Darcy W. E. Allen

Blockchains and the Boundaries of Self-Organized Economies: Predictions for the Future of Banking

This chapter uses economic theory to explore the implications of the blockchain technology on the future of banking. We apply an economic analysis of blockchains based on both new institutional economics and public choice economics. Our main focus is on the economics of why banks exist as organizations (rather than a world in which all financial transactions occurring in markets), and how banks are then impacted by technological change that affects transaction costs. Our core argument is that blockchains are more than just a new technology to be applied by banks, but rather compete with banks as organizations, enabling banking transactions to shift out of centralized hierarchical organizations and back into decentralized markets. Blockchains are a new institutional technology — because of how they affect transaction costs in financial markets — that will fundamentally re-order the governance of the production of banking services. We then explore this implication through broader political economy lens in which banking moves out of organizations and deeper into markets. We examine this as a form of institutional economic evolution in which the boundary of catallaxy — i.e., a self-organized economy — is enlarged, at the margin of the banking sector. Such institutional competition enables evolutionary discovery in the institutions of banking.

The Innovation Commons – Why it Exists, What it Does, Who it Benefits, and How

We propose a new type of commons – an ‘innovation commons’ – that is an emergent institutional solution to ‘the innovation problem’ (defined as a collective action problem, not a market failure problem). In an innovation commons entrepreneurs pool innovation resources (i.e. inputs into the innovation process) under defined access and governance rules. Innovation requires entrepreneurship, which requires information about market opportunities. This information has interesting characteristics that lend itself to becoming a common pool resource: it is dispersed about the economy; difficult to value in its parts; and largely produced through experiment and experience. Moreover, this information resource fits poorly in institutions of markets or states because uncertainty renders them comparatively costly. We show how the innovation commons solves this problem as a temporary institution that forms around a particular new idea at the very beginning of an innovation trajectory where uncertainty is highest.

Discovering and Developing the Blockchain Crypto-Economy

Blockchain is an institutional technology to coordinate and govern distributed ledgers of information. This paper examines the economic problem facing blockchain entrepreneurs as they use blockchain for political exit to create new private institutions (i.e. crypto-secession). The analysis draws on the mainline economics of new development economics, and in particular focusing on the economic problem of institutional entrepreneurship. The economic problem for the blockchain entrepreneur is defined as discovering the complementary combinations of blockchains to form a new decentralised frontier society, the cryptoeconomy. This is a higher-order explanation for the current collaboration between blockchain entrepreneurs within hybrid privately governed organisations, such as Bitcoin Centres and hackerspaces (Allen 2017).

Subjective Political Economy

Ideas fit poorly into the economics of political systems. This paper provides a new, highly-adaptable framework for analysing the role of ideas in political change. Starting with Djankov et al’s (2003) institutional possibility frontier, in which institutional choice is depicted as a trade-off between disorder costs and dictatorship costs, we observe that costs are subjective to the political actor that perceives them. Long-run institutional changes can be seen as the result of perceived changes in these costs. The paper then looks at political bargaining between actors with different subjective institutional possibility frontiers, how subjective costs help us understand institutional innovation, and the role of uncertainty and ignorance in creating follower-leader dynamics in political systems. By integrating ideas into the economic analyses of politics we create the foundations of a subjective political economy.

Some Economic Consequences of the GDPR

The EU General Data Protection Regulation (GDPR) is a wide ranging personal data protection regime of greater magnitude than any similar regulation previously in the EU, or elsewhere. In this paper, we outline how the GDPR impacts the value of data held by data collectors before proposing some potential unintended consequences. Given the distortions of the GDPR on data value, we propose that new complex financial products—essentially new data insurance markets—will emerge, potentially leading to further systematic risks. Finally we examine how market-driven solutions to the data property rights problems the GDPR seeks to solve—particularly using blockchain technology as economic infrastructure for data rights—might be less distortionary.

