By Giovanna Massarotto
Blockchain technology is a relatively new phenomenon that many of its proponents believe can help to decentralize the economy and enable economic freedom. However, what decentralization means is often unclear. Importantly, we have a century of economic studies focused on decentralization, offering valuable lessons to inform today’s digitally driven economy.
In an ideal world, everyone would be free, and each other’s freedom would be respected through rules that express the majority. We live in a digital, data-driven economy where blockchain technology strives to achieve this goal through decentralized peer-to-peer systems governed by a computer protocol rather than a central authority, like a monopoly or the state. Blockchain has the potential to decentralize the data industry, which a few Big Tech corporations, such as Google and Amazon, control by using a peer-to-peer network that stores data in a distributed ledger.
The present discussion about decentralization in technologies seems very similar to the debate I have seen in the political economy since the nineteenth century and examined in my paper, Regulating Tech Titans. Many economic thinkers viewed decentralization as a foundation for economic freedom; the natural extension today is that decentralized technologies are essential to achieving that same goal in a digital economy.
Decentralization guided the neoliberal schools of political economy emerging in Europe from the end of the nineteenth century to contrast an increasingly concentrated economy in a few private or public hands. Austrian economists at that time, most notably Nobel laureate Friedrich Hayek, advocated for a decentralized economy driven by competition and consumer choice while strongly opposing a central planning economy of the state. In other words, markets function more effectively without centralized government control. According to these economists, the consumer directs the market, determining what should be produced, the prices of goods, and the allocation of all factors of production. Ludwig von Mises developed this idea into the concept of consumer sovereignty, and in this framework, competition implies “the opportunity to serve the consumers in a better or cheaper way,” which does not need a state to be enforced. Austrian economists argued that a legal framework was unnecessary for markets to function properly. However, they recognized private property as the cornerstone of a free society and supported a legal system that enforces contracts and penalizes fraudulent practices.
Another neoliberal school promoting competition and a decentralized economy as a premise for a free economy and society emerged in Germany in 1930s to contrast the Nazi totalitarian regime and concentration of economic power in the hands of the state. Ordoliberalism developed as a philosophical concept based on the idea that a legal framework was necessary to ensure competition and a decentralized economy. This legal framework, grounded in rulemaking to ensure economic freedom, became the defining feature that sets ordoliberals apart from Austrian economists. Ordoliberals promoted the adoption of “rules for the market game that make consumer preferences the ultimate controlling force in the process of production.” However, ordoliberal scholars were criticized, particularly regarding the risk of intellectuals regulating the economy—a technocratic government of experts—designing these rules. As a result, their approach was seen as risking the creation of a biased elite rather than a truly democratic, decentralized system.
What makes this important for blockchain? Several scholars argued that blockchain fulfills the Austrian economists’ goal of a decentralized economy by reducing government intervention. However, the ordoliberal tradition might provide more insights for blockchain development. If we consider how a blockchain protocol regulates through a set of rules within its peer-to-peer system, these rules resemble the ordoliberal legal framework in regulating economic activities. The similarities include the risk that whoever writes the rules might not be the expression of the majority but the product of a technocratic elite.
In the context of blockchain, software developers typically write these rules by raising a criticism, which is similar to ordoliberals. The lack of understanding of most people about how these decentralized technologies and protocols work might lead to a rulemaking process that is far from being decentralized or reflecting a democratic system where rulemakers are elected.
Consider Bitcoin, a decentralized monetary system that relies on a peer-to-peer blockchain infrastructure. Bitcoin’s creator designed the rules governing its blockchain to bypass both the centralized banking system and government regulation by using a decentralized network. However, he also kept enough stake in the Bitcoin supply to control it. Would you maintain control of something you developed as an open and decentralized platform? The blockchain narrative of creating a decentralized economy is nothing new. Nearly a century of European schools of political economy developed the same core principles, offering valuable lessons. Most importantly, the formation of a class of elite, rather than a truly democratic system, threatens the very foundations of economic freedom and democracy. Before replacing human decision-making with algorithms, we must first bridge the technological divide or ensure that rulemakers truly represent the majority.
Giovanna Massarotto is Academic Fellow at the Center for Technology, Innovation & Competition at the University of Pennsylvania Carey Law School. The views and ideas expressed in this post are those of the author and do not necessarily represent those of the Wharton School or the Wharton Initiative on Financial Policy and Regulation.