Magic Bitcoin

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Historical Background On The Phenomenon
Using context to understand why hackers set out to build digital currency systems.
Satoshi Nakamoto was the first participant in his own network, and left a message within the very first “block” of data produced by Bitcoin. The message within this so-called Genesis Block read
The original headline appears in the British paper The Times (see figure below). The inclusion of this note is a source of widespread confusion.

Given what we know about Nakamoto’s motivation to create a free economic space outside the purview of institutional oversight, it would seem that this message makes light of the sympathetic relationship between politicians and central bankers. Many people use this allusion to infer that Bitcoin was purpose-built as some kind of disruptor or destroyer of central banks. Taken this way, the headline would seem to be a statement of superiority or self-righteousness.

We suggest that this is a mischaracterization. If Bitcoin does evolve into a large-scale alternative currency system, then Nakamoto’s use of The Times headline will strike historians as timely, but it is more than just a political statement.
In fact, putting a headline in the Genesis Block has a second, more practical purpose: it serves as a timestamp. By reproducing the text from that day’s paper, Nakamoto proved that the first “block” of data produced by the network was indeed made that day, and not prior. Nakamoto knew Bitcoin was a new kind of network that prospective participants would scarcely believe was real. At the outset, it would be important to send a signal of integrity to people who might join. Getting volunteers to value the project was top priority, indeed a far higher priority than mocking central bankers.

For investors outside the technology industry, understanding this volunteer-based way of working is critical to understanding why Bitcoin operates the way it does, and why it is an improvement on conventional methods of human collaboration. To get to these points, we will first explore the origins of the “war” that Satoshi is engaged in, and how the invention of Bitcoin is meant to change the tide.

The old friction between technologists and management
For the last 50 years, corporate technology companies are increasingly at odds with the engineers that build their critical systems. Recent headlines tell the story: at Microsoft, Amazon, and Salesforce, employees protested contracts with Customs and Border Patrol and ICE. At Google, employees protested the company’s Project Maven AI contracts for the Department of Defense, which promised to increase the accuracy of drone strikes; it bowed out from Project Maven, but has said it will continue to work with the US military in other projects. Google’s announcement that it would agree to censor search results inside China drew 1400 workers to protest. Microsoft is facing a lawsuit by two employees who may have suffered PTSD after seeing ***** *****ography as part of “content moderation” roles. YouTube employees describe their jobs as a “daily hell of ethics debate.” Facebook has experienced protests for the gentrification wrought by its tens of thousands of employees, as well as more recent protests for its “intolerant” political culture.

Other *****s of technological systems include the personal data leak at Equifax, and the ***** of account-creation privileges within the Wells Fargo bank computer system, where accounts were opened and cards issued—in some cases, with forged signatures—in service of sales goals. The worst example of abusive corporate software systems might be the maker of the automated sentencing software employed by some court systems, called COMPAS, which has been shown to recommend prison terms based on the convict’s race.

Tensions between software developers and their employers have spilled out of Silicon Valley and into mainstream news. “This engineer’s lament is a microcosm of a larger trend sweeping across the Peninsula” of San Francisco, reported Vanity Fair in August of 2018:

“In Silicon Valley’s halcyon days, employees didn’t have any qualms about the ethics of the companies they were joining since many honestly believed that they were going to advance a corporation that was going to—yes—change the world. The people who helped transform the Bay Area into the greatest wealth-generation machine in human history—and themselves into millionaires and billionaires in the process—are now turning their backs on the likes of hegemonic corporations who, in their own depictions, moved fast and broke things without an end in sight.”

The article quotes an anonymous Uber executive who fears that ethical issues will motivate engineers to leave en masse: “If we can’t hire any good engineers, we’re *****ed.”

This is a liminal moment in business, where the “good engineers” suddenly have leverage over the wealthy and elite management of some of the largest corporations in the history of the world. This development did not arrive overnight; it has its origins in a tension that originated decades ago.

Next, we will look at how the balance of power shifted, and how Bitcoin tips the scale further for the “good engineers.” To appreciate how the software engineers got their leverage, we must begin in the early 20th century, and learn how managers and engineers got to be at odds in the first place.

The emergence of the corporate institution (1900-1929)
The study of human behavior in a business context has a rich tradition. Perhaps the first person to take a meaningful step forward in this discipline was Frederick Winslow Taylor. “Taylorism,” his conception of management science, was all about rational planning, reducing waste, analyzing data, and standardizing best practices. Business owners used these techniques to drive workers uncommonly hard. Andrew Carnegie obsessed over worker productivity, becoming so frustrated with the Homestead Strike of 1892 that he hired a private police force to have picketing workers shot.

