We have been trying to end poverty for a really long time. And failed.
Can Decentralized Finance (DeFi) really be the one to finally give us an economy that works for all people on Earth? To get to the bottom of this, let’s consider a case study.
Ten years of extreme poverty were ushered in by the Great Depression in 1929.
People suffered for generations as a result. People who had been financially affluent a year earlier suffered hunger, homelessness, hardships, crime, loss, family disintegration, and worse. This was the worst economic downturn in modern history.
Nevertheless, I believe it was utterly unnecessary and avoidable.
Take a moment to consider it. Workers didn’t disappear. The workforce stayed the same. They begged for work. Things that had to be done, the work, didn’t disappear. Roads still required to be built, people to eat, clothes made, and so on. No resources or tools were lost. No factories disappeared. They closed their doors, but they didn’t disappear into thin air. They just stopped operating. People could theoretically walk into factories and do the necessary work.
What prevented them from doing so? What made them suffer ten years of misery instead?
The reason was that the monetary system itself collapsed. Banks closed, so the only real collapse was in the monetary system. Despite the absence of currency, everything else remained. The people, the tools, the resources, and the needs. Psychologically, though, “there were no jobs” due to a lack of official currency to “pay wages” and “buy materials.” The means of exchange disappeared. That is all. There weren’t enough “permission slips” to be issued for people to confidently exchange resources and time.
While the world had resources, tools, people, and things to do, it suffered for ten years because the means of exchange, the cash, was stopped. This is artificial scarcity. If there had been an alternative monetary system that people could have trusted and used, ten years of suffering could have been avoided.
Clearly, this is the lesson here, and DeFi will be able to resolve it. And just in time. Because today, as billionaire Ray Dalio points out in his Changing World Order, the global financial system is on very shaky ground indeed. We can avoid the repeat of history if we are willing to learn from it and call a spade a spade.
Poverty is a sign of a failing economy. An economy that works for everyone is the best. All of us benefit from eliminating poverty worldwide. This brings us to The Great Scarcity Hoax.
The Great Scarcity Hoax
I define The Great Scarcity Hoax as comprising three distinct myths, as follows:
- The “It’s Just The Economy Doing Its Thing” Myth (The Case Against Debt-Based Monetary Systems)
As a fish born in water knows no other alternative to water, we have been born, for generations, into a monetary system we assume is the only way monetary systems can work. Most of us don’t even think to question it, to wonder if there could be a better or at least a complementary way of doing it.
As Sir Mervyn King, ex-Governor of the Bank of England, says, “Of all the many ways of organizing banking, the worst is the one we have today. Change is, I believe, inevitable. The question is only whether we can think our way through to a better outcome before the next generation is damaged by a future and bigger crisis.”
We have a debt-based, privately owned monetary system. Such a system results in ballooning debt. Debt’s inherent default creates foreclosures, which transfer tangible assets from the public to system owners. Additionally, the types of decisions that must be made about monetary and fiscal policy create money scarcity under such a system. And, because money can come into circulation only through borrowing, it forces producers to convert their value produced into cash by becoming debtors. This makes producers slaves to money.
This is all unnecessary. There are many better alternatives to such a system. A monetary system need not be privately owned. It can be owned by the people themselves, or it can be a public good, a common good, or autonomous. And debt does not have to be involved. Asset-based or productivity-based are good options. Defi is ideally suited to build on these alternatives.
Different types of monetary systems create completely different types of economies, cultures, societies, problems, and solutions. We have been taught economics by “fish born in water”, those who never experienced anything else but a privately-owned, debt-based monetary system.
- The “Single Currency Per Country” Myth (The Case Against Monoculture)
Diversity makes ecosystems healthier and more resilient. Monoculture is unsustainable. Diversification even applies to investing. Nevertheless, for some reason, we think that each country should have only one currency, and anything else seems blasphemous.
As Bernard Lietaer, the Euro’s “architect,” says in his book New Money for a New World, “Our national currencies are but one form of money. Just as no single tool can build a house, no single type of money, no matter how ingenious or robust, can be designed to address each and every one of the many and sometimes divergent requirements of society. Moreover, given the particular architecture of our current money, with its artificially maintained scarcity, there will never be sufficient sums of national currency available to meet our many and ever-growing demands. A one-type-fits-all monetary design makes as much sense as artificially limiting our use of tools to hammers when so many other specialized tools are readily available for practical use right now.”
- The “Unbanked People Are Poor Or Criminal” Myth (The Case Against Financial Exclusion)
Try opening an account at a bank today without identification. AML and KYC laws make this impossible. However, the World Bank reports that over 1 billion people (1/7th of the world’s population) lack identification. They are not being issued ID by any government. These are good people who simply did not receive a birth certificate, or fled from a war without documents, or whatever. These people are not criminals. Yet, because of lack of documentation, these people are permanently excluded from the financial system.
Furthermore, 2.5 billion people, 36% of the world, are unbanked. They cannot be served affordably by the old banking system. And not just in Africa, as many people believe. It’s happening all around the world. According to the Federal Reserve, 55 million adult Americans were unbanked or underbanked in 2018, accounting for 22% of households.
In Rachel W. Robinson’s paper Blockchain Serving the Unbanked (Blockchain Research Institute), we see that “The Center for Financial Inclusion reported that the lower 40% of the population in emerging economies constitute $3 trillion in annual spending and disposable incomes continue to rise. In total, the financially excluded make up a $380 billion market revenue opportunity for institutions that can find a way to provide services efficiently and inexpensively.”
The point is, these people are not inherently poor. Rather, they are poor because of a systemic failure. Once again, the old system creates poverty through artificial scarcity and restrictions. In order to handle what it cannot handle, the old system needs help and alternatives. This is where DeFi comes into play.
The DeFi Solution: Adding Complementary Currencies and Alternative Monetary Solutions
Currently, many DeFi solutions are built to do what is already done in CeFi, but with DeFi. This is all well and good, but I suggest we go further. We should not simply replace CeFi with DeFi. Sort of like old wine in new bottles. Let’s also consider using DeFi to build local community currencies and complementary currencies such as LETS and Time Dollars. A complementary currency is a currency that is used in addition to the national currency. Complementary currencies are usually accepted only within a subset of society. Examples include LETS and Time Dollars (TimeBanks). In history, they have proven to fill in the gaps left by national currencies, alleviating poverty where a national currency cannot. DeFi can also be used to build alternative monetary systems that are not debt-based or privately owned.
We can summarise all this as follows:
- The economy works best when it works for all.
- A single national currency = money scarcity = artificial scarcity
- National currencies need a backup, an alternative so that when they inevitably fail or go into a slump, there is something else to hold people up.
- National Currencies mixed with DeFi + Complementary Currencies + Alternative Monetary Systems = A more resilient economy
This is the hidden potential and power of DeFi. FinTech for social good. Simply eliminating the artificial scarcity of MoEs (means of exchange) can significantly alleviate, if not eliminate, poverty.
I go into these concepts and more in my book “Money for All“, available here on amazon.