Adam Smith on Royal Mile

The Blockchain’s Burial of Classical Economics

in Economy by

He is arguably the father of Classical Economy, and among his most profound pronouncements comes one in the form of a very simple statement.

When Adam Smith uttered “All money is a matter of belief,” the phrase was accommodated by his peers and followers; it was, however, never truly digested.

The truth is that most classical economists – and everyone else – could not quite bring themselves to fully embrace the idea.

The feeling still lingered that money had inherent value, its own set of qualities, all external to the human psyche, that somehow justified the essential value that we attributed to it.

All money is a matter of belief – Adam Smith

Smith’s assertion, however, was arguably put to its first real test by President Nixon who, in 1971, formally decoupled the dollar from the gold standard. Government was no longer promising to back up what was essentially nothing more than paper with something that was held to have intrinsic value.

Educated opinion thus saw how the paper dollar was deriving value from nothing more than the confidence that people held in the government which stood behind it. But, still, even here, the paper dollar’s value was still not fully received as something that was nothing more than the result of collective mass perception.

This is where we now see one of the more surprising and unintended consequences of blockchain technology. Any lingering resistance to Smith’s claim has been firmly laid to rest by the emerging phenomenon of cryptocurrency economies.

Full Steem Ahead for a New Economic Model

To understand why, it helps to have a look at a concrete example. The one we’ll go with here is Steemit, a website which incorporates a rewards system for the creation of ‘good’ content and its curation (a convoluted term for the number of likes an article or comment receives).

In other words, if you write an interesting article – or at least one that is deemed by the platform’s algorithms to have generated interest with other Steemit users – then you will find yourself being rewarded with payment in Steem, the cryptocurrency that is embedded into the platform’s underlying blockchain that goes by the same name.

Alternatively, if you simply consume content, you can also get paid for providing feedback through a system of likes and posting reply comments.

Where things get interesting, however, is in how the Steem blockchain pays its users. For the purposes of this discussion, we’ll ignore the intricacies of the Steem blockchain’s internal economy (it has three distinct cryptocurrencies), and simply pretend for now that it has the one. The point being made will still stand.

Printing Your Own Money on the Fly

Content creators and curators on the Steemit platform – when their contributions are deemed valuable to that platform by its native ‘Proof-of-Brain’ algorithms – are paid in Steem. The Steem cryptocurrency, however, is simply created from thin air. One could go even further by saying that Steem is simply a set of abstractions which are designed to attach meaning to deliberated digital strings of 1’s and 0’s.

As a cryptocurrency created from thin air, it does not even derive its value from scarcity – Steem currency is endlessly being created by the Steem blockchain on the fly as more and more users collaborate with its platform. It is simply the shared, collective perspective of the Steemit community of users that conspires to attribute value to Steem.

And Steem, unlike gold, cannot be argued to have intrinsic qualities – it doesn’t have malleable use cases, for instance, from which it can ultimately derive some kind of fundamental ‘justification’ for its value. For Steem, the justification is there simply because the collective has decided, albeit unconsciously, that their will for it to have value is enough to give it value.

It is, then, the ultimate vindication of Smith’s assertion. And it spells at the same time the death of the Classical Economy which, ironically, Smith is arguably the father of.

In practice, then, we have people being paid for creating and consuming written content with a digital commodity that is created literally from nothing. Those ex-nihilo rewards can be – and are – translated into US dollars which then get translated into flight tickets, online pizza orders, earphones and every other good or service that is available in the traditional, ‘real-world’ economy.

And it is this merging of the virtual and real-world economies that finally spells the end of the classical economic environment we had been inhabiting up until the emergence of the Blockchain.