Tyler Cowen’s latest book, Stubborn Attachments , explores the maximization of prosperity and individual liberty and finds a satisfyingly simple answer: optimize for economic growth at the expense of only a few inviolable human rights. It is dense and concise, as more books should be. I recommend it1.
In theory, prioritizing growth over everything is good. But in practice, there are many scenarios where prioritizing growth would face moral and philosophical challenges. For instance, how do we choose between investing in an elderly person and a younger person? It may cost millions to keep a sick, elderly person alive but just thousands to give birth and raise a child.
We can think of the elderly as individuals who are poor in one particular dimension, namely in their future human capital. The elderly are more likely to die soon than are the young. And while we should do a good deal to help the elderly, the logic of sustainable growth places limits on these obligations, too.
Cowen asks, why not value human life at its replacement cost2? All else equal, we can expect a younger life to contribute more to long term growth than an older life, so as humanity we should invest more in younger people and less in older people.
Of course, this is an awkward ethical position. Invoking replacement cost when deciding whether to repair your old home or buy a new home is a useful logical exercise. Invoking replacement cost when deciding whether to treat a sick person is an emotionally charged minefield.
Even Cowen is unwilling to commit fully to “human life should be valued at replacement cost.”
If one life disappears and another is added, the new life does make up for some of the value lost, at least in utility terms. Argued another way, losing an irreplaceable civilization is a much greater tragedy than losing a civilization in a way which allows for the birth of a new and different one in its place. Replaceability therefore seems to count for something, even if we do not agree for how much.
Still, it’s a useful exercise for understanding the “market value” of human life: replacement cost plus marginal preference for the continuation of that particular life3. Whether we should discouraeg people from having large marginal preferences for the continuation of lives is outside the scope of this post.
Should we value cryptocurrencies at their replacement cost?
There’s still no consensus on cryptocurrency valuation and as I’ve written before, I don’t expect consensus. Cryptocurrency prices are based more on meme-driven “pricing” than fundamental “valuation.” In this regard, cryptocurrencies are like human lives. Rather than value a human life, many prefer to price life at infinity (priceless).
Replacement costs offer a new way to view the problem of cryptocurrency valuation.
For some coins, the replacement cost is high. Consider replicating the mindshare, hashpower, and fanatic loyalists of Bitcoin; the developer community of Ethereum. For others–most smart contract protocols–the replacement cost is low.
Like with human lives, the market value for cryptocurrencies is the replacement cost plus the marginal preferences for the continuation of that cryptocurrency. So when a cryptocurrency has a high valuation but a low replacement cost, its market value is being propped up by pure faith.
When we frame investments in cryptocurrencies with replacement costs, we can tackle some tricky questions:
1. Do zombie coins have an obligation to shut down?
If a project has failed, is it unethical to continue to spend resources on it? A failed project should have a low replacement cost. But there are many scenarios where a project is poor in prospects but rich in resources (e.g. a failed token project that raised a lot of money). If we believe in the virtues of growth, allocating resources to a zombie project is unvirtuous. Better to scrap the failed project.
2. Is it value destructive to compete with Bitcoin?
The allure of creating or investing in the next Bitcoin results in lots of coins. Would it be better for overall growth if the devs and investors in these coins spent their resources growing Bitcoin? The answer is probably yes in most cases and no in the rare cases where something genuinely new and now expensive to replace emerged (e.g. Ethereum).
3. What projects should we support if we want to see overall growth?
Cowen concludes that we should invest more in young people and less in old people. Should we invest more in young coins and less in old coins? If anything, it should be the reverse because of e.g. Lindy, but age is probably orthogonal. Instead, we should invest more in projects that are getting more expensive to replace more quickly and less in clones and novelties4.
Applying replacement costs to cryptocurrencies yields clear guidance if we prioritize growth of the overall ecosystem: we should invest more in projects that are expensive to replace and getting more expensive to replace. The problem, of course, is that individual and group incentives often run counter to the growth of the overall ecosystem.
It’s unclear how somebody gets rich and famous making unpaid, opensource contributions to Bitcoin Core. For a more recent example, while investors have poured $100M+ into Grin mining operations, its lead developer has struggled to raise even a modest salary. But models for funding development of cryptocurrencies is a topic for another day.
I’m curious what readers think of using replacement costs in cryptocurrency valuation. I’ve seen surprisingly little written about it outside of individual asset valuation, human resources, and (?) ecological wetlands. Startup culture runs on a default assumption that it’s cheaper to replace most things (disruption) than continue to invest in the status quo. It’s satisfying to think that cryptocurrencies may run counter to this logic (and I think many Bitcoiners may agree), but does this really hold up?
- And for balance, here are some critical reviews of the book: here and here. They mostly take issue with how abstract the concepts in the book are, which I like (and like writing about).
- I searched “replacement cost” on marginalrevolution.com and found Tyler writing about this as early as 2005, in the context of Terri Schiavo, a woman who was kept alive for many years in a severed impaired mental state, costing the state $80K per year. Internet indexing and search are truly wonderful things.
- This framing is inspired by this response from one of Cowen’s readers: “We should value a particular human life at the lower of total preference for the continuation of that life and replacement cost for that life.”
- The degree to which a project develops a high replacement cost is related to its competitive moats. If one can simply fork a project and get a close replacement, then it has poor competitive moats. But if it has powerful moats like strong network effects, then it becomes much harder to replace.