EconoMatters

One Hooray For Cryptocurrencies

Today’s tech sector has become a slow-moving behemoth, but there is one area bubbling with creativity — that of crypto-currencies.

Credit: Duncan Rawlinson www.flickr.com

Takeaways


  • Large organizations are almost never innovators. Throughout history, the periods of greatest innovation coincided with market chaos, a myriad of small competitors and no established standards.
  • Today’s tech sector has become a slow-moving behemoth, but there is one area bubbling with creativity -- that of crypto-currencies.
  • Yes, of course there is fraud in the crypto-currency sector, but that does not make the entire sector fraudulent.
  • It is not clear where the future of crypto-currencies lies, just as it was not clear in 1995 which dot-com projects would succeed.
  • One danger for crypto-currencies is that governments, probably acting globally through the G20, will seek to ban them.

Large organizations are almost never innovators. Throughout history, the periods of greatest innovation have generally coincided with the periods of market chaos, with a myriad of small competitors and no established standards. We need to figure out a way to encourage such periods.

As has been well documented, the last decade has seen a dearth of start-ups. At present, even the California tech sector shows signs of increasing maturity, even senescence.

Long-established venture capital companies fund round after round of private financing for companies that rarely go public. Meanwhile, Google and Facebook, the very largest tech companies that have become true behemoths in less than two decades, have over 60% of the online advertising market between them and tend to buy out innovators and/or squeeze out competition.

As the rate of innovation has declined, the industry is showing signs of a stultifying conformism. Industries can carry on like this for a great deal of time (though there must surely be a weeding out of the perennially unprofitable in the next downturn), but you would not expect great innovation to come from such a milieu.

Parallels with General Motors

Google and Facebook are very similar to the 1950s General Motors. They concentrate on innovating tail fins, lobby like crazy, celebrate conformism and declare their equivalent of “What’s good for General Motors is good for America.” That kind of industry ends up producing the Edsel and loses market share to imports.

The truly innovative business environments are very different. In the early Industrial Revolution, the textile companies employing the new steam technology were tiny, generally just a few thousand pounds in capital, with large companies not appearing in Britain until the 20th Century.

Likewise, in early 20th century America, the automobile market was fragmented and chaotic until Henry Ford consolidated it after about 1912.

In both cases, the level of innovation was very high, but it was coming from individual entrepreneurs trying new things, not from within large corporations.

The dot-com boom of the late 1990s was a quintessential environment of chaos, competition and creativity. Most of the dot-com companies were mayflies, lasting less than a decade.

Even when a company had apparently become dominant in a sector that was to be important, like Ask Jeeves, Webvan and Friendster, their dominance dissipated when new competition came along.

Many medium-sized fortunes were made, but the entrepreneurs, even super-wealthy ones like Steve Case of AOL, did not become leaders of major businesses. Instead, they sold out and lost much of their importance by doing so. There were no 1990s equivalents of Eric Schmidt of Google, Mark Zuckerberg of Facebook or Tim Cook of Apple.

Today’s tech sector has become a slow-moving behemoth dominated by large companies, with a symbiotic link through lobbyists to the government.

Enter crypto-currencies

However, there is one sector where the buzz, chaos and creativity of early textiles, early autos and early dot-coms is rampant, that of crypto-currencies.

Crypto-currencies are disruptive, as were those earlier innovations, but in this case they are disrupting the lethargic world of government-mandated fiat currencies.

Ned Ludd was displaced by the textile mills, the buggy-whip companies were bankrupted by the early automobile industry and the fax machine manufacturers were put out of business by the dot-coms.

Today, the world’s central banks are under threat as never before. They have to contend with new stores of value that are uncontrolled by governments. As in other embryonic markets, the environment is chaotic, the systems do not work properly, there are a myriad of tiny competitors.

However, also as in other embryonic markets, the speed of innovation is blistering and ferocious competition is bringing massive technological gains.

A future full of possibilities

It is not clear where the future of crypto-currencies lies, just as it was not clear in 1995 which dot-com projects would succeed, in 1900 what the automobile could do, or in 1810 what steam power could do for the textile industry (let alone elsewhere).

Yet, the most important thing is the atmosphere in the sector. Huge amounts of money are being made, there are no dominant players and all kinds of different ideas are being tried.

Just as the handloom weaving business was overwhelmed by the textile mills, so some sectors of business, probably including the centralized Internet and very possibly including the world’s monetary system, will be overwhelmed by the crypto-currency revolution.

It is an awe-inspiring prospect, which will be most awe-inspiring if cryptos cause us to re-invent money itself.

Paul Singer, of the hedge fund Elliott Management, told his clients that crypto-currencies would be seen as one of the most brilliant scams in history. As a hedge fund manager, Singer will doubtless have seen many scams.

Yes, of course there is fraud in the crypto-currency sector, but that does not make the entire sector fraudulent. However, plenty of fraud exists in much better-established sectors, too.

Banning crypto-currencies?

One final danger in crypto-currencies, increased by attitudes such as Singer’s as well as the very real frauds that occur in the space, is that governments, probably acting globally through the G20, will seek to ban them.

Remember that this has been attempted before. In May 1820, the well-respected Whig leader 4th Earl Stanhope (1781-1855) proposed in the House of Lords a bill banning the use of machinery in manufacturing, on the grounds that it was throwing people out of work.

For crypto-currencies, the forces seeking a ban are much stronger, and the forces resisting one are much weaker than the economically sophisticated and determined Tory government of Lord Liverpool.

Before you support the banning of cryptos, just think for a moment of where we would be today if Stanhope had succeeded!

Editor’s Note: This article was originally published in the author’s “True Blue Will Never Stain” blog.

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About Martin Hutchinson

Martin Hutchinson is the co-author of Alchemists of Loss: How modern finance and government intervention crashed the financial system (Wiley, 2010) and a Contributing Editor at The Globalist. [New York, United States]

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