In the history books of the future, they’ll point to the computer and the internet as the first two major pieces that drove the major economic and societal shift to come. I believe that shortly after that, they’ll name the advent of cryptocurrency as the third.

The appearance of these three pieces of technology are going to break the monopoly that government has held over the populace since the beginning of the industrial revolution. And I believe the changes are going to be more profound than many people realize.

Backdrop

Large, powerful governments came into being for many reasons, but the primary ones are that 1) improvements in weapons technology made it easy for well-armed groups to seize control of property, and government was necessary for protection, and 2) the industrial revolution enabled the creation of large, physical assets like railroads, factories, and mines that could not be physically moved, which meant both that these assets needed protection from violence and that governments and labor unions could charge extortionary taxes and wages, and capitalists had little means of defending themselves.

Changes

The development of the computer and the internet has meant that a larger and larger portion of the productive output of the world is now non-physical. Non-physical assets are by definition not tied to any physical location, which drastically reduces the leverage that labor and governments have over such producers because they are able to change physical locations.

However, since the only currencies historically available have been ones minted and controlled by governments, companies have still to a large extent been at the whims of governments, as governments have retained the power to seize assets by force (if only financial ones rather than physical ones).

With the advent of cryptocurrencies, this is now changing. While previously a company had to have a government sanctioned bank account in order to operate, that restriction will no longer exist. It will now be possible for organizations to exist entirely outside of the purview of any sovereignty.

These governments will of course resist this change, but they currently derive the ability to enforce their will from the fact that they control the banking system. Once this tool is removed, their power to exact taxes will be drastically diminished.

Some Implications

Once the power to tax is removed, the welfare state will quickly vanish.

Since companies don’t require anywhere near as much labor as they previously did, and because markets are increasingly global rather than national, productive people and organizations will be able to create drastically more wealth with far fewer resources (labor in particular). As a consequence, and in conjunction with the vanishing welfare state, income and wealth inequality will rise drastically.

Since productive parties of society will have their tax burdens drastically reduced, they will retain nearly all of the wealth that they create. If we assume that such wealth creators will be more efficient at allocating this capital than the government, capital efficiency in the economy will rise, and societal wealth will rise.

There will likely be a very chaotic transition between these two states.

While to some these implications may appear to be negative, I contend that protesting them will be as futile as protesting bad weather.

Note: Many of the ideas in this post were inspired by the book “The Sovereign Individual: Mastering the Transition to the Information Age “