Category Archives: Finance

The informal sector Singularity

At the intersection of cryptocurrencies and the "gig economy" lies the prospect of almost self-contained shadow economies with their own laws and regulations, vast potential for fostering growth, and the possibility of systematic abuse.

There have always been shadow, "unofficial" economies overlapping and in some places overruling their legal counterparts. What's changing now is that technology is making possible the setup and operation of extremely sophisticated informational infrastructures with very few resources. The disruptive impact of blockchains and related technologies isn't any single cryptocurrency, but the fact that it's another building block for any group, legal or not, to operate their own financial system.

Add to this how easy it is to create fairly generic e-commerce marketplaces, reputation tracking systems, and, perhaps most importantly, purely online labor markets. For employers, the latter can be a flexible and cost-efficient way of acquiring services, while for many workers it's becoming an useful, and for some an increasingly necessary, source of income. Large rises in unemployment, especially those driven by new technologies, always increase the usefulness of this kind of labor markets for employers in both regulated and unregulated activities, as a "liquid" market over sophisticated platforms makes it easy to continuously optimize costs.

You might call it a form of "Singularity" of the informal sector: there are unregulated or even fully criminal sectors that are technologically and algorithmically more sophisticated than the average (or even most) of the legal economy.

While most online labor markets are fully legal, this isn't always the case, even when the activity being contracted isn't per se illegal. One current example is Uber's situation in Argentina: their operation is currently illegal due to regulatory non-compliance, but, short of arresting drivers — something that's actually being considered, due in some measure to the clout of the cab driver's union — there's nothing the government can do to completely stop them. Activities less visible than picking somebody up in a car — for example, anything you can do from a computer or a cellphone in your home — contracted over the internet and paid in a cryptocurrency or in any parallel payment system anywhere in the world are very unlikely to be ever visible to, or regulated by, the state or states who theoretically govern the people involved.

There are clear potential upsides to this. The most immediate one is that these shadow economies are often very highly efficient and technologically sophisticated by design. They can also help people avoid some of the barriers of entry that keep many people from full-time legal employment. A lack of academic accreditations, a disadvantaged socioeconomic background, or membership in an unpopular minority or age bracket can be a non-issue for many types of online work. In other cases they simply make possible types of work so new there's no regulatory framework for them, or that are impeded by obsolete ones. And purely online activities are often one of the few ways in which individuals can respond to economic downturns in their own country by supplying services overseas without intermediate organizations capturing most or all of the wage differential.

The main downside is, of course, that a shadow economy isn't just free from obsolete regulatory frameworks, but also free from those regulations meant to prevent abuse, discrimination, and fraud: minimum wages, safe working conditions, protection against sexual harassment, etc.

These issues might seem somewhat academic right now: most of the "gig economy" is either a secondary source of income, or the realm of relatively well-paid professionals. But technological unemployment and the increase in inequality suggest that this kind of labor markets are likely to become more important, particularly for the lower deciles of the income distribution.

Assuming a government has the political will to attack the problem of a growing, technologically advanced, and mostly unregulated labor economy — for some, at least, this seems to be a favoured outcome rather than a problem — fines, arrests, etc, are very unlikely to work, at least in moderately democratic societies. The global experience with software and media piracy shows how extremely difficult it is to stop an advanced decentralized digital service regardless of its legality. Silk Road was shut down, but it was one site, and run by a conveniently careless operator. The size, sophistication, and longevity of the on-demand network attacks, hacked information, and illegal pornography sectors are a better indicator of the impossibility of blocking or taxing this kind of activity once supply and demand can meet online.

A more fruitful approach to the problem is to note that, given the choice, most people prefer to work inside the law. It's true that employers very often prefer the flexibility and lower cost of an unregulated "high-frequency" labor economy, but people offer their work in unregulated economies when the regulated economy is blocked to them by discrimination, the legal framework hasn't kept up with the possibilities of new technologies, or there simply isn't enough demand in the local economy, making "virtual exports" an attractive option.

