Skip to main content
SpringerLink
Log in

Blockchain and investment: An Austrian approach

  • Published:
The Review of Austrian Economics Aims and scope Submit manuscript

Abstract

Investment is a function of expected profit, which involves calculation of the cost of trust. Blockchain technology is a new institutional technology (Davidson et al. 2018) that industrialises trust (Berg et al. 2020). We therefore expect that the adoption of blockchain technology into the economy will affect investment and capital structure. Using a broad Austrian economic approach, we examine how blockchain technology will affect the cost of trust, patterns of investment, and economic institutions.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. See, e.g. https://medium.com/@hayekian/how-bitcoin-spreads-austrian-economics-and-thus-worldwide-intellectual-revolution-9df49929725d

  2. What Menger called ‘higher-order goods’, Böhm-Bawerk (1889) called ‘roundaboutness’, Hayek (1931) called ‘stages of production’, and Lachmann (1956) called ‘heterogenous capital’.

  3. “Hayek greatly simplified the Austrian vision of a capital-using economy by modelling the economy’s production activities as a sequence of inputs and a point of output.” (Garrison 2001, p. 2).

  4. Obviously, this prediction depends upon factor elasticities and bargaining outcomes as to where rents are captured, i.e. whether by consumers through lower prices (income effects dominate) or by other factors as increased rents (substitution effects dominate).

  5. This accords with Adam Smith’s (1776) idea of the origin of wealth arising from the market process of an increased division of labour and division of knowledge.

  6. Sustainable economic growth in long run consumption is only possible through an exogenous increase in technology (e.g. real business cycle theory, Nelson and Plosser 1982) or change in intertemporal preference that induces longer capital structure.

  7. viz. “The early bird gets the worm, but the second mouse gets the cheese.”

  8. Equilibrium theorising arrived mid-century with the formal turn in economic analysis ushered in by Paul Samuelson, Arrow-Debreu, et al. (see Mirowski 1989). This provided the context for generalised theoretical and empirical analysis of departures from equilibrium in terms of bounded rationality, imperfect information, competitive frictions, etc.

  9. And some Post-Keynesian analysis, building on Keynes (1936: ch 12) (e.g. Shackle 1978, Loasby 1999).

  10. This was the analytic direction Austrian economics was heading before its mid-century defeat pulled focus away from analysis of decentralised orders.

References

  • Albright, L. (2014). What does bitcoin mean for Austrian money theory? Available at http://mises.ca/posts/blog/what-does-bitcoin-mean-for-austrian-money-theory/.

  • Allen, D. W. E., Berg, C. & Davidson, S. (forthcoming). The New Technologies of Freedom. American Institute for Economic Research.

  • Allen, D., & Potts, J. (2016). How innovation commons contribute to discovering and developing new technologies. International Journal of the Commons, 10(2), 1035–1054.

    Article  Google Scholar 

  • Ammous, S. (2016), Can cryptocurrencies fulfil the functions of money?. Columbia University, center on capitalism and society, working paper no. 92, available at SSRN: https://ssrn.com/abstract=2832769

  • Ammous, S. (2018). The Bitcoin Standard: The Decentralized Alternative to Central Banking. John Wiley & Sons.

  • Arthur, W. B. (2009). The nature of technology. Oxford University Press.

  • Bachmann, R., & Zaheer, A. (Eds.). (2006). Handbook of trust research. Cheltenham: Edward Elgar.

    Google Scholar 

  • Bakhshi, H., Freeman, A., & Potts, J. (2011). State of uncertainty: Innovation policy through experimentation. London: NESTA.

    Google Scholar 

  • Berg, C., Davidson, S., Potts, J. (2019a) Byzantine political economy. Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3344110

  • Berg, C., Davidson, S., & Potts, J. (2019b). Understanding the Blockchain Economy: An Introduction to Institutional Cryptoeconomics. Edward Elgar.

  • Berg, C., Davidson, S., & Potts, J. (2020). Proof of work as a three sided market. Frontiers in Blockchain, 3(2), 1–5.

    Google Scholar 

  • Boettke, P. J. (2018). F A Hayek: Economics, Political Economy and Social Philosophy. Springer.

  • Böhm-Bawerk, E. v. (1889). Capital and Interest: A Critical History of Economic Theory. (W. Smart, Trans.) London: Macmillan.

  • Böhme, R., Christin, N., Edelman, B., & Moore, T. (2015). Bitcoin: Economics, technology, and governance. Journal of Economic Perspectives, 29(2), 213–238.

    Article  Google Scholar 

  • Boudreaux, D., & Holcombe, R. (1989). The Coasian and Knightian theories of the firm. Managerial and Decision Economics, 10(2), 147–154.

