Megalextoria

The core of the free market explanation for global poverty is simple and compelling: much of the world’s poor are poor because of institutional failure.

The court systems that service the bottom billion are unreliable or hard to access. The governments impose extractive taxation. The bureaucracies are corrupt.

And some institutions are simply missing in the developing world. A lack of reliable identity services makes it hard to access financial markets. A lack of property titles, as Hernando de Soto famously wrote, makes it hard to use the capital embodied in homes.

Corruption and Monopolies

These explanations are all true. But the free market response to global poverty is insipid to the point of uselessness. Faced with evidence that institutions in developing countries are corrupt, classical liberals respond: well, don’t be so corrupt.

There are other responses, of course. We sometimes adopt the Washington Consensus approach—use the levers of political globalization to force reform on unwilling populations. Or maybe we just hope for a revolution that might turn out liberal. Neither alternatives have good track records.

The problem here is that institutions tend to be monopolies. One country has one court system, one bureaucracy in charge of property titles, one authority giving out birth certificates. To get better institutions, we have to replace the corrupt old ones, and that’s hard to do, especially given the intransigence of rent-seekers who benefit from them.

Institution Innovation

What the developing world needs is a technology of institutions—a way not to replace institutions but to create more of them, experimentally and entrepreneurially.

This is what we see in the blockchain. Blockchain technology is an institutional technology that allows multiple institutions to operate in one place. It is perfectly suited to hostile institutional environments.

There’s been a lot of work, unsurprisingly, on individual blockchain applications that might be helpful for the world’s poor: supply chains, democratic governance, and identity management for example. With these applications, blockchain might allow poor countries to leapfrog some of the stages of development—a poor country might skip the creation of the centralized institutions characteristic of the rich world and instead adopt immediately decentralized ones.

But we think blockchain technology offers something more fundamental than these specific applications.

It offers the possibility of creating new institutions—new algorithmic legal systems, contract dispute resolutions systems, identity technologies, mutual welfare and insurance, and public goods provision—in competition with the existing set of institutions.

For instance, the invention of a smart contracting platform could compete with existing court systems, helping to overcome the problems of hold-up or counterparty risks. The contracting parties to decide which institutional structure they wish to use—the terrestrial one or a near-infinite number of new digital alternatives.

These applications do not need to replace their competitors to function. And they are virtually impossible for the beneficiaries of the old order to prevent.

Institutional Layering

We call this process institutional layering. Blockchain institutions co-exist with existing institutions, effectively layering on top.

Blockchain entrepreneurs in developing economies don’t require international aid agencies or development experts to define economic problems and try to solve them. Rather, they apply their entrepreneurial judgment and skills to define institutional problems and use blockchains to design and test new institutional solutions.

William Easterly famously outlined the distinction between “planners” and “searchers” in economic development. Development economics has been plagued by planners implementing top-down institutions that don’t match local conditions and have a raft of unintended consequences.

The capacity of entrepreneurs to search, however, is constrained by the transaction costs they face and the technologies they have available. Rather than propelling institutional change through centralized planners (whether it be through conquest or special economic zones), blockchain enables a new decentralized process of search.

Rather than forming businesses within the existing institutions, entrepreneurs can use the blockchain to more effectively operate on the level of the institutions themselves. Blockchain enables institutional entrepreneurs to search by operating on the governance or “protective-tier” level of entrepreneurship.

Now entrepreneurs can search, discover, and deploy new governance mechanisms. They can attract users by better economizing on transaction costs than alternatives.

Polycentric Institutions

The process of institutional layering will also be more polycentric. Rather than having centralized institutions attempting to fit over broad groups of people within a geographical nation-state, entrepreneurs will, over time, discover the necessary levels of institutional rules within regions and across borders.

Another ongoing problem of institutional change in the developing world is aligning formal institutions with the underlying informal norms. Blockchain-based institutional layering—using governance approaches developed by local entrepreneurs—might better match the underlying norms, or what James C. Scott describes as metis.

Because blockchain institutions are built from the bottom-up and draw on local entrepreneurial knowledge, we might see greater levels of institutional stickiness, where formal blockchain institutions better match underlying norms and therefore are embedded and longer-lasting.

Our argument risks techno-utopianism. We are confident that blockchain—or successor distributed ledger technologies not yet invented—might solve several institutional problems within the developing world. It will not, of course, solve all of them.

Nevertheless, the invention of a class of new, digital, uncensorable, trustful institutional technologies opens up enormous opportunities for decentralized economic development.

And it allows the same entrepreneurial creativity that has driven prosperity in the rich world to be turned to the causes of poverty in the developing world.

This article was originally published on FEE.org. Read the original article.

Since January, the CDC has issued multiple warnings of E. colicontamination causing hundreds of people to become infected across the nation. Of course, countless bags and heads of lettuce have since been pulled off of shelves and destroyed. On November 20, the CDC spoke out but gave no answers to the public on what caused the outbreak: “At this time, no common grower, supplier, distributor, or brand of romaine lettuce has been identified.”

But it’s been more than a month since the first E. coli cases were reported—and there is no culprit. As a result, thousands of grocers and growers are suffering from what might just be a contamination at a single farm. If the government would have utilized the power of blockchain, we might already have an answer.

Blockchain? How?

Blockchain is simply a new, technologically advanced database used for tracking resources and information as they exchange hands. A copy of the database is stored by everyone on the blockchain network, which allows every user to track each item on the network. Each blockchain network can have different parameters for who can join—some are open to anyone, while others require permission from a central authority to join.

Anytime a change is made, every other user is notified and can make a copy of that change on their own computer. With a multitude of copies, no user can make a change to any information on the network that they don’t rightfully own.

Tracking produce on a blockchain could dramatically reduce the time spent tracing contaminated produce back to the source and put a cap on how often industry-wide recalls are even required. If health officials and retailers can pinpoint the exact sources of contamination and pull only the product at risk off the shelves, the danger to the public and the costs to the guiltless producers would be significantly diminished.

Say we use blockchain to track produce from farm to table. A grocer, truckers, distribution centers, packaging facilities, and the farmers could all have accounts on a blockchain network. Picked and packaged produce would be scanned, uploading a record of its location to the blockchain. From there, the lettuce might be trucked to the distribution center, and once it arrives, its location would again be uploaded to the blockchain. The same process would be followed until a grocery store cashier makes the final scan at the register. If a customer reports contamination from a single head of lettuce, they could trace it back to the source, identifying where it was at every step of the process.

Theory’s Great, but What about Real Life?

When it comes to agricultural products, there are so many parties involved in the growing, packaging, distributing, and selling of each piece. Blockchain offers tracking benefits that traditional databases don’t. The new technology allows multiple parties to be on the same database without risk of one party controlling all the information. The network is governed by the parameters are set up when it is established, and every user on the network must abide by those parameters. Small farmers and food-giants alike can participate in the network without one overshadowing the other.

That’s why Walmart and other grocers have already put this technology to test—with much success. When Walmart tested the technology with the recall of a batch of mangos, the time it took to trace the produce back to its farm was reduced from seven days to just 2.2 seconds. And major food producers are getting wind of how well this could work. Dole and Nestle, for instance, are set to track their products on the blockchain network at the beginning of the new year.

Moving food from the farm to the table is truly a miracle of the market. The vast majority of the time, the normal process works just fine. Yet, when contamination occurs, the process doesn’t lend itself well to pinpointing the source. It’s time for our food producers to realize that blockchain is the technology that will make sure the foods meant to keep us healthy aren’t the ones putting us at risk.

Source: Food Recalls May Soon Be a Thing of the Past—Thanks to Blockchain – Foundation for Economic Education