The Great Inversion

Technology like bitcoin flips the logic of collective action

MAY 19, 2014 by CARL OBERG

Filed Under : Cryptocurrency

The political logic of “concentrated benefits and diffuse costs” has been with us since day one of democracy. But it was only recently explained effectively by great economists like the Nobel Prize-winning James Buchanan and Mancur Olson.

It works like this: A special interest group such as the sugar lobby wants money in the form of subsidies, tax breaks, scientific study funding, or anything else of value to them. Let’s say the package they want is worth $100 million. The benefit is concentrated with that company or industry doing the lobbying at $100 million.

How much will this cost the American taxpayer? $100 million is the partially right answer. Of course, as individuals we react to the impact of this corruption not as a $100 million tax, but rather as a 32-cent tax ($100 million divided by 310 million Americans). The costs are diffused over every taxpayer, lessening its impact and making it more politically palatable to any individual voter.

Are you willing to protest for $0.32? Will you hit the barricades for $0.32? Will you use your precious income-earning time to get back that $0.32? They’ve already won, because almost no one is willing to lose time or sleep over this—if they even know any individual instance is occurring.

And so the “logic” of Public Choice problems is for spending to increase—seemingly forever—on pet projects and special interests until a crisis is reached and the system has to be reset.

But something interesting happens when you start talking about diffuse systems like the Internet and bitcoin—something that hasn’t yet been fully examined. This Public-Choice logic gets turned on its head. The systems not only survive, but thrive. Let’s look at bitcoin as an example.

The government sees bitcoin as a threat to its monopoly on money and the power to create federal reserve notes whenever it wants. The federal government jealously guards this power because it allows the government to pay for anything it desires while passing on the true costs of the money printing to the citizenry through inflation. Increased spending (concentrated benefits) and diffuse costs (inflation, which lowers the value of savings) are hallmarks of the current federal monopoly on money.

But as the feds fight against bitcoin and other cryptocurrencies, they will find the tables turned: The beneficiaries of these diffuse systems are legion, and spread far and wide. But the costs of fighting technological advancement and increased monetary freedom are laid squarely at the feet of the government. Investigations, new laws, prosecutions, and new snooping technologies all cost significant time and resources. And the government has just begun to go after cryptocurrencies.

The closure of the first Silk Road site and the arrest of BitInstant CEO Charlie Shrem are just the beginning. Meanwhile, the benefits of a robust, changing and growing cryptocurrency community and ecosystem are constantly spreading to more and more people. The government can stop places like Silk Road and others, but more will pop up, considering the relatively low setup costs and the value throughout a large user community.

The Internet as a whole functions in the same way. Attempts to constrain it, like the Stop Online Piracy Act, incur huge costs for the lawmakers who attempt to get them passed. Meanwhile, technology has developed to the point where even if the government were able to constrain or suppress the Internet, other networks outside of the government's control could easily pop up. The darknet already exists, is being actively used by individuals interested in privacy, and could be expanded to address outside infringement of the regular Web.

This is a development that turns the very logic of political action on its head. Thanks to technology and the distributed nature of networks, we are no longer beholden to the political process, majoritarian rule, and the so-called “fair” tax and fiat money regime. The more of the economy we move to the Internet, the safer we will be and the more distributed power becomes. 

Find a Portuguese translation of this article here.


June 2014



Carl Oberg is the chief operating officer of the Foundation for Economic Education.

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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