    Article  Google Scholar 

  • Catalini, C., Gans, J., (2017) Some simple economics of the Blockchain, Rotman School of Management Working Paper no. 2874598; available at SSRN: https://ssrn.com/abstract=2874598

  • Davidson, L., & Block, W. (2015). Bitcoin, the regression theorem, and the emergence of a new medium of exchange. Quarterly Journal of Austrian Economics, 18(3), 311–338.

    Google Scholar 

  • Davidson, S., De Filippi, P., & Potts, J. (2018). Blockchains and the economic institutions of capitalism. Journal of Institutional Economics, 14(4), 639–658.

    Article  Google Scholar 

  • Demsetz, H. (1968). The cost of contracting. Quarterly Journal of Economics, 82(1), 33–53.

    Article  Google Scholar 

  • Dwyer, H. (2015). The economics of bitcoin and similar private digital currencies. Journal of Financial Stability, 17, 81–91.

    Article  Google Scholar 

  • Foss, N. (1993). Theories of the firm: Contractual and competence perspectives. Journal of Evolutionary Economics, 3, 127–144.

    Article  Google Scholar 

  • Foss, N. (1994). The theory of the firm: The Austrians as precursors and critics of contemporary theory. Review of Austrian Economics, 7, 31–65.

    Article  Google Scholar 

  • Friedman, M. (1968). The role of monetary policy. American Economic Review, 58(1), 1–17.

  • Friedman, M. (1977). Inflation and unemployment. Journal of Political Economy, 85, 451c472.

  • Gambetta, D. (Ed.). (1988). Trust: Making and breaking cooperative relations. Oxford: Blackwell.

    Google Scholar 

  • Garrison, R. (2001). Time and money: The macroeconomics of capital structure. London and New York: Routledge.

  • Garrison, R. W. (2005). The Austrian School: Capital-Based Macroeconomics. In B Snowdon and H R Vane (eds), Modern Macroeconomics: Its Origins, Development and Current State, Chapter 9, Aldershot: Edward Elgar.

  • Graf, K. (2013). On the origins of bitcoin.http://www.konradsgraf.com/blog1/2013/10/23/on-the-origins-of-bitcoin-my-new-work-on-bitcoin-and-monetar.html

  • Harwick, C. (2018). Money and its institutional substitutes: The role of exchange institutions in human cooperation. Journal of Institutional Economics, 14(4), 689–714.

    Article  Google Scholar 

  • Hausmann, R., Rodrik, D. (2003). Economic development as self-discovery. Journal of Development Economics 72(2), 603–633.

  • Hayek, F. A. (1935). Prices and production. London: Routledge.

    Google Scholar 

  • Hayek, F. A. (1941). The pure theory of capital. Chicago: University of Chicago Press.

    Google Scholar 

  • Hayek, F.A. (1945) The Use of Knowledge in Society. American Economic Review, 35(4), 519–530.

  • Hayek, F. A. (1990 [1976]). Denationalisation of money: The argument refined: An analysis of the theory and practice of concurrent currencies. London: Institute of Economic Affairs.

  • Hendrickson, J., & Luther, W. (2017). Banning bitcoin. Journal of Economic Behavior and Organization, 141, 188–195.

    Article  Google Scholar 

  • Hendrickson, J. R., & Luther, W. J. (2019). Cash, crime, and cryptocurrencies. AIER Sound Money Project Working Paper No. 2019–01.

  • Holcombe, R. (2003). The origin of entrepreneurial opportunities. Review of Austrian Economics, 16(1), 25–43.

    Article  Google Scholar 

  • Jones, R. (1976). The origin and development of media of exchange. Journal of Political Economy, 84, 757–775.

    Article  Google Scholar 

  • Kirzner, I. (1973). Competition and entrepreneurship. Chicago: University of Chicago Press.

    Google Scholar 

  • Lachmann, L. (1956). Capital and its structure. Sheed Andrews and McMeel: Kansas City Available at: https://mises.org/library/capital-and-its-structure

    Google Scholar 

  • Loasby, B. (1999). The significance of Penroses theory for the development of economics. Contributions to Political Economy, 18, 31–45.

    Article  Google Scholar 

  • Luther, W. (2013). Friedman versus Hayek on private outside monies: New evidence for the debate. Economic Affairs, 33(1), 127–135.

    Article  Google Scholar 

  • Luther, W. (2016a). Cryptocurrencies, network effects, and switching costs. Contemporary Economic Policy, 34(3), 553–571.

    Article  Google Scholar 

  • Luther, W. (2016b) Bitcoin and the future of digital payments. The Independent Review 20(3), 397–404.