The point isn't that online labor markets, reputation systems, cryptocurrencies, etc, are unqualified evils. Quite the contrary. They offer the possibility of wealthier, smarter economies with a better quality of life, less onerous yet more effective regulations for both employers and employees, and new forms of work. However, these changes have to be fully implemented. Upgrading the legal economy to take advantage of new technologies — and doing it very soon — isn't a matter of not missing an opportunity, particularly for less developed economies. Absent a technological overhaul of how the legal economy works, more effective and flexible unregulated shadow economies are only going to keep growing; a lesser evil than effective unemployment, but not without a heavy social price.

The gig economy is the oldest one, and it's always bad news

Let's say you have an spare bedroom and you need some extra income. What do you do? You do more of what you've trained for, in an environment with the capital and tools to do it best. Anything else only makes sense if the economy is badly screwed up.

The reason is quite simple: unless you work in the hospitality industry, you are better — able to extract from it a higher income — at doing whatever else you're doing than you are at being a host, or you wouldn't take it up as a gig, but rather switch to it full time. Suppliers in the gig economy (as opposed to professionals freelancing in their area of expertise) are by definition working more hours but less efficiently so, whether because they don't have the training and experience, or because they aren't working with the tools and resources they'd take advantage of in their regular environments. The cheaper, less quality, badly regulated service they provide might be desirable to many customers, but this is achieved partly through de-capitalization. Every hour and dollar an accountant spends caring for a guest instead of, if he wants a higher income, doing more accounting or upgrading his tools, is a waste of his knowledge. From the point of view of overall capital and skill intensity, a professional low-budget hotel chain would be vastly more efficient over the long term (of course, to do that you need to invest capital in premises and so on instead of on vastly cheaper software and marketing).

The only reason for an accountant, web designer, teacher, or what not, for doing "gigs" instead of extra hours, freelance work, or similar, is if there is no demand for their professional labor. While it's entirely possible that overtime or freelance work might be relatively less valuable than the equivalent time spent at their main job, to do something else they would have to get less than what they can get from a gig for which they have little training and few tools. That's not how a capital- and skill-intensive economy looks like.

For an specific occupation falling out of favor, this is just the way of things. For wide swaths of the population to find themselves in this position, perhaps employed but earning less than they would like, and unable to trade more of their specialized labor for income, the economy as a whole has to be suffering from depressed demand. What's more, they still have to contend with competitors with more capital but still looking to avoid regulations (e.g., people buying apartments specifically to rent via Airbnb), in turn lowering their already low gig income.

This is a good thing if you want cheaper human-intensive services or have invested on Airbnb and similar companies, and it's bad news if you want an skill-intensive economy with proportionally healthy incomes.

In the context of the gig economy, flexibility is an euphemism for I have a (perhaps permanent!) emergency and can't get extra work, and efficiency refers to the liquidity of services, not the outcome of high capital intensity. And while renting a room or being an Uber driver might be less unpleasant than, and downright utopian compared to, the alternatives open to those without a room to rent or an adequate car, the argument that it's fun doesn't survive the fact that nobody has ever been paid to go and crash on other people's couches.

Neither Airbnb nor Uber are harmful on themselves — who doesn't think cab services could use more a transparent and effective dispatch system? — but customer ratings don't replace training, certification, and other forms of capital investment. Shiny apps and cool algorithms aside, a growing gig economy is a symptom of an at least partially de-skilling one.

Bitcoin is Steampunk Economics

From the point of view of its largest financial backers, the fact that Bitcoin combines 21st century computer science with 17th century political economy isn't an unfortunate limitation. It's what they want it for.

We have grown as used to the concept of money as to any other component of our infrastructure, but, all things considered, it's an astoundingly successful technology. Even in its simplest forms it helps solve the combinatorial explosion implicit in any barter system, which is why even highly restricted groups, like prison populations, implement some form of currency as one of the basic building blocks of their polities.

Fiat money is a fascinating iteration of this technology. It doesn't just solve the logistical problems of carrying with you an impractical amount of shiny metals or some other traditional reference commodity, it also allows a certain degree of systemic adaptation to external supply and demand shocks, and pulls macroeconomic fine-tuning away from the rather unsuitable hands of mine prospectors and international trading companies.

