Conversable Economist

For those who can be fuzzy on global geography, like me, it’s perhaps useful to say that the Persian Gulf is a body of water bordered by eight countries: Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, the United Arab Emirates (UAE), and Oman. These countries include some of the world’s most prominent oil exporters, who have shipping ports for their oil on the Persian Gulf. However, oil tankers leaving the Persian Gulf (and headed for the Arabian Sea, the Indian Ocean, and destinations around the world) need to travel through the Strait of Hormuz, a channel that is about 100 miles long, but with shipping lanes for big oil tankers that at the narrowest point are only about two miles wide in each direction. The chokepoint is bordered by Iran to north and UAE and Oman to the south.

Chokepoints can cause problems, and not just because of armed conflict. Some readers may remember that five years ago in 2021, a container ship called Ever Given ran aground and shut down traffic through the Suez Canal for six days. Now the Strait of Hormuz is giving the world a lesson about how supply shocks affect oil prices.

About 90% of international freight trade moves over the oceans. What are some other main chokepoints for global ocean shipping? Stephan Maurer, Luke Heath Milsom, and Ferdinand Rauch offer insights in “The fragility of the global trading system” (London School of Economics Centre for Economic Performance, Discussion Paper 2186, May 2026). A readable short overview of the paper is available at the blog of the LSE Business Review. In the overview, Maurer, Milsom and Rauch write:

[W]e measured sea routes between 455 ports with a statistical trade model that lets us simulate what would happen if a major route closed, or if a new one opened. We simulate shutting three shipping lanes: the Panama Canal (which connects the Caribbean Sea with the Pacific Ocean), the Suez Canal (between the Red Sea and the Mediterranean Sea) and the Strait of Malacca (between the Indian Ocean and the South China Sea). We also looked at opening two new routes: a year-round Northwest Passage (connecting the Atlantic and Pacific oceans through the Arctic north of Canada) and a proposed canal across Thailand’s Kra Isthmus. (This scheme would lower the distance for many shipment routes between China or Japan and Europe, although the Thai government is reported to be considering a land-bridge project instead of a canal.)

As geography suggests, the Panama Canal is most important for the US economy, because the alternative is that some shipping would instead need to travel around the southern tip of South American. The Suez Canal is important for European trade, because otherwise shipping would need to be re-routed around the southern tip of Africa. (Although Suez is most important of all to the economy of Egypt; the authors estimate that a closure of Suez would reduce the total GDP of Egypt by 8%.) The Strait of Malacca (between Malaysia and Indonesia, with Singapore at its southern end where a key channel is only about two miles wide) is most important for China’s international shipping trade. Otherwise, shipping between China and India, Africa, the Middle East, and Europe would need to be rerouted further to the east through an alternative passage like the Sunda Strait (between the Indonesian islands of Sumatra and Java, but also shallow and narrow for some large modern ships