Cost-Based Economics: A New Economic Model Enabled By Blockchain
The blockchain technology has been opening up so many opportunities for us that people still fail to take advantage. Flying solo in this episode, host, Monika Proffitt, lets us in on a new economic model that is enabled by crypto or blockchain: cost-based economics. She defines what it is and shares with us how it came to be and how it could change the game of the economic system in the post-late stage of capitalism. Monika has so many insights in store about looking at value and finding where it is, and what matters, so don’t miss out on this great information.
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Cost-Based Economics: A New Economic Model Enabled By Blockchain
I am not interviewing anyone. I’m doing a new format for the show after talking with Tracy, a bit about all kinds of different ideas that I’ve had that have been spurred on and inspired by blockchain and crypto. I’ve always been hearing about some new ideas I have or something else that could happen or a used case. Is there anyone working on this? Do you know someone in that? She’s like, “Monika, why don’t you do some episodes by yourself?” I wanted to talk about a couple of different ideas that I think blockchain and crypto have enabled and are enabling and people aren’t doing yet.
Part of my desire to put out ideas in the world that I don’t own necessarily. I’m not doing something about them. I hope someone else is. I imagine that in the logic of creation, all of my ideas don’t belong to me and there are plenty of other people that are having these ideas at the same time. If this makes sense to you or if you know someone who’s doing something like this, please let me know and comment or reach out to me because I would love to meet more people that are doing some of the things that I’m thinking about. I’m a little bit driven by the way that my stepfather lived his life. His name was Gilbert White and he was an amazing person.
When he passed away, in his obituary, somebody had shared a story that got published and it was a perfect testament to his life. He worked in geography and he had penned and come up with many basic fundamental ideas around flood plain management and water management that he was considered the grandfather of flood plain management. If you can think of a more boring title to die with, that takes the cake in this story that I try to remember for myself a lot as an innovator and as a person who hopefully has things to contribute to the world of whatever genres I’m in. It’s in blockchain. It used to be in art.
He had been coming up with many great ideas that he found himself sitting next to a good friend. His friend was telling a story about him after he died. The person on stage at this conference where they were sitting and attending was a member of the Army Corps of engineers. He was a big fancy dude. He was espousing all of Gilbert’s ideas and not giving him credit. He was acting like they were his ideas. He was like, “This thing we should do looks great and that thing because I believe that we should.” The man sitting next to Gilbert said, “Gilbert, he is using your ideas and espousing them as his own and not giving you credit.” His ideas, he’s taking them and using them. Gilbert turned to him and said, “I know, isn’t it wonderful?”
As much as I’m out for building a business and being good at what I do and that means in this particular world since I’m not in the world of global bureaucracy and water management, I’m in the world of business much more than that. I have to consider what I have and I have IP and things like that. That’s an unfortunate side effect. In the spirit of putting out ideas and hoping they take fire, they are inspiring to others, they take root in other people and they get pushed forward. I would much rather give up my signature on them then see them not be born or not be taken hold of. I hope that I get to meet the other people that think this might be cool and people that might criticize or whatever. Any feedback is great. Please don’t be a troll. That goes for anybody on the internet.
I have this idea that I’ve been thinking about. Here’s the first one. I’ve decided to call it cost-based economics. It comes out of me hating capitalism for a long time. Being a young person and looking at luxury goods and thinking like, “What a horrible thing. Not only does it ruin only one person and it gives only something that only some people can have like the extra soft sheets or the Lexus car.” It also acts as a symbol that you can’t have what I have. It’s such an unfortunate way that we as human beings have chosen to organize ourselves, that I am ashamed of us, frankly. Here we are and this is what we do. I’ve tried to stay away from stuff that I think is distasteful.It's such an unfortunate way that we, as human beings, have chosen to organize ourselves. Click To Tweet
That’s one of the things. Aside from that, I also couldn’t help but start thinking about this. When I was around 18, 19 years old, I was like, “Why do I hate Lexus cars?” That was part of the reason why. I was like, “What makes this awful?” I realized it was the scarcity model of capitalism that’s underpinning it. That was the real problem. It wasn’t the car itself. It wasn’t if I cared what it looked like. It wasn’t that some people could afford it. It was a scarcity model of how it was distributed. That’s always been in the background is like, “Why do I have this taste for certain systems and how could that system shift?” I came up with this idea of cost-based economics that, with cryptocurrency, becomes a lot easier to understand and implement. Because with cryptocurrency, you can take the rules of money and strip away all the regulations and all of the rules that have already been there. Rebuild it then however you want.
