Free Markets, Free People

The shape of things to come

Michael Wade sent me and email a few days ago asking me what purpose I thought banks served any more. That email led to a phone conversation, and that conversation led to this post. Because that simple question opened up a whole area of investigation about not just banking, but a whole universe of institutions that may be near the end of their purpose.

The modern era has been an age of institutions. Banks, unions, governments, corporations—a whole panoply of organizations whose sole purpose was to provide a central clearinghouse for goods and services, and the regulatory rules and legal framework under which they operated. But we are now seeing glimpses of a future in which institutions simply have no purpose, or, at the very least, will serve a different purpose than they do now. The era of institutions is passing, and is being replaced by the era of…something else. I think—I hope—it will be the era of the individual.

Let’s take the example of banks, first. Currently, banks take deposits from their customers, then loan those deposits out—less a reserve requirement—for mortgages, revolving credit, business loans, etc. They also offer their customers the convenience of access to their money on a moment’s notice, almost anywhere in the civilized world. 

Now, imagine a world where your money is stored on a personal biometric device. So, you no longer need an institution to store your money.  You can carry it with you—perhaps implanted in you—everywhere you go. Your entire stock of cash and savings are now truly yours, and in your personal possession at all times. So what happens to banks? Without depositors, there are no longer any deposits to loan out in credit cards or home purchases. What happens to banks, then? More importantly, what happens to credit then? Perhaps banks will have to change from depository institutions to investor-funded lenders. Or be replaced by them, as there are already web sites where potential creditors and debtors can engage in micro-lending.

We are on the cusp of really transformative technological change, and if you want to see what the implications are for institutions, you need look no further than the music industry, where the RIAA is in a fierce rear-guard battle to maintain their viability. The entire music industry is being destroyed, as an institution, by the new digital technologies that were created just a decade ago. It may be a shock for some of you younger readers, but there was, at one time in the recent past, a world in which there were record stores in every shopping center and mall.

It used to be that the recording industry controlled every aspect of commercial music.  They would underwrite the recording costs, would create the playable media and packaging, then pay for the distribution to music stores. If you wanted a piece of that pie, and hit it big in the music world, you had to scrape up enough money to make a demo tape, send it into Sony, BMG, RSO, etc., and hope that some executive was impressed enough to sign you to a contract to make your first album.

The world doesn’t work that way any more.  For less than $1000, you can turn your dingy studio apartment into a multi-track recording studio. You can get a web site, upload your MP3 files onto it, and sell them online. You don’t need a record company, a distribution channel, or marketing money. This is killing the record industry. The RIAA is actually trying to extort royalty money from bar owners who have live bands play, on the theory that they should get a piece of the bar’s profits from the music performance.  Good luck with that.

Digital publishing is starting to do the same thing to the publishing industry, as Amazon is making it possible for anyone to publish their book. Yes, a lot of less than stellar talents are publishing for the Kindle now, but some mainstream writers are now moving over to the Kindle platform. Publishing, as an institution, is in trouble.

Technology is now empowering individuals in ways that were undreamed of 20 years ago, and the pace of that change, and the vistas it’s opening up for individual empowerment is increasing every day.

Obviously, institutions, including governments, are going to become increasingly leery of this trend. After all, it is not in the best interests of institutions to allow individuals to be empowered. So there will be some sort of backlash at some point. Hopefully, that backlash will be as ineffective as the RIAA’s backlash against digital music has been. But some institutions have their own police and armies, and they have the potential to resist more strongly.

Of course, since we are now in the middle of what appears to be a huge test of government’s ability to manage the economy and currency—and government is not doing a very good job of demonstrating competence—maybe even that potential problem can be minimized.

We can only hope.

17 Responses to The shape of things to come

  • Dale, did you perchance read The Sovereign Individual (Davidson and Rees-Mogg, 1999)? The did a lot of speculation along these lines. I think they were overly optimistic about the transition, seriously underestimating the willingness of entrenched interests (government and corporate) to fight, even violently if necessary, to maintain their perqs. But it was a thought-provoking book.

  • “You can carry it with you—perhaps implanted in you—everywhere you go.”
    Except without a third party validating system–which may well be what banks become–no one believes you have what you say you have.  And then you cannot trust a mere algorithm without trusting the hardware it runs on.  Whether you call it a mint, a bank, a post office, a sheriff’s E!-ledger–whatever–it makes little difference.
    People exchanging “value” represented solely as bits will need something they perceive to be much larger and more solid than either of them to confirm the value of the bits, or trade will be reduced to pure barter.\
    Which is not better.

    • Paper money has worked. How is that different from money in the computer? Hell, its often exactly that.

      • A)  Paper money is actually hard to counterfeit well.  I can make lots of 1’s and 0’s with a computer.
        B)  Those are bank’s computers, by and large–it’s because they are in institutions (banks, S&L’s, and so on) they are trusted.
        I believe that absent tremendous unrelenting government pressure–a de facto totalitarian state–what we now call banks will remain as a validating service to an all but entirely digitally stored system of value storage, or government doing the same thing will provide it as a monopoly service.
        Whether they are called banks or not I don’t know or care.  I would prefer private entities intermediate between direct government control over all but fully digital money.

  • With regard to “backlash”, I suggest that it won’t be just the institutions that demonstrate it: there will be a lot of people who do, too, simply because they do not wish to live in a world that puts that much responsibility on them, or else they outright fear their inability to do so.  Indeed, can we not say that much of the history of man is a drive toward relieving him of the “burden” of having to take care of himself?  Man invented currency to relieve him of the burden of having to barter for things he needs but cannot provide for himself.  Man invented banks in part to safeguard his currency so he didn’t have to worry about personally guarding it from robbers.  Man invented schools to educate his children to relieve him of the burden of doing so himself.  Now we have FDIC, unemployment insurance, Social Security, welfare, ObamaCare, etc., all programs that man has invented to relieve him of the burden of having to worry about / provide for himself.  In effect, he has made the decision to exchange his liberty for security.  Many people will not especially want to trade back.

