1/ The problem of incomplete information was first addressed by Friedrich Hayek in his 1945 paper, The Use of Knowledge in Society
2/ Hayek asks readers to consider a world in which all information is known to single individual. In this world, allocating resources in the most efficient way is just a math problem.
3/ However, Hayek points out, this “is emphatically not the economic problem which society faces.” In the real world, information is spread out, incomplete and often contradictory.
4/ Hayek observed that most knowledge is not universal knowledge like physics. E=mc2 is true whether you are in Bhutan, Cincinnati or Mars.
5/ Most knowledge is local, “the knowledge of the particular circumstances of time and place.”
6/ For example, I know that the sole on my right shoe is coming off and if I don’t buy a new one soon, it will fall off. How likely is it that anyone else would know that? That everyone else would know that?
7/ The problem of local knowledge is compounded because the world is dynamic, constantly changing, not fixed. If I buy a new pair shoes or glue the sole of my existing pair back on, the knowledge I had about my sole falling off is no longer true. T optimal allocation..
8/ This means theof resources has changed - I don’t need new shoes anymore.
9/ To solve this problem requires some form of decentralization where decentralized actors need to be able to
10/ A) Exploit their local knowledge
11/ B) Make use of some sort of summary of the local knowledge possessed by others.
12/ This problem is solved by markets and the price system. If a local actor in a market discovers some new valuable use for tin or copper or microchips, they will buy more of them up and that will drive up the price.
13/ Another actor in the same market doesn’t need to know that new valuable use case, that knowledge is encapsulated in the price.
14/ Much local knowledge can’t be made explicitly legible, or at least not without a lot of difficulty. It's tacit knowledge, embodied by Nassim Taleb in the character of "Fat Tony"
15/ But you only need on actor to understand it in order for that knowledge to start being incorporated in the price.
16/ If you reflect on your own experience, Hayek’s point intuitively makes sense: are the difficult decisions in your life hard because you know every last relevant detail and aren’t sure how to add it together? Or because they are full of unknowns?
17/ Imagine how many more unknowns there must be for the CEO of a large company or a government official in charge of a large department.
18/ Here’s Hayek again:
19/ “If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these...
20/ ...circumstances, who know all the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge,...
21/ ...issues its orders. We must solve it by some form of decentralization."
22/ Because of the price mechanism, individual actors need to know very little in order to properly allocate resources. If the price of a new pair of shoes goes from $50 to $500, I don’t need to investigate the shoe industry demand spike and its supply chain issues...
23/ ...to know that I would rather buy some glue and patch up my shoes to make them work than pya $500. All the local information about the shoe industry is expressed via the increased price.
24/ Markets increase socially scalability and contribute to economic growth and wellbeing in large part because they dispense with the need for any one individual to know all information. They aggregate local information through price.
25/ Blockchains and smart contracts will more effectively distribute knowledge and mitigate the problem of incomplete information because they make it possible to create markets in areas we couldn’t.
26/ The limit to markets has always been humans. Only humans could aggregate the local knowledge and use it. With cryptocurrency, it is now possible for machines to exchange value with other machines.
27/ We are currently in the process of what Netscape founder Marc Andreesen has called software eating the world. As connectivity spread around the world and more and more machines are embedded in the world via the Internet of Things, all the networks will come online.
28/ When you add cryptocurrency, those networks will become markets.
29/ When you get in the autonomous cars of the future, you will see a sliding scale offering him the ability to set an arrival time and calculate the cost of the ride.
30/ If you wants to arrive quickly, the car will make a flurry of payments to other cars allowing it to pass. If you’re not in a hurry, you may choose a later arrival time and lower fare, allowing other cars fly past in return for the lower fare.
31/ The solar grid on your roof will be able to buy and sell power with your neighbors depending on how hot or cold you want your air conditioning and demand at each time of the day.
32/ No one central planner will have to control these networks because the blockchain will act to secure the ledger and the state of the system and the smart contracts will execute the logic.
33/ Over time, the networks we rely on will change. Starting with money, then the financial system then the internet, networks will become decentralized markets.
34/ Eventually there will be no functioning money, Internet, financial system or any other network without blockchains.
35/ thoughts, feedback and criticism welcome!