It’s a completely iterative process. You can take everything away and start from zero. I love that. In this analogy, I can use $1 for it so you can understand the process but you can digitally create a token that would behave this way inherently. It wouldn’t be up to how somebody manages it but it would manage itself, which is a cool thing about crypto. My analogy here is in current economics, in our current model, let’s say it costs you $1,000 to make an app. I pick an app because it’s scalable and it’s digital. It can serve multiple people because it’s made once. It can scale out without additional efforts.
Maybe there are some analyses made for efforts here and there to maintain but those are nominal and they’re small comparatively. The large idea here is if you make an app and it costs you $1,000, you find some guys in India. They make it or you find your brother knows how to do it or whatever it is and you make it and this is how much it costs you. You go to the Apple Store, colonoscopy and finally, you get it on the Apple Store. You put over $1 and everybody downloads it for $1. The first 1,000 downloads, you’re trying to break even. After that, it’s all profit. It’s all gravy-like, “Pie in the sky, go for it.”
The ideas around that are societally we say, “Yes, that’s a good thing. It’s a great thing. Now you’re in the black. You’re not in the red anymore.” You’ve broken even and it’s profit as far as you possibly can. We applaud you for your wonderful and successful business. If you want to have a conscious business, then the app has to do a conscious thing but they still might want to do a conscious thing. They want to get their pie in the sky and once you get there, then our sentiment changes because as a collective, as a society, as a global world, we’re going like, “You go too far. Jeff Bezos, you didn’t pay some taxes,” or, “Microsoft, we have some antitrust suits for you,” or “We need more healthy competition in the market. You can’t be the only one.”
Alternative Cost-Based Model
We applaud people for doing it and being successful in this price-driven business up to a point. If they’re successful by those metrics of only money, then at some point we want to scale it back. If they’re successful by doing unscrupulous things like taking a $5 insulin shot and turning into a $300 insulin shot, we don’t applaud that anymore. Isn’t that strange because we would applaud it if they did it fair and square for $5? We have these rules around this price-based economic model that tries to curb it. Mine is a cost-based economic model. Part of my life I spent being a Bohemian artist, I had no interest in money and in making much of it. I was good at saving but I didn’t want to go out and trade my hours for too many dollars because I liked my hours. I was spending my hours making art and doing things.
The best thing that I could do with my time would be to be making something new or thinking a new thought, not giving it to somebody for dollars too often. I did my best to avoid the economic system and it was great. Along the way, I also saw that there are two ways of looking at value when there’s time and there’s space. Those are the things that make up physical reality. Most people are in tight space and they can get things and get a nicer apartment. They can get a nicer car. They have that Lexus, luxury items, non-luxury items that are food by having more money. They can be enticed to sell their time for this money thing because the money thing can get them the space back and space, you can get so much more. You can always get a bigger apartment. You can always work harder for something else. There’s not supposed to be a limit on it. A lot of disparities issues that show, “There are limits on it,” but the idea here is that you can go on and on.
As a resource, you have no idea how much you have. I could keel over in 30 seconds right here and this thing goes and eventually stop and somebody comes in and find me dead and maybe this would be published posthumously. I have no idea how much time I have. You don’t either. It is the most precious thing and that is what drove me and my economic decisions for a long time. I realize that for you to feel like you have wealth of some sort, it’s this difference between how much you need and how much you have. As long as there’s a cushion between there, you can have some sense of relative stability. If you need more than you have, you’re in the pinnacle. Instead of trying to expand how much I had, I tried to reduce how much I needed and keep that buffer there so I could expand the buffer by needing less. That was always my approach.
Fast forward to now and I’m doing way more capitalist things but I’m still thinking that way. I’m still thinking, “How do these incentive systems work long-term?” In an alternative cost-based model, if you were to build an app and it costs you $1,000 to build, once you reached $1,000, it’s now back to where it started. The one thing that you didn’t add to your economics there is how much you pay yourself. When you go to build a business, you’re like, “Throw everything at it.” What if you said, “I’d be happy if I made $100,000 on this app, I would be thrilled. Outside of that or whatever,” or “I want to get paid this much for what I do.” What I do is build apps. “This is how much it is. I will cap it at the cost here. The cost for me is this.” You can do this for an organization, you can use it for the MTA system, wherever you know there’s an absolute cost limit to it, you say, “Here’s what it is.”