    Tom PerkinsPeople exchanging “value” represented solely as bits will need something they perceive to be much larger and more solid than either of them to confirm the value of the bits, or trade will be reduced to pure barter.

    I agree.  While I don’t see people clamoring for a pre-computerized society, I think that computer crime is (relatively) too easy for people to trust to the extent that Dale Franks describes.  Indeed, I think it reasonable to suggest the potential for a MAJOR “data crisis” that drives people back toward currency and away from the electronic money that so many of us use these days.  “Cash only” is an awkward way to conduct business, but a greenback cannot be hacked.

    • “Many people will not especially want to trade back.”

      Count me as one of them. I prefer to forego the liberty of losing  my wealth (such as it is) to theft, robbery, fire, flood, accident, etc. I guess that makes me a craven statist. So be it. I can only dream of being an omnipotent libertarian who has the time and power to personally defend their property (and lives, health, etc.) from all those risks.

      • Do you need a behemoth Bank of America to protect your wealth, or a small regional bank with a safe deposit box and some guards?
        Perhaps we won’t see everything devolve to the individual, but we could see things devolve to smaller institutions.
        Also, you may feel safe with Bank of America but how safe are they when they almost disappeared last time. We may not have enough money to bail them out again, unless we print money, which is also a threat to your wealth.

        • “Also, you may feel safe with Bank of America but how safe are they when they almost disappeared last time.”

          Just as safe as with a small bank. That is what the FDIC is for. 

      • Exactly.  It seems to me that we’ve had two competing impulses animating Western society since the Enlightenment.  The first is the noble idea of liberty: a man should be free to live his life as he sees fit without reference to another man (king, lord, etc.).  The second is that communal organizations – banks, churches, schools, the state – give a man security to live a life of increasing leisure and self-improvement.  The balancing act we’ve had for the past few centuries is one between the desire for liberty and the growth of the power and reach of organizations, especially the state.  Where does the balance lie now?  Are we too much at the mercy of the state?  Or do we need more regulation in our lives?  If the latter, then from where shall that regulation come?

  • I don’t see how carrying your accounts with you would eliminate the need for a bank. I use my bank to pay my bills, to pay me interest on my deposits, and to lend me money if I need it.
    If my net worth was put into a binary form and carried with me, it would be actually more difficult to do all of those functions which I can now do with a few strokes of my keyboard.

    • The bank just has some software which allows you to pay your bills. What if that software was on your “body computer” and could do the same thing. You could act as your own bank then. Yes, there might be an intermediary company or software but it won’t be a bank making profit and loss based on borrowing and lending, but a tiny transaction fee instead.
      See Paypal.

    • Why would I need an atm card where I have to punch in some numbers etc. when I could just write a check with my pen.

  • I go with Tom on this one – technologist byproduct that I am.
    Not yet, you cited two examples of items we don’t ‘need’ – we don’t ‘need’ music, and we don’t ‘need’ books (and as I was reminded on Saturday – good luck reading when your Kindle battery goes and you’re not near a recharge…..that didn’t ever happen with one of my paperbacks, but I acknowledge to continue with paper, if possible, will cost extra and be much harder to find here in the US.)
    Leisure activities.  They don’t fill my car with gas, or my cupboard with cans.
    The actual survival items are not going to move into that area for a long time.  You’re back to proving the items you have to trade for those survival goods (food water shelter clothing, and my bling of course, oh, wait, I’m not IN New Orleans ) are of real value.  Unless you can figure out a way for the guy selling you things to prove the electro credits are good (here, try a bite to see if it’s 24 karat) you’re not getting there.
    And, this presumes a world wide means of instant, or near instant communication – meaning SOMETHING is an institution.  You aren’t going to have mom and pop comm companies stringing lines from town to town across the globe (or setting up wireless relays either).  “Martha?  Can you connect me with the Lonnie’s credit verification service please, I need the biometric validation on some guy that just rolled into town on his lectric scooter and is trying to buy the old Sears Tower…”
    You’re going to have some institution maintaining the comms, at a minimum, and some institutions that verify you’re you, and you’re worth x (so, not unlike…now).  And the Barney Frankers who want to regulate them all of course.
    You can’t replace a means of exchange with bits.  We think we can because we’re living in the first world, where we (until Uncle Obie decides to cut the power plants again) have power.  Not going to fly where it’s not as readily available.  Good luck with electronic methodologies where, and when, there’s no electronic.  Just because it looks like we do, today, doesn’t mean it’s got a future.  Hell, the bastids just began to put the kibosh on debits with their latest regulations that will have the banks charging the debit card user instead of the vendor because they capped the amount that can be charged the vendors.  Wait to see how that is going to trickle down in the next year or two.
    and how is this not the ultimate fiat currency?  I declare I have value because my biometric device declares it to be so?  Maybe in the long haul, but not any time soon…
    you haven’t even begun to delve into the religious aspects of the proposal (there ARE some? – yep).   Sorry to remind, but there are a lot of people out there still ‘clinging to their Bibles’ and this biometric marker thingamabobby is going to sound a lot like ‘666’ to them.  Just sayin.

  • If we have biometric based banking, it will make inheritances more fun…”don’t cremate the body until we have all the funds out of it.”

  • Banks pay interest, my back pocket doesn’t. 

  • Call it a bank or call it a blafoodle. Any advanced civilization is going to need some functions performed that can only be done by an institution. Even the digital world has its institutions wihout which it could not function.