Melbourne

Nicholas Gruen E ngruen@gmail.com

T @ngruen1

9th July 2014

Bitcoin: a public good privately provided

Outline

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Emergent public goods

What is money? • Hint: an emergent public good

Perfect and monopolistic networks• Phase transitions and transactions costs

Banks: what are they good for?• Hint: ripping us off

Bitcoin: what is it good for?

Public private partnerships

Public goods – goods that no-one will supply if the government doesn’t

Public goodsPublic goods . . . present seriousproblems in human organisation.

Vincent and Elenor Ostrom - 1977

(as a problem)

Public goods(as an opportunity)

He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.

Thomas Jefferson to Isaac McPherson, August, 1813

Web 2.0 platforms are public goods:

Google (1998)

Wikipedia (2001)

Blogs (early 2000s)

Facebook (2004)

Twitter (2006)

The Wealthof Nations (1776)

• Private Goods

The Theory ofMoral Sentiments (1759)• Social rules (like road rules)Order the social world and Transform potentialconflict into harmony and cooperation

Language

Adam Smith

The ecology of private and public goods: Markets

Private Goods• Traders address

their mutual self-interest

Public Goods

• Marketplace for meeting

• Price discovery• Liquidity

Public Goods

Private Goods

[The public good of] Justice . . . is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society . . . must in a moment crumble into atoms.

Adam Smith

The ecology of public and private goods

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The fractal ecology of public and private goods

The old and the new

The old and the new

The old and the new

The old and the new

The economics of abundance: a new birth of freedom

Public goods . . . present serious problems in human organisation.

Vincent and Elenor Ostrom - 1977

He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.

Thomas Jefferson

Public goods as a problemPublic goods as an opportunity

When the economics of abundance runs out

What c

ould be built in th

is space?

What c

ould be built in th

is space?

Is money a thing? A commodity that becomes a medium of exchange?

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Or something else?

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Modern practice in regard to gold reserves has a good deal to learn from the more logical practices of the island of Yap.

John Maynard Keynes

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16 October 1834

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Money is information(including incentives to maintain its integrity)

+Social convention as to value

(AKA collective hallucination)

The significance of transactions costs

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Two Networks

Phone Network Internet

Two Networks

• Monopolistically competitive

• Large transactions costs to establishing interfirm trade

• Concentration is high

• SMS, International Roaming

• Obstacles to innovation

• Perfectly competitive

• Negligible transactions costs - 99.5% informal agmts

• Low concentration

• Where marginal cost is zero, so is marginal price

• Innovation is exploding

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Phone Network Internet

Both built from interconnect agreements

Economic growth is held back by industries where established interests are so powerful that disruptive innovation can be staved off forever.

Financial services is probably one.

UK Econ Prof and FT Journalist John Kay, 2012.

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The significance of transactions costs

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• Home lending at <60% loan to valuation

• Foreign Exchange

• Credit cards

• Wealth Management

Margins from 500% to 2,000% above costs

The significance of transactions costs

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Reasonable Margin

Actual Margin

(Smarts)

Ratio (Smarts)

Actual Margin (Mugs)

Ratio (Mugs)

<60% LVR Loan 0.50% 2.50% 500% 3.50% 700%

FX 0.20% 2% 1,000% 9% 4,500%Retail

Payments 0.20% 2.50% 1,250% 5% 2,500%Wealth

management 0.25% 1.75% 700% 2.50% 1,000%

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Two Foreign Exchange Markets

10%10%

14%14%

13%13%

14%14%

21%21%

23%23%

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Implicit Too-Big-To-Fail Subsidy For The 29 Biggest Banks

Source: Bank of England calculations. (Haldane, 2012)

Bitcoin: what is it good for?

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1. Medium of exchange: 2. Unit of account:3. Store of value:

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When the economics of abundance runs out

What c

ould be built in th

is space?

What c

ould be built in th

is space?

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10,000% Productivity Improvement

PPPs 2.0

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Private sector builds service

Public sector contributes its resources– Networks– Nudges – Non-obstruction– Financial internalisation

Subject to openness and privacy undertakings

Much more for each in partnership than alone

Australia acquires new research assets

Not ‘picking winners’ but mediated through usual processes such as open tenders, etc.

When the economics of abundance runs out

What c

ould be built in th

is space?

What c

ould be built in th

is space?

It’s the protocol stupid

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The End