The Great Inversion
How innovation can flip the logic of concentrated benefits, diffuse costs
by Carl Oberg
The political logic of “concentrated benefits and diffuse costs” has been with us since day one of democracy. But it was only recently explained effectively by great economists like the Nobel Prize-winning James Buchanan and Mancur Olson.
It works like this: A special interest group such as the sugar lobby wants money in the form of subsidies, tax breaks, scientific study funding, or anything else of value to them. Let’s say the package they want is worth $100 million. The benefit is concentrated with that company or industry doing the lobbying at $100 million.
How much will this cost the American taxpayer? $100 million is the partially right answer. Of course, as individuals, we react to the impact of this corruption not as a $100 million tax, but rather as a 32-cent tax ($100 million divided by 310 million Americans). The costs are diffused over every taxpayer, lessening its impact and making it more politically palatable to any individual voter.
Are you willing to protest for $0.32? Will you hit the barricades for $0.32? Will you use your precious income-earning time to get back that $0.32? They’ve already won, because almost no one is willing to lose time or sleep over this—if they even know any individual instance is occurring.
And so the “logic” of Public Choice problems is for spending to increase—seemingly forever—on pet projects and special interests until a crisis is reached and the system has to be reset.
But something interesting happens when you start talking about diffuse systems like the Internet and bitcoin—something that hasn’t yet been fully examined. This Public-Choice logic gets turned on its head. The systems not only survive, but thrive. Let’s look at bitcoin as an example.
The government sees bitcoin as a threat to its monopoly on money and the power to create federal reserve notes whenever it wants. The federal government jealously guards this power because it allows the government to pay for anything it desires while passing on the true costs of the money printing to the citizenry through inflation. Increased spending (concentrated benefits) and diffuse costs (inflation, which lowers the value of savings) are hallmarks of the current federal monopoly on money.
But as the feds fight against bitcoin and other cryptocurrencies, they will find the tables turned: The beneficiaries of these diffuse systems are legion and spread far and wide. But the costs of fighting technological advancement and increased monetary freedom are laid squarely at the feet of the government. Investigations, new laws, prosecutions, and new snooping technologies all cost significant time and resources. And the government has just begun to go after cryptocurrencies.
The closure of the first Silk Road site and the arrest of BitInstant CEO Charlie Shrem were just the beginning. Meanwhile, the benefits of a robust, changing, and growing cryptocurrency community and ecosystem are constantly spreading to more and more people. The government can stop centralized platforms like Silk Road (and others), but more will pop up, considering the relatively low setup costs and the value that extends throughout a large user community.
The Internet as a whole functions in the same way. Attempts to constrain it, like the Stop Online Piracy Act, incur huge costs for the lawmakers who attempt to get them passed. Meanwhile, technology has developed to the point where even if the government were able to constrain or suppress the Internet, other networks outside of the government's control could easily pop up. The darknet already exists, is being actively used by individuals interested in privacy, and could be expanded to address outside infringement of the regular Web.
This is a development that turns the very logic of political action on its head.
Thanks to technology and the distributed nature of networks, we are no longer beholden to the political process, majoritarian rule, and the so-called “fair” tax and fiat money regime. The more of the economy we move to the Internet, the safer we will be and the more distributed power becomes.
This article first appeared at FEE.
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Important points and well-argued. Thanks.
I wouldn't necessarily presume so much, to be true, though.
For instance, is government necessarily able "to create federal reserve notes whenever it wants?" Can the government "pay for anything it desires?"
Perhaps we can find some hope in the comment "Increased spending (concentrated benefits) and diffuse costs (inflation, which lowers the value of savings) are hallmarks of the CURRENT federal monopoly on money."
In that perhaps we can end the CURRENT monopoly on money being federal reserve notes, since the U.S. Constitution only allows Congress to coin as tender gold and silver coin for the Union.
I have a 10-newsletter issue look (starting in March, 2022) at the devious conversion from gold and silver coin to paper currency, where I argue that paper currency was only made a legal tender in and for the District of Columbia, which is NOT a "State" that is expressly prohibited from emitting bills of credit or making things a tender beyond gold and silver coin.
Also, is a separate (11th [January, 2022]) issue (covered before I began the look at money), I show FDR's 1933 gold confiscation to actually only affecting "persons" defined as member banks of the federal reserve system (who had a contractual legal obligation to back their bank notes and customer deposits with gold). No one else was a "person" who had to deliver their gold to a bank--in other words, E.O. 6102 was but a "margin call" on over-extended bank shareholders, who needed to bring their gold to cover their over-leveraged banks.
Here's the link to the issue first covering the 1871 Legal Tender Cases:
https://matterickson.substack.com/p/the-legal-tender-cases-supreme-court