How Bitcoin Will Reshape Nations
Large nations need trust proxies, but the current proxies are flawed.
“We can only know what we can truly imagine. Finally what we see comes from ourselves.”
― Marge Piercy, Woman on the Edge of Time
Imagine that you know of somebody who needs a loan for a car. Their car broke down and they can’t afford to replace it. If they don’t get another car, they’ll lose their job. You have the money and are in a comfortable position to make the loan. Walk through the following list of people and ask yourself: If this was the person in need, would I lend them the money?
An immediate family member (brother, sister, parent)
An extended family member (cousin, aunt, uncle)
A close friend
A coworker you work with every day
An associate you see occasionally but are friendly with (e.g. a church member)
A neighbor you’ve talked to a few times
A person you recognize that works at a grocery store you frequent
Someone you’ve never met who lives in a different city within your state or province
A person you’ve never met who lives in a different state or province
A person you’ve never met who lives in another country
It’s very likely that the further down the list you got, the more the answer was “no”. That’s sensible, of course. Once you get outside the group you have a close relationship with, your history with that person is limited or non-existent and you have no reason to trust they will repay you. Especially if they live somewhere far away, enforcing any agreement you might make would be difficult or impossible. You’re not obligated to help them and however unfortunate their current circumstances may be, they’re not your responsibility.
It’s estimated that human beings can create and maintain a maximum of around 150 relationships. This number is known as Dunbar’s Number. I’ve written about it before in the context of how Bitcoin enforces the Golden Rule. Our brain has evolved (or was created, if you prefer) for much smaller social groups than we live in now. Pre-civilization, humans lived in tribes of a few dozen to a hundred people at most. That was around 12,000 years ago, which sounds like a long time but in evolutionary terms isn’t long at all.
Just because we live in massive civilizations now doesn’t mean our brains have caught up to that growth – they haven’t. Internally we’re still built for tribes. For most people, family, friends, associates, and neighbors gets us to the limit of Dunbar’s Number. Within that group there is some mutual inherent trust. Outside there is none. As human beings we’re cooperative by nature, so you don’t automatically distrust everyone in the sense that you think they’re up to no good – you just wouldn’t give them a loan.
In a tribal setting of a few dozen people, cooperation and support were necessary for survival. Any breach of the trust within the group was likely to hurt you as much as it hurt the person you acted against. It might hurt you even more once the breach was discovered, which was likely given the small pool of potential perpetrators. The personal relationship coupled with the need to survive would usually be enough to prevent the treachery.
Today, however, with cities and countries of millions of people, we’ve had to come up with proxies for the trust born out of a close relationship. These proxies aren’t perfect, though. For instance, if you want to get a loan for a car, an institution can do a credit check to see whether you’ve got an established record of paying off your debt. The problem with credit scores is they disfavor the most responsible people. If you never needed a loan because you were responsible enough to save and pay for everything in cash, you’ll have a low credit score and may not get the loan when you finally need one, at least not with favorable terms.
We’ve done the same kind of offloading of trust in the way governments are structured. In a tribe you might have one leader or a group of elders that were responsible for decision-making. Because those individuals also had to live with the consequences of the decisions, they were less likely to purposefully make bad choices that would hurt them, too. If they made a decision that favored themselves over the tribe, they risk losing the trust of the group, potentially putting themselves in physical danger if the tribe rebels.
The thinking behind representative democracies is that we vote for people who live in our city or region to go represent us before the larger government or governments. The belief was that people who live nearby are incentivized to look out for the interest of those they live around and interact with when they come home. While this might be true for smaller towns, in very large cities the number of locals a representative actually interacts with is minimal, especially if they are of a far higher economic rank – and they usually are.
In that case, whose interests will they feel more pressure to look out for? Other upper class, wealthier individuals. You can’t blame them for that. If your family or close friends wanted you to make one decision but neighbors you never talk to or others in the community you never see want you to make a different one, which choice are you more likely to make? As long as we have vast civilizations, we need these trust proxies, we just need them to be better.
Fix the Money, Fix the World
The number one cause of corruption in every facet of human society is unsound money. People are inherently selfish, particularly outside their Dunbar circle. Without a relationship connecting you to those outside individuals, we see them as part of a different “tribe” than our own. We will put ourselves and our own interests in front of theirs, rationalizing whatever decision we make as being necessary for our own good or the good of those we care about.
That’s fine if the system we’re all working within is fair, but it isn’t. Fiat money has corrupted the system to favor the people closest to the money printer (known as the Cantillon Effect). Everyone else gets robbed by rising prices caused by inflation. When the money supply is in the hands of the government, the people who fund political campaigns are owed favors by the elected. These favors put them closer to the money supply, ensuring that laws are passed, government contracts assigned, and tax loopholes created that favor the funders. All these favors are paid for by taking the money out of the average citizens’ pocket through inflation. Print more money, make sure it gets handed out to your supporters and keep yourself in the good graces of wealthy industry players. When you eventually make the leap out of politics a golden parachute floats you gently down into a lucrative position within the industry you enriched.
Sound money solves these problems. It can’t be printed out of thin air and must be backed by work, whether that’s the work it takes to extract a hard asset (like gold) or the work it takes to generate electricity to mine (like Bitcoin). Since money can’t be printed and handed off to political cronies, robbing the citizenry through inflation, the incentive structure for political funders changes dramatically. While not putting an end to corruption since laws can still be passed that favor the funders, it limits how much those politicians can do in return for the favors and removes their ability to steal from the people to do it.
This, in turn, also changes the incentive structure for the politicians. With less incentive to pour billions into political campaigns due to a lower return on their “investment”, funding from industry decreases and the golden parachutes politicians are promised become more limited and less lucrative. Politicians would have to rely more on campaign donations from individuals and would have to do a better job working for the people in order to be reelected. No more relying on massive funds paying for campaign propaganda from industry players looking to cash in on the money printer.
Incentives change for the citizenry also. With the money printer gone, the incentive to vote for politicians promising “free money” in the way of social benefits go away because they can’t just create those funds out of thin air. All government funded programs must have their cost justified, which means much smaller government and more personal responsibility for the individual.
The economic hamster wheel average citizens are on also disappears in the presence of sound money. Today, due to the inflation caused by government robbing people through money printing, your savings lose value year after year. This has forced people to work longer and harder just to keep their head above water, since wages have not kept pace with inflation since the 1970s when the US dollar came off the gold standard.
Without inflation, the natural deflationary effects of technology will bring prices down, as it should have been doing all this time. The supply chain for coffee beans is 80 times more efficient than it was in 1980, and yet your average cup of black coffee costs four to five times more than it did back then. Inflation has risen faster than technological improvement has been able to offset for most industries.
Prices coming down means the money people save is worth more each year rather than less. Risky investments are no longer required to offset inflation, so workers can just live beneath their means, save their extra money, and know that by the time they’re ready to retire their savings will be worth far more and they will be comfortable. The financial anxiety of being constantly squeezed disappears, giving people better quality of life.
Decentralized Money
If this all sounds wonderful, it is, but there’s still another problem to deal with. Prior to the 20th century, money was almost always sound money based on a hard asset (usually gold or silver). Why did that change to the fiat currency most countries use today? It changed because governments had the ability to change the laws and thereby change the money, and it was in their own interests to do so. With unsound fiat money that could be printed out of thin air, governments no longer had to ask citizens to pay for their wars and fund their pet projects. Of course, citizens were still paying for them every time the money printer generated more fiat, it just wasn’t necessary to get permission through votes for raising taxes to pay for them. Instead, the money could be stolen from the citizenry through the inflation caused by money printing.
The perpetual warfare of the 20th and 21st centuries is evidence of this. When was the last time you scanned the news and there wasn’t an armed conflict funded by a world power going on somewhere?
The solution to this is removing control of the money from the hands of the government. Without that control, the incentive to change the money evaporates because it’s impossible. That reduces wars only to those that can be justified to the citizenry through tax increases they vote to allow. “Pork projects” also disappear, since those, too, will have to be justified before the people and voted on.
Bitcoin takes the money out of the governments’ hands through decentralization. People who run their own “bank” (called a node, which is just software that runs on a typical computer or even your phone), and people who mine Bitcoin using powerful computers, all must agree on any change made to the Bitcoin monetary policy. Unless it’s in everyone’s best interest to accept the change, it doesn’t go through because any transactions made by the modified software will be rejected by all the nodes. Only changes that benefit everyone make it into the network. This ensures that Bitcoin can only change for the better.
Don’t Trust, Verify
These properties of Bitcoin make it a pristine trust proxy for money, and sound, trustable money is the solution to myriad socioeconomic problems in the world today. Bitcoin is sound, secure, and decentralized, and anyone running a node can verify every transaction that’s ever been made to see for themselves that nobody is cheating. It’s the ultimate credit score system for money, only it doesn’t favor the debt-driven economy of current credit scoring that only benefits banks.
If we only lived in small tribal communities of 150 people or less, trust proxies would be unnecessary. Our personal relationships with, and daily interaction and reliance on every other member of the community would be all the trust we needed. Because that’s no longer our world, we need to be able to trust by proxy – and that means removing the need to trust at all. Bitcoin removes the need to trust by giving every Bitcoin holder the ability to verify that the money is sound and by removing the ability to print more out of thin air for the benefit of the few at the expense of the many.
Will the world be a utopia once Bitcoin is the world currency? No, it won’t. People will always try and game the system, and our current nation structure and the sheer scale of our civilizations makes it possible to hide those efforts in the vastness of our populations. But it can greatly mitigate the problems, and it will prevent stealing from the citizenry through inflation.
Prior to fiat money, people’s wages rose with their productivity, personal wealth was growing, and the workweek was getting shorter – especially after the Industrial Revolution. Those trends will return, people’s lives will improve, and perhaps in time we’ll discover solutions to the other national problems. I am optimistic and confident we will, but first we have to fix the money, and Bitcoin fixes that.