VANCOUVER, 16 September 2020 — In this first of two posts, we share why we believe the next decades will bring an unprecedented wave of entrepreneurialism. In a second part to follow in our October issue, we discuss the urgency for a new organizational form and the importance of governance.
The prevailing paradigm
American physicist, historian and philosopher of science Thomas Kuhn introduced a helpful analysis of “paradigms” as competing — and often irreconcilable — accounts of reality in his influential 1962 work The Structure of Scientific Revolutions.
According to Kuhn, a paradigm is an account of reality that goes beyond scientific truth. Rather, it is defined by the consensus of a community. As a result, competing paradigms clash until a consensus shifts and a new paradigm replaces the old.
The prevalent paradigm of capitalism has its roots in what is commonly referred to as the First Industrial Revolution: a power law phase of economic growth resulting from scientific breakthroughs in the communications/transport/energy (“C/E/T”) complex.
The First Industrial Revolution lead to the ubiquity of print to disseminate information, the use of steam as a source of energy, and rail as a new way of transport. It lead to a first wave of unprecedented economic activity.
In the early 20th Century, the introduction of the telephone, the discovery of oil and the invention the internal combustion engine gave rise to a new C/E/T complex that lead to rapid industrialization, predominantly in the West where the capitalist paradigm enjoyed a broader consensus.
This industrialization required capital and capital in turn lead to increasing financialization.
Organizationally, the vertically intergrated conglomerate became the prevalent business model, as it was perceived to allocate capital most efficiently.
This logic lead to an increased concentration of capital in the hands of fewer economic actors.
Even today, in what many see as the sunset days of the fossil fuel era, oil remains the most concentrated industry in the world, followed by telco and electrical power generation.
Technology too, despite its initial promise of democratization and open networks, has reinforced centralization, with a dozen global technology companies controlling how we access and use technology in our daily lives.
Free markets at work? Perhaps: scale may be what’s required to build and monetize the specialized knowledge of an ExxonMobil or a Google, and one can argue that as long as ownership is dissipated via public stock market listings, centralized business models at least have decentralized ownership.
However, recent research indicates ownership too is increasingly concentrated. Work by i.a. José Azar at Princeton/Navarra, started to dissect the concentration of voting power as a result of cross-shareholdings in U.S. public companies by large institutional shareholders such as Fidelity and BlackRock.
The results are disconcerting: a handful of institutional asset management firms controls 90% of all listed stock in the United States. Maybe BlackRock rather than Goldman Sachs is the “octopus wrapped around the face of humanity”, as Rolling Stone famously put it.
Or to paraphrase Churchill: arguably, in no other period of history have so few centralized institutions wielded so much economic power over the lives of so many people.
It’s thermodynamics, stupid!
Just as the centralized paradigm seems to have reached its apex, and society is perceived ever more unequal and polarized, a new Communications/Energy/Transport complex is emerging which may herald the end of centralization.
The contours of this Third Industrial Revolution are defined by the use of the internet as the backbone for global communications and decentralized ledgers, an increasing reliance on renewable energy, and the promise by the Internet of Things to optimize transport and logistics.
This Third Revolution is perhaps best understood along a continuum of efficiency gains in how we harness thermodynamic energy.
Thermodynamic energy, under its first law, is constant: the total energy in the universe remains the same, it just appears in different forms. Under its second law, thermodynamic change is entropic and irreversible (and hence also responsible for he “arrow” or one-way direction of time).
For instance, unless all energy used to manufacture a handset could be reused, whetever energy embedded in the handset is at the expense of the energy that is irretrievable lost in the process of making it.
This “entropic bill” is like a bank account we keep debiting without ever topping up funds. The account is ultimately going to be depleted.
In this analysis, economic efficiency is the evolution towards optimizing the amount of goods and services we get out of a unit of energy.
In manufacturing terms, it means reducing the marginal cost of producing an extra unit of a product.
Under extreme efficiency, this means producing at zero marginal cost. In such end state, goods and services will be free. As a consequence, pricing power is eroded and profits, the lifeblood of the capitalist system, dry up.
Giants with feet of clay
Herein lies the paradox of capitalism: its perfection unforbiddingly accelerates its passing, not for the reasons Marx thought capitalism would “eat its children” but because of the inescapable logic of the laws of nature.
Firms firmly cemented at the top of the centralized pyramid, whose entire business model depends on the rents they extract from selling at a margin above cost, will eventually see their pricing power evaporate when marginal costs go down to zero.
They will either find new business models that do not rely on oligopolistic pricing power or they will be replaced by new players who have solved the paradox of how to prosper without profits.
The new economic equation: How to prosper without profits
Solving this new equation requires the type of seismic innovation that acted as the catalyst for past paradigm shifts.
We believe that the ubiquity of decentralized computing power from open, uncensored networks such as Ethereum and other blockchain protocols will be the cause of secular changes in how value is created and parceled around in the new economy.
This ubiquitous computing is set to provide the rails for a global network economy with distributed economic participants.
It holds the promise of allowing billions of people to become individually empowered by participating in non-intermediated, peer-to-peer networks that are underwritten by social capital, rather than financial profit.
Meet capitalism’s rebel child
Some call this the “networked economy” or the “collaborative commons”, some the “sharing” or “networked economy.”
Irrespective of its name, the new paradigm is manifestly a rebel child of capitalism:
- It values access more than ownership;
- “Exchange value” in markets is gradually being replaced by “shareable value” from token economics;
- The collaborative commons emerge as the organizing principle of economic life.
Because of the cardinal role of participation, we propose the name Participalismo! (The Spanish Participalismo — compared to the English Participalism — also makes it sound more like a movement with the capacity to mobilize people, have them spray slogans on walls and even die for…).
Remember the Future
We predict Participalismo will lead to a short-term frightful and longer-term hopeful outcome:
1. The end of the centralized paradigm
Short term, the fiat system, with its Ponzi scheme-like fractional reserve banking, is likely to collapse under its own weight.
Increasingly, debt is used to underwrite the capital requirements of the centralized economic paradigm. Hyperfinancialization in turn created trillions of dollars without real asset backing or productivity growth.
When profits go to zero, there is no surplus money to pay off creditors and the debt equation no longer solves. Central bank money printing as a medicine only adds to the total amount of debt and will ultimately kill the patient it was administered to.
What follows are deep throughs in the economic cycle accompanied by radical readjustments.
2. Towards horizontalism
History shows that such periods of adjustment often carry the risk of systemic seizures.
However, what may emerge longer-term is a more horizontal economy in which value is built without leverage.
The infrastructure for this new economy is being laid right before our eyes: anti-inflationary crypto currencies, blockchains and their committed smart contract code, uncensored banking in defiance of traditional finance, and (if we may!) instant onchain legal wrappers such as Otonomos’ otoco.io company assembler as the new legal legal blocks for a decentralized world.
This infrastructure will in turn unlock the labor of millions of not billions more economic participants.
This is where the true uprising begins: when labor rather than capital emancipates itself from the strictures and happenstance of location.
When millions if not billions of newly-liberated atoms suddenly have the possibility to freely bind themselves to the projects they choose to associate with, in some sort of perpetual dance of economic attraction and repulsion, as in nature itself.
It will unlock human ingenuity on a level never seen before…
At Otonomos, our mission is to build freedom tools for the widest possible group of free atoms out there to associate, collaborate and exchange value with legal certainty.
We’re tinkering with various wrappers and in our October issue, we’ll examine some real-world setups and try to answer the question: “If God would conceive the perfect organization, how would it look like?” 🙂