly within our reach.”

Hmmm, ‘steady but moderate growth’ – we’ve not seen that for a while have we?