A protocol-level hack that increases systemic robustness in a seamless distributed manner: technology-oriented people should love this. And they would, if only that hack weren't, to a large degree... ugh... political. From the point of view of somebody attempting to make a ton of money by, literally, making a ton money, the fact that a monetary system is a common good managed by a quasi-governmental centralized organization isn't a relatively powerful way to dampen economic instabilities, but an unacceptable way to dampen their chances of making said ton of money.

So Bitcoin was specifically designed to make this kind of adjustment impossible. In fact, the whole, and conceptually impressive, set of features that characterize it as a currency, from the distributed ledger to the anonymity of transfers to the mathematically controlled rate of bitcoin creation, presupposes that you can trust neither central banks nor financial institutions in general. It's a crushingly limited fallback protocol for a world where all central banks have been taken over by hyperinflation-happy communists.

The obvious empirical observation is that central banks have not been taken over by hyperinflation-happy communists. Central banks in the developed world have by and large mastered the art of keeping inflation low – in fact, they seem to have trouble doing anything else. True, there are always Venezuelas and Argentinas, but designing a currency based on the idea that they are at the cutting edge of future macroeconomic practice crosses the line from design fiction to surrealist engineering.

As a currency, Bitcoin isn't the future, but the past. It uses our most advanced technology to replicate the key features of an obsolete concept, adding some Tesla coils here and there for good effect. It's gold you can teleport; like a horse with an electric headlamp strapped to its chest, it's an extremely cool-looking improvement to a technology we have long superseded.

As computer science, it's magnificent. As economics, it's an steampunk affectation.

Where bitcoin shines, relatively speaking, is in the criminal side of the e-commerce sector — including service-oriented markets like online extortion and sabotage — where anonymity and the ability to bypass the (relative) danger of (nominally, if not always pragmatically) legal financial institutions are extremely desirable features. So far Bitcoin has shown some promise not as a functional currency for any sort of organized society, but in its attempt to displace the hundred dollar bill from its role as what one of William Gibson's characters accurately described as the international currency of bad shit.

This, again, isn't an unfortunate side effect, but a consequence of the design goals of Bitcoin. There's no practical way to avoid things like central bank-set interest rates and taxes, without also avoiding things like anti-money laundering regulations and assassination markets. If you mistrust government regulations out of principle and think them unfixable through democratic processes — that is, if you ignore or reject political technologies developed during the 20th century that have proven quite effective when well implemented — then this might seem to you a reasonable price to pay. For some, this price is actually a bonus.

There's nothing implicit in contemporary technologies that justifies our sometimes staggering difficulties managing common goods like sustainably fertile lands, non-toxic water reservoirs, books written by people long dead, the antibiotic resistance profile of the bacteria whose planet we happen to live in, or, case in point, our financial systems. We just seem to be having doubts as to whether we should, doubts ultimately financed by people well aware that there are a few dozen deca-billion fortunes to be made by shedding the last two or three centuries' worth of political technology development, and adding computationally shiny bits to what we were using back then.

Bitcoin is a fascinating technical achievement mostly developed by smart, enthusiastic people with the best of intentions. They are building ways in which it, and other blockchain technologies like smart contracts, can be used to make our infrastructures more powerful, our societies richer, and our lives safer. That most of the big money investing in the concept is instead attempting to recreate the financial system of late medieval Europe, or to provide a convenient complement to little bags of diamonds, large bags of hundred dollar bills, and bank accounts in professionally absent-minded countries, when they aren't financing new and excitingly unregulated forms of technically-not-employment, is completely unexpected.

A quick look at Elance statistics

I collected data from Elance feeds, in order to find what employers are looking for on the site. It's not pretty: by far the most requested skills in terms of aggregated USD demand are article writing (generally "SEO optimized"), content, logos, blog posting, etc. In other words, mostly AdSense baiting with some smattering of design. It's not everything requested on Elance, of course, but it's a big part of the pie.

Not unexpected, but disappointing. Paying low wages to people in order to fool algorithms to get other people to pay a bit more might be a symbolically representative business model in an increasingly algorithm-routed and economically unequal world, but it feels like a colossal misuse of brains and bits.