Thorstein Veblen was a Norwegian-American economist who published his seminal study of practitioners of management science in 1904. He created a series of insights about the nature of “institutions,” as distinct from the “technologies” used by them. This distinction is a good starting point for understanding the problems that arise for people who create new technologies within institutions.

An important aspect of Veblen's concept of "institution" is that they are by nature non-dynamic—they resist changes that don’t benefit the top people in the hierarchical structure. Hierarchy persists through what Veblen called “ceremonial aspects,” traditional privileges that served to elevate the decision-makers. It is new technological tools and processes which make the institution profitable. But so-called “spurious” tools may be also be produced because they have ceremonial aspects that make management look or feel good.

After the Great Depression, the historian and sociologist Lewis Mumford would develop the idea that “technology” had a dual nature. Polytechnic developments involved complex frameworks which combined technologies to solve real human problems; Monotechnic developments were technology for its own sake. Monotechnics oppress human beings, Mumford argued, citing the automobile as one such development that crowded out pedestrians and bicyclists from roads, and led to a massive annual death toll on American highways.

The institutions of the day, corporations and governments, Mumford called megamachines. Megamachines, he said, are comprised of many human beings, each with a specialized role in a larger bureaucracy. He called these individuals “servo units.” Mumford argued that for these people, the specialized nature of the work weakened psychological barriers against questionable commands from leadership, because each individual was responsible for only one small aspect of the machine’s overall goal. At the top of a megamachine sat a corporate scion, dictator, or commander to whom god-like attributes were attributed. He cited the lionization of Egyptian Pharaohs and Soviet dictators as examples.

Ceremonial, spurious, monotechnic developments could lead to extremely deadly megamachines, said Mumford, as in the case of the Nazi War Machine. This phenomenon owed itself to the abstraction of the work into sub-tasks and specialties (such as assembly line work, radio communications). This abstraction allowed the servo-units to work on extreme or heinous projects without ethical involvement, because they only comprised one small step of the larger process. Mumford called servo-units in such a machine “Eichmanns,” after the Nazi official who coordinated the logistics of the German concentration camps in World War II.

In the early 20th century, the new and trendy field of “management science” was greatly influenced by Fordism: the practices of Henry Ford. Fordist mass production was characterized by a rigorous and somewhat dreary focus on efficiency, specialization, mass production, reasonable hours, and living wages. But when the Great Depression came, owners like Ford laid off workers by the tens of thousands. Wages dropped, but the punishing nature of the work remained.

Ford Motor Company laid off 60,000 workers in August of 1931. Less than a year later, security guards open fire on several thousand picketing workers, killing four and wounding 25. Henry Ford placed machine gun nests around his home, and equipped guards with teargas and surplus ammunition. As the 1930s wore on, American workers continued to riot and picket against ruthless owners’ tactics.

Modern management emerges to protect workers (1930-1940)
After the Depression, a class of professionals emerged to take major business decisions away from the business owners. Industry would be run by professional managers, who would execute plans in the best interest of both the owners and the employees. They derived their positions and power from their competence, not their percentage of ownership. The greedy shareholders could be held at bay in this new structure. John Kenneth Galbraith, the Harvard economics professor, studied this phenomenon at the time:

“The power passed from one man—there were no women, or not many—into a structure, a bureaucracy, and that is the modern corporation: it is a great bureaucratic apparatus to which I gave the name the Technostructure. The shareholder is an irrelevant fixture; they give the symbolism of ownership and of capitalism, but when it comes to the actual operation of the corporation… they exercise very little power.”

This “bureaucratic apparatus” of the Technostructure consisted of upper tier managers, analysts, executives, planners, administrators, operational “back office” staff, sales and marketing, controllers, accountants, and other non-technical white-collar staff.

In 1937, Nobel Prize winner Ronald Coase built on the ideas of the managerial scientists to theorize why these massive firms were emerging, and why they accumulated so many workers. He theorized this behavior was rational, and was aimed at reducing transaction costs. He wrote:

“The source of the gain from having a firm is that the operation of a market costs something and that, by forming an organization and allowing the allocation of resources to be determined administratively, these costs are saved.”

In other words, in the hiring of skilled labor, it is cheaper to retain a salaried worker who returns each day, than to go out each day and select a new temporary candidate from a pool of contractors in a “market.” He continued:

“Firms will emerge to organize what would otherwise be market transactions whenever their costs were less than carrying out the transactions through the market.”

The corporation was the most efficient way to mass produce and distribute consumer goods: it tied together supply chains, production facilities, and distribution networks under centralized management. This increased efficiencies and productivity, lowered marginal costs, and made goods and services cheaper for consumers.