  • Luther, W. J., & Olson, J. (2015). Bitcoin is memory. Journal of Prices & Markets, 3(3), 22–33.

    Google Scholar 

  • McCloskey, D. N. (2010). Bourgeois Dignity: Why Economics Can't Explain the Modern World. University of Chicago Press.

  • Menger, C. (2009 [1892]). On the origins of money. Auburn, Alabama: Ludwig von Mises Institute. Translation by C. A. Foley.

    Google Scholar 

  • Mises, L. (1980 [1912]). The theory of money and credit, Indianapolis: Liberty Classics. translated by H.E. Batson

  • Nakamoto, S. (2008) Bitcoin: A peer-to-peer electronic cash system. Working Paper.

    Google Scholar 

  • Nelson, C., & Plosser, C. (1982). Trends and random walks in macroeconomic time series. Journal of Monetary Economics, 10(2), 139–162.

    Article  Google Scholar 

  • Nelson, R. R., & Sidney, G. (1982). An evolutionary theory of economic change. Harvard University Press.

  • Nooteboom, B. (2002). Trust. Cheltenham: Edward Elgar.

    Book  Google Scholar 

  • Novak, M., Davidson, S. & Potts, J. (2018) The cost of trust: a pilot study. The Journal of the British Blockchain Association 1(2):1–7

  • North, D., & Weingast, B. (1989). Constitutions and commitment: The evolution of institutions governing public choice in 17th century England. Journal of Economic History, 49, 803–832.

    Article  Google Scholar 

  • ODriscoll, G., Rizzo, M. (1985) The economics of time and ignorance, Oxford: Blackwell.

  • Olson, M. (1993). Dictatorship, democracy, and development. American Political Science Review, 87(3), 567–576.

    Article  Google Scholar 

  • Phelps, E. (1968). Money-wage dynamics and labor-market equilibrium. Journal of Political Economy., 76, 678–711.

    Article  Google Scholar 

  • Potts, J. (2000) Uncertainty, complexity, and imagination P earl and S Frowen (eds) Economics as an Art of Thought: Essays in memory of G.L.S Shackle. Routledge. pp. 162–84.

  • Potts, J. (2004). Liberty bubbles. Policy, 20(3), 15–21.

    Google Scholar 

  • Potts, J. (2019). Innovation commons. Oxford: Oxford University Press.

    Book  Google Scholar 

  • Radford, R. (1945) The economic Organization of a P.O.W. camp, Economica.

  • Romer, P. (1990). Endogenous technological change. Journal of Political Economy, 98(5), 71–102.

    Article  Google Scholar 

  • Schneider, B. (2012). Liars and outliers. Wiley.

  • Selgin, G., & White, L. (1987). The evolution of a free banking system. Economic Inquiry, 25, 439–457.

    Article  Google Scholar 

  • Shackle, G. (1972). Epistemics and economics. Cambridge: Cambridge University Press.

    Google Scholar 

  • Solow, R. M. (1956). A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics 70(1), 65–94.

  • Šurda, P. (2014) On the origin, classification and utility of bitcoin SSRN https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2436823

  • Szabo, N. (1997). The idea of smart contracts. In Nick Szabos papers and concise tutorials Available at http://szabo.best.vwh.net/idea.html

    Google Scholar 

  • Szabo, N. (2002) Shelling out https://nakamotoinstitute.org/shelling-out/

  • Werbach, K. (2018). Blockchain and the new architecture of trust. Princeton University Press.

  • White, L. (2015). The market for Cryptocurrencies. Cato Journal, 35(2), 383–402.

    Google Scholar 

  • Williamson, O. (1985). The economic institutions of capitalism. New York: The Free Press.

    Google Scholar 

  • Zak, P., & Knack, S. (2001). Trust and growth. Economic Journal, 111(470), 295–321.

Download references

Author information

Authors and Affiliations

  1. Blockchain Innovation Hub, RMIT University, Level 2, 108 Victoria Street, Carlton, 3053, Australia

    Darcy W E Allen, Chris Berg, Sinclair Davidson & Jason Potts

Authors
  1. Darcy W E Allen
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Chris Berg
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Sinclair Davidson
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Jason Potts
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Darcy W E Allen.

Ethics declarations

Conflict of interest

The authors declare they have no conflict of interest.

Additional information

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Allen, D.W.E., Berg, C., Davidson, S. et al. Blockchain and investment: An Austrian approach. Rev Austrian Econ 34, 149–162 (2021). https://doi.org/10.1007/s11138-020-00504-x

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11138-020-00504-x

Keywords

Search

Navigation