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This year has seen the proliferation of proposed applications and startups using blockchain technology. Predicting which will succeed and which will fail with 100 percent accuracy is, of course, impossible. But the likeliest candidates for success are the cases where the benefits of not relying on a central intermediary most exceed the extra costs of using a blockchain to process transactions. Will our health records and deeds to our homes end up on blockchains? The answer will depend greatly on these costs and benefits.
The benefits of not relying on a central intermediary are often larger than we first assume. Let’s look at the most well-known blockchain application — payment processing — and one of the most important functions of today’s intermediaries, namely keeping our data secure.
We use central payment-processing systems such as credit cards, PayPal, or bank transfers all the time, almost without thinking about it. As we do so, we implicitly trust these intermediaries to protect our personal and financial data from being stolen and to not misuse the data themselves. Data hacks of epic proportions do happen, but let’s assume that the probability of something bad happening when we use one of these intermediaries is very low. Does that mean the cost of relying on these intermediaries to secure our data is low? Not necessarily.
We place our trust in these intermediaries because they have made costly investments over time to engender that trust. Firms that centrally process payments spend millions per year on hardware, software, employees, and research and development to communicate to customers that their data is safe in each transaction. And all the major credit cards require their e-commerce merchants to meet the Payment Card Industry Data Security Standard, first rolled out in 2004. Merchant compliance, which includes network security, monitoring, and several other standards, is expensive. For the smallest e-commerce merchants (defined as under 20,000 transactions per year) accepting Visa, MasterCard, or Discover, becoming compliant costs an estimated $75,000 to $90,000, and maintaining compliance costs an additional estimated $35,000 annually. For the largest merchants (processing over 6 million transactions per year), the costs are estimated to be 10 times as large.
Intermediaries pass security costs along to consumers in the form of credit card or banking fees. But if blockchain technology’s advocates are correct and if a network has enough independent computing “nodes,” we can avoid these costs while providing perhaps even greater security.
Data security is, of course, just one problem with relying on centralized intermediaries. Financial intermediaries can grow large enough to dictate fees to consumers or influence government policy, and many people have privacy and other concerns. And intermediaries often cost more than we initially think.
But these problems are just one side of the story. Central intermediaries generally process data at a lower cost per transaction than blockchains (Jeffrey Tucker, our newest addition to the AIER family, recently described the latest news in the battle over scaling Bitcoin’s ability to process transactions).
The market will ultimately determine whether the benefits of decentralization outweigh the costs in payment-processing and other industries, but intermediaries often cost more than we initially think.
Max Gulker
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Why Is the System Rigged?
It’s crazy season, that special time on the American calendar when aspiring candidates for the nation’s highest office try to outdo each other in an effort to attract more voters to their platforms. This time around, background support is provided by a virtual anvil chorus of anti-capitalism clatter. Senator Elizabeth Warren, for example, frequently unleashes criticism of American capitalism by asserting that the “system is rigged,” a complaint that seems to resonate with meaningful populist appeal. It’s an old refrain that has echoed across the years from Karl Marx onward.
Nobel Laureate Robert J. Shiller explains why this may be the case in his new book, “Narrative Economics.” As Shiller points out, when a story is repeated enough, the viral message may be accepted as conventional wisdom, more like an article of belief than a matter of reason.
I’ll also emphasize that for a message to prevail, it helps if its content rests on a preexisting and inherently moral foundation that reflects our tribal instincts as an evolved human species. And what works for a small tribe doesn’t necessarily work so well for a huge industrialized nation.
Consider this: Some may inquire, “Do you believe in capitalism?” almost as if the position one takes is a matter of religion. When answering, we reflect on our tribal preferences, and cooperating and sharing with our family and neighbors is often a key to success. Thus, many people will almost instinctively answer “no,” or at least “yes, but …” followed by some serious caveats and exceptions.
Yes, the beneficial-but-invisible hand of commerce driven by self-interest has never been an instinctually lovable idea. Gains from trade, while well-documented since the days of Adam Smith, can be more elusive than we may first realize. Given the widespread negative views on the subject, politicians’ calls for greater accountability and government intervention may not be welcomed by all, but they’re understandable.
Shiller adds another dimension to his narrative economics story by using data from Google’s Ngram Viewer. The viewer produces charts based on the frequency of particular words and phrases in Google Books, which include some 8 million downloaded volumes in various languages.
Consider an Ngram we might apply to Senator Warren’s comments. The nearby figure contains one for “system is rigged” that shows the frequency of the phrase’s occurrence from 1940 through 2008, the final year in the database. I have smoothed the data by using a three-year running average:
The data show four viral periods: 1940-1950, 1960-1985, 1990-1998, and 2000-2008. The first period encompasses World War II, a time of draft, rationing, price controls, defense contracting, and related cronyism that may in some cases have been highly profitable for hand-picked firms.
The second viral period is much longer and encompasses a period including the Vietnam War and related draft, Watergate and significant social unrest.
The third period includes the first Iraq war, and the fourth contains anti-capitalism protests and budding expressions of concern about income inequality as a version of the economy closer to what we know today took shape.
The Ngram suggests that in seeking to communicate to her base, Senator Warren artfully chose a phrase that had gone viral before—which is to suggest that there may be an embedded tribal norm that reacts during periods when a relatively small number of people are able to build large fortunes or avoid burdens, such as the draft, as a result of government actions and favors.
Oddly enough, Senator Warren and other capitalism critics seldom ask how the system got rigged and what might be done to undo the rigging. But of course, the rigging is done in Washington, sometimes when special interest groups—including corporations—lobby congress for favorable treatment.
And how might that be undone? By trimming away uneven regulation and adopting policies that expose all business firms to the refreshing winds of competition. Put another way, by forcing capitalists to act like capitalists and not lobbyists.
Bruce Yandle
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business and Behavioral Science.
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Holiday Spending Off to a Modest Start
Retail sales and food-services spending increased 0.2 percent in November following a 0.4 percent gain in October. Excluding gasoline station sales, retail sales and food services were up 0.1 percent in November after a gain of 0.7 percent in October. Over the past year, total retail sales and food services were up 3.3 percent through November, while retail sales and food services excluding gas have increased 3.6 percent (see chart).
The November performance was mixed, with gains in 7 retail-spending categories, two posting declines and one essentially unchanged. Gains were led by a 0.8 percent increase for nonstore retailers (primarily online shopping), and a 0.7 percent rise for electronics and appliance stores – two traditional holiday spending categories. Gasoline stations also posted a 0.7 percent gain which is a surprise since average retail gasoline prices (which often drive monthly changes in retail sales spending) were actually down 2.0 percent. Also posting gains for the month were motor vehicles and parts (autos), up 0.5 percent, food and beverage stores, up 0.3 percent, home furnishings stores and general merchandise stores, each up 0.1 percent.
On the negative side, health and personal care stores saw sales fall 1.1 percent, clothing and accessories stores had a 0.6 percent fall, sporting-goods, hobby, musical-instruments, and book stores posted a 0.5 percent decline, miscellaneous retailers had a 0.4 percent setback, and food services (restaurants) saw a 0.3 percent fall. Building materials, and gardening supply store sales were essentially unchanged for the month.
The mediocre retail sales data for November suggest that the early predictions of a booming holiday spending season may have been premature. Certainly, consumer fundamentals are generally solid with a low unemployment rate, decent income growth, and positive consumer sentiment. Government data are subject to revisions and there is plenty of time for consumers to spend, but today’s data suggest slow growth remains the most likely path.
Robert Hughes
