Three Topics for Young Political Economists

Young people often ask me, “What should I study?” For years I gave some anodyne answer, a version of “Well, what are you interested in?”

And that is still my first answer. But if the questioner persists, it makes sense to give an answer, if there is one. Increasingly, over the past five years I have come to see three broad categories of research and study activity that are likely to be important, and even paradigmatic. We live in an age of wonders, and the outlines of a very different future are starting to come into focus. It’s as if it is 1910, and some visionaries are starting to explore the implications of automobiles, and the development of commercial aviation. Early cars were not very good, and early attempts to fly passengers and cargo were both dangerous and expensive. But the collective interest these clusters of activities generated solved the problems of commercialization within two decades. 

The skeptics were correct, until they were wrong. The “proof of concept” for commercial aviation was carrying US mail, since crashes killed only the pilot, most mail could be replaced, but speed of delivery was valuable enough that people would pay for it. I hope some readers of this post will come up with “proof of concept” applications for the ideas that are 21^st century versions of cars and planes.

Platforms and Commodifying Excess Capacity

In two recent books, Tomorrow 3.0 and The Sharing Economy, I have tried to lay out the foundations for my answer. If you are interested in those foundations, you should look at one of those books (the PDF version of The Sharing Economy is available as a free download from IEA!). In this post I am simply going to describe what I think is a topic that will reward study, and may earn a young person a fortune if you start now. 

We stand on the threshold of such change. I would claim that the growth of platforms that allow peer-to-peer cooperation, and foster the low-cost commodification of excess capacity, are likely to change our relations to work, to ownership, and to each other.

The three topics are as follows, in no particular order:

• Distributed generation, and storage, of energy (DERs)
• Decentralized autonomous organizations (DAOs) and generating dynamic consensus protocols embodying predetermined agreements
• Reputation portability and assurance scores, using pseudonymous identities

1. Distributed energy resources, or DERs, have reached a critical mass in terms of their impact, and the population available to be served by new software. The problem with DERs (think individual residences or businesses with rooftop solar arrays, as an example) is that the entity literally switches, using switching software and hardware, between being a consumer and a producer, sometimes in relatively short time periods. At night, I might buy power from the grid; during the day, I sell the difference between what my solar panels produce and what I consume. The problem is that what I actually need is to store that energy, not sell it. A big reason this is important is that transmission of electricity over more than a few dozen feet wastes energy through impedance of the power lines.

Batteries are expensive, obtaining the materials to make batteries strain the trade system, and disposing of the toxic waste that batteries become harms the environment. But storage doesn’t require batteries, though it will require a rethinking of what it means to design a home. If my home in Arizona (say) contained a sterile sealed system of oil that could be pumped up into a roof storage unit during the day, my solar panels could provide the energy for pumping at no cost. The potential energy of that large mass fifteen feet in the air could be released to run a turbine all night, generating electricity. As a bonus, the oil would be cooled by running back underground during the night, and then the cool oil would be pumped up during the day, providing substantial insulation on the roof against the sun’s heat on the home. 

If every home had software for managing the local DER and connecting to the neighborhood, buying and selling could be substantially decentralized. Peak load problems would be substantially mitigated, because there is a lot of redundancy in a system with substantial storage. In the present system, generation has to ramp up in real time to match consumption, since storage is not possible at any scale. DERs scale by being decentralized, but the aggregate consequences will transform the way we think about energy.

2. Decentralized autonomous organizations, or DAOs, are a combination of cybernetic artificial intelligence and “smart contracts” using blockchain (or other distributed assurance) technology. It is amusing, and a little scary, to watch computer scientists try to reinvent 60 years of Public Choice wisdom on contracts, constitutions, and the generation of consensus protocols. 

There is an arbitrage opportunity for anyone who has ever studied constitutional political economy and problems of balancing decision costs and exclusion costs. James Buchanan’s “Theory of Clubs” was made for DAOs and for the people who are trying to solve the problem of writing bylaws that can dynamically update and make new decisions. The technology is far from being usable at this point (though there are interesting examples), but within a decade many people with training in Public Choice and political economy will be needed. Just make sure you learn how to code, kids. 

3. Reputation portability and assurance scores are already happening. As I argued in Tomorrow 3.0, the key to solving the problem of commodifying excess capacity is “trust.” Brand names and reputations are depreciable capital assets, and while not perfect mechanisms for assurance in the face of asymmetric information, a portfolio of reviews is a big help. If I want to rent an apartment on AirBnB, it would help me get started to be able to port over my reviews as a trustworthy partner from Uber, or from Ebay. Similarly, the set of connections and preference orders embedded in my Spotify “tastes” could be ported over to a different music app, if I owned the data. 

Owning my own data, and control over my reputation or social credit score, would improve the performance of the system and make individuals more willing to invest in reputations. But such reputations would also have to shield my “real” identity, revealing a unique but pseudonymous entity only at the level that provides assurance. Counterparties need to know that I can be trusted, and a pseudonymous system of identity stored in a distributed ledger and updated by a constituted system of consensus generation would solve the problem.

There it is. Those are the three great problems that I can see. Readers, and other writers can no doubt identify others. The reason I wanted to offer at least a summary of interesting problems is that these problems are going to be solved in our lifetimes, maybe in the next decade. And then the world will be different, in ways that I cannot predict. 

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