There are plenty of incentives that are not necessarily aligned here, but let’s say for argument’s sake, I say I want to make $100,000 on my app. I go to the App Store, get a colonoscopy, I download and the first $100,000, so I get $99,000 and my developers get one and that’s somehow fair to honor them. We have 100,000 downloads and $1 apiece and now we’ve broken even. I got paid what I wanted to get paid and everything is done and there’s this app that exists in the world. If I kept what I get because I don’t have this belief system that if I invent something cool, I should be infinitely rewarded for it.
What if I can be rewarded up to a point without taxes, it’s not because at some point I’d be taxed at a higher rate like, “No, I did a thing in the world. They liked it. They needed it. They bought it. I named my price and I got it. Done.” What happens when the next 100,000 people download it? In this model, barring it, needing to be maintained or small things that on an ongoing basis needs to be paid for. Let’s say as a system itself, it’s a static thing and it’s fine for diseasing numbers. The next 100,000 people and there are 200,000 downloads and they’ve put in $1, but now they’ve all been refunded $0.50. If they used a cryptocurrency that was functioning this way, it would be automatic.
With their app comes to a wallet with no cryptocurrency because they spent $1 but as soon as the number of app downloads is noticed by each wallet on the blockchain, then suddenly everyone gets $0.50. Now, they’ve only paid $0.50 for it because they put $1 in they have $0.50 back. It scales out until you put in $1 and you have $0.99 in your account. You put $1. It drives the cost down to free. I have my price. I don’t get to be Mr. Greedy. All I can say is I made something that everybody in the world wanted but I named my price. This sounds insane to most people because they were like, “No. It’s the whole point. There is no incentive to make anything.”
Crisis Of Meaning
I can’t help but think about what’s coming in the post-AI future. This is where I think all the rules are going to be changing soon and in a way that we can’t adjust to yet. Elon Musk, for whatever it’s worth, was saying our post-AI world is not going to create a crisis of work or of employment, it’s going to create a crisis of meaning. I’ve done a little bit of research around this and I see that at some point a future where there’s a universal basic income. Rote problems are taken care of by non-people. The idea that you would do, you would trade your time to do a rote thing and get money for it, so then you can consume something and spin around is going to be eroded.There are two ways of looking at value, when there's time and there's space. Click To Tweet
In that erosion, as Elon Musk said that we’re going to have more of a crisis of meaning and that meaning can be driven more by rather than being like, “I’m going after space. I’m trading all of my dollars for time. My time for these dollars to get this stuffed. It makes me look good and stuff.” It’s consumer-driven capitalism, late-stage capitalism in the worst sense. What about post-capitalism where it still has a capitalist, there’s still an exchange rate. It’s that it folds back in on itself so that every good invention goes back to benefit everybody. You can name your price, but that’s your price because you have a fixed price. Why? Because you have a basic income. How much do you need? At some point, isn’t your crisis of meaning not of money? It’s like, “You don’t get a yacht.” If that’s your crisis, you better find a nice way to market around your $3 million price tag for your next path. If you can get people to do that, great, maybe you can’t, I don’t know.
This is a way that I think you can formalize the recirculation of externalities and also resources. Rather than someone saying, “We’re going to be mission-driven.” They’re right. You want to be mission-driven. You want to make a bunch of money. It’s the same thing as anybody else but you don’t want to feel horrible and kill people in the third world over it, which is commendable, although honestly a low bar for me to applaud over. Ultimately, how are you trying to redistribute our resources? Are you trying to make your greasy buck by not having blood on your hands and at what point, do you call it blood on your hands?
I can’t think of the whole system as something that is a little grotesque and needs an overhaul. I think cryptocurrency gives us the tools to overhaul that potentially. When people say, “That wouldn’t work. There’s no incentive.” I’m like, “BS.” First of all, there are plenty of social businesses. Muhammad Yunus got the Nobel Peace Prize for his work and social business and mission-driven economic models. I call BS. If you take that, not to the extreme of people, do want to do good. It’s true, they do. That’s why there’s what we call a conscious business. If you take it further out and you start to see the effect of viral marketing when someone says, “If I get my friend to sign up, I get money back in my account.”
If this continues to work, if we continue to spread this, if there continues to be a good app for this many people or whatever, great. Another use case that I’ve thought of that is similar is it’s got a fixed cost. It’s got a fixed cost and can scale up in terms of how many people it serves. Because New York City is magical and wonderful, I was on the subway out a couple of weeks ago. I happen to be standing next to this guy and his wife and their kid in a stroller. They took a lot of space because of the stroller. It was crowded and he leans further into me and I’m against the door. He’s like, “I’m sorry.” I’m like, “It’s okay.” He’s like, “It’s so crowded.” I said, “It’s collectively all of our faults that it’s crowded, so don’t say you’re sorry. We’re all sorry.” He was like, “Ha-ha.” We had a moment and he’s like, “I used to work for the MTA.” I’d been thinking, “I wonder how much it costs to run the MTA for a year?” Could I use that as a use case in this discussion around this model? Cost-space transportation model, I don’t know.
