*Migrated from Medium* Original Date - 10/10/21
I spent a nice chunk of the Sunday morning reading through Why Nations Fail — a good break from crypto and finance, at least so I thought. Running through Chapter 7, “The Turning Point”, I couldn’t help but think about crypto in the context of the Industrial Revolution. Specifically, the legislative changes undergone by Parliament during the early innings of the Industrial Revolution.
The chapter starts with an account of William Lee, a soon to be local priest who invented a ‘stocking frame’ knitting machine, which would free people from endless hand-knitting. Proud and excited of his invention, he went to Elizabeth I to show the machine and be granted a patent; a machine, that by all objective measures, would benefit society and the economy. What happened? Well, contrary to so-called common sense, Queen Elizabeth I declined it — “It would assuredly bring to [my subjects] ruin by depriving them of employment, thus making them beggars”. No patent and no more development of the machine. Why? The mechanization of machined production was just too risky from a political standpoint as it could destabilize society. Acemoglu and Robinson, authors of Why Nations Fail, draw from this and other strands of evidence a key point: “the elite, especially when their political power is threatened, form a more formidable barrier to innovation”.
Quite a frustrating point to swallow, but as history shows, time (and of course LUCK) can come to the aid. As the years went by, both changes in the legislative powers of Great Britain (the Parliament gaining more power over the monarchy) and changes in the composition of the political body drove the creation of a favorable set up for the Industrial Revolution to prosper.
Firstly, the reshuffling of those in power began to occur starting in 1832, when the First Reform Act was passed, enfranchising Birmingham, Leeds, Manchester, and Sheffield. What do all these cities have in common? They were clusters of factories and innovation centers. The inclusion of these boroughs in the legislative mix started to tilt the scale towards supporting manufacturing and away from supporting an entrenched land-based aristocracy.
Secondly, the rise in wealth of the manufacturer and entrepreneurship interest groups led to the ability to incentivize change in their favor. Added to this was the decrease in the relative wealth of the aristocratic land owners and (quite importantly) West Indies plantation owners. Result: more members of the House of Commons and Lords either were manufacturers / entrepreneurs or were investors in those businesses.
Third and finally, the passage of acts that enforced property rights (Sir Timothy Baldwyn’s case), voting expansion, and patent protection built the rails to scale the innovation provided by the entrepreneurs.
So, how does this all relate to crypto? Well, the industry finds itself in a similar position to William Lee — the technology and potential is amazing, but the political elite are scared. What does this mean for the banks? What does this mean for the Fed? What does this mean for the wealth of key donors? What does this mean for the ability to tax? The list goes on and on. Crypto is innovation and innovation is creative destruction — things will become obsolete and other things will be completely remolded. This is a scary time for the political elite, even if the potential of the innovation is amazing.
However, one can be optimistic as history has shown (of course we might need some time and luck, which I concede are drawbacks to my reasoning). With time, the current political elite will begin to shuffle out. New senators and reps will see the promise in crypto money to (sadly as this sounds) finance their campaigns and (what they should actually be thinking about) its ability to help their constituents. Old senators and reps will also see the same benefits and switch over (we already saw this in August with the Infrastructure bill voting patterns). Key people in society will begin to invest in the space, which translates to influence: all these accredited investor funds in BTC and ETH lead to the slow shift in wealth and protection incentives. The successful crypto players like SBF, Coinbase, a16z will aid in the education and the establishment of the new political elite. And, overall, the generational shift from boomer to millennial will create a significant change in societal behavior and desires… making way to influences everywhere in the system for crypto to be valued. These are the catalysts that stand to shift the US legislative and executive bodies.
Conclusion
What does all this mean? Does it mean that we have a rosy road ahead where everything will be rock solid awesome? No, sadly not. A lot of negative barriers can be set up and progress may take a lot longer in the US. BUT, should we be negative and doubt the future of American crypto? According to history, no. Contrary to what the average history class teaches, the Industrial Revolution wasn’t a straight a-ha moment for the British, a “this makes sense, let’s do it” process. History tremendously simplifies success. There were several barriers, it required time and toil, but in the end the revolutionary innovation prevailed. Crypto will go through the same, but in 100 years, kids will be told all the good things and how obvious it seemed from the start. That’s history I guess.
Disclosure:* This blog series is strictly personal/ educational and is not investment advice nor a solicitation to buy or sell any assets. It does not represent any views from where the author is working — all views, opinions, and arguments are the author’s. Please always do your own research.*