Blockchain: an entangled political economy approach

This paper incorporates blockchain activities into the broader remit of entangled political economy theory, emphasising economic and other social phenomena as the emergent by-product of human interactions. Blockchains are a digital technology combining peer-to-peer network computing and cryptography to create an immutable decentralised public ledger. The blockchain contrasts vintage ledger technologies, either paper-based or maintained by in-house databases, largely reliant upon hierarchical, third-party trust mechanisms for their maintenance and security. Recent contributions to the blockchain studies literature suggest that the blockchain itself poses as an institutional technology that could challenge existing forms of coordination and governance organised on the basis of vintage ledgers. This proposition has significant implications for the relevance of existing entangled relationships in the economic, social and political domains. Blockchain enables non-territorial “crypto-secession” not only reducing the costs associated with maintaining ledgers, but radically revising and de-concentrating data-conditioned networks to fundamentally challenge the economic positions of legacy firms and governments. These insights are further illuminated with reference to finance, property and identity cases. Entangled political economy provides a compelling lens through which we can discern the impact of blockchain technology on some of our most important relationships.

Blockchain Innovation Commons

This paper examines the institutional context of the entrepreneurial discovery of blockchain applications. It draws on institutional and entrepreneurial theory to introduce the economic problem entrepreneurship in the early stages of new technologies, examines the diversity of self-governed hybrid solutions to coordinating entrepreneurial information, and draws policy implications. To perceive a valuable and actionable market opportunity, entrepreneurs must coordinate distributed non-price information under uncertainty with others. One potential class of transaction cost economising solution to this problem is private self-governance of information coordination within hybrids. This paper explores a diverse range of entrepreneurial hybrids coalescing around blockchain technology, with implications for innovation policy. Defining the innovation problem as either choice-theoretic or contract-theoretic changes the remit of innovation policy. Innovation policy and blockchain policy should extend beyond correcting sub-optimal investments or removing barriers to action, to incorporate how polices impact entrepreneurial choices over governance structures to coordinate information.

The Subjective Political Economy of the Innovation Commons

This chapter connects the preceding analysis — on the private collective action governance of proto-entrepreneurial discovery — with the political economy context of innovation policy. How can the efficacy of private governance of entrepreneurial resources be reconciled with the reigning conception of market failure? To answer this question, the institutional possibility frontier (IPF) — a framework depicting comparative institutional choice (Djankov et al., 2003)—is theoretically extended to incorporate the notion of Austrian subjective costs. The result is a subjective innovation institutional possibility frontier (SIIPF). Previous lack of scholarly attention to the private governance of entrepreneurship can be explained as a systematic overweighting of the subjective costs of disorder. This discrepancy has implications for the role of ‘ideas’ and ‘rhetoric’ in the discovery and implementation of points within the SIIPF institutional space — developing a robust and effective institutional mix for innovation policy is itself a discovery process over subjective costs.

Hackerspaces as Entrepreneurial Anarchy

Claims that hackerspace anarchy may be a potentially comparatively efficient form of governance for proto-entrepreneurial information about market opportunities in the early stages of new technologies. An analytic narrative over secondary data of hackerspaces reveals private governance mechanisms including graduated social ostracism, costly signalling to facilitate ordering, collective action processes and nested hierarchies of rules. Agents in hackerspaces eschew, at least temporarily, organising in firms, markets and states, in favour of their own privately developed rule systems. There are two main comparative institutional drivers for why anarchy may be a more efficient solution for the problem of entrepreneurial coordination of distributed information. First, the institutions of firms and states may be comparatively ineffective at dealing with highly uncertain and distributed Hayekian information. And second, collective action processes may through time increase the comparative efficacy of private institutional solutions. The implication of this are that policy attempts to integrate these autonomous independent innovation organisations into the entangled system may either: impurify the spontaneous order processes underpinning hackerspaces and thereby distort the emergent ordering of entrepreneurial information into market opportunities; and decrease the institutional ‘robustness’ of the innovation system writ large.

The Origin of the Entrepreneur and the Role of the Innovation Commons

We introduce the proto-entrepreneur as an economic agent who must first — i.e., before acting entrepreneurially — coordinate non-price information with others in order to reveal exploitable opportunities. Entrepreneurship, therefore, involves dual economic discovery problems, each of which may hold different efficient institutional solutions. Applying transaction cost economics logic to this problem, we reveal what we call an ‘entrepreneurial fundamental transformation’: while the entrepreneurial process begins with proto-entrepreneurs undertaking non-price coordination in polycentric collective action governance structures called innovation commons (Allen & Potts, 2016), it ends with integration in the hierarchical start-up firm. This governance shift, we argue, is the result of falling structural uncertainty — as unknown complementary collaborators become known — and rising idiosyncratic quasi-rents, both of which bring contracting hazards and move the economising structure towards the nascent firm.