I was like, “You used the word MTA.” Now, he’s talking. I’m like, “I love New York.” Thank you, New York, for sending me what I need. I said, “That’s funny because I’ve been working on an economic model. I was wondering if you could tell me how much it costs to run the MTA for a year, including all of this stuff like capital improvements and amortizing it over time. What’s the total budget?” He was like, “I did leave the position a few years ago.” I’m like, “Yes, it would probably have gone up 20% at least in that period.” He’s like, “Yes, I’d say $100 million. They used to run at $60,000. I was like, “That’s safe to say, I’ll say $100 million a year.”
Let’s pretend now that it costs $100 million a year to run the MTA subway system in New York City per year. The first 100 million rides and if everybody’s doing two rides a day and let’s say we can get 100 million rides out of people in a year. I don’t know their usage stats on this, but in a city of 8.5 million with commuters the way that we are, we get over 100 million users. We’re paying $2.75 a ride right now. I don’t know why but here we go. If we had 100 million users, 100 million rides and $1 a ride, great. We reached our limit. Why do we need more than 100 million? We said that. We have a fixed cost. What happens if all have our MTA cards as New York City residents, the next time we swipe it, it only costs us $0.50 and then it keeps going down and down until we have all of the money back on our card and we replenish it the next year? We have to pay that same first ride or we’d have to pay up until that first 100 million and then it replenishes back in. With inflation, it’ll be $1.10 or $1.05 or whatever. We can see it come back and then what about this? The sociologist in me is excited about, “What this can mean for really frustrated tourists?”
Part of that reason that train was freaking packed was that we had lots of tourists who didn’t know where they’re going and looking at their old maps, walking slow and all the things that they do. What if they come and they don’t get the resident card because they don’t come very often? They don’t need to have a lasting incentive to keep running MTA. They’re going to be here for a week. They get the regular card and that’s extra money that goes in. The more of them that come in, they don’t get the refund money. We do because we’re the ones that live here and pay taxes here and stuff. Now, we like tourists because they’re driving the price of our subway rides down all year long and they’re only here for some time.
There are ways to systematize circular economies and incentives and use incentives and the benefits thereof. Also, you can potentially lose a lot of work and friction and additional compliance costs by always having to audit things in the same way. Blockchain in its immutability, there’s a lot of opportunity for that and I’m not going to get into compliance too much. It would be interesting to see something with a fixed cost that has a scalability of a utility and have access to be utilized in this manner. If you know Richard Branson, please forward him this. He does a lot of cool social innovation stuff. Any other big rich people that are visionaries that want to do something cool in a certain environment. That might be a good place.
I don’t know if they have a bus system there though. It seems more like a yacht system. Somewhere in the Bahamas or some closed system that has a fixed cost and enough especially external money coming in that they’d like to see directly recirculate to their population. That might be a vehicle for doing so. I can think of transportation for it. I can think of digital products for it. Anything has a relatively fixed or predictable cost and has minimal systems around it and can scale in terms of usability. Hopefully, it has engagement from a lot of external participants so that you could watch wealth go directly back into the user base that is local. There’s my idea. I’ve called it cost-based economics and I’m going to keep using the app analogy because it seems simple. I won’t get as many people saying like, “That’s not how much it costs to run the MTA,” but I hope that illustrates the idea.
If you know anybody who’s doing anything like this, if you have any input on it, I think this will work best on a proof of stake chain. There’s no reason for proof of work chain, which means a private chain to some degree. There are some guys at MIT in Al Grand who have talked about this. They’re excited and interested in it. I’m working on publishing something. I hope that if you have outpatient for this that you reach out. If you’re working on something that uses this or if you want to use something like this, I’d love to advise on that and help. I think it’s a good idea. Its first easy iterations will be in the nonprofit world because people won’t be as threatened by the notion of what a different capitalist system would look like. Hospice economics is going to be more and more useful as we have different incentives come about in a post-AI and post universal basic income world. I’m speaking into a camera 50 years too soon. Thank you for reading. I will catch you next time on our show. Thanks a lot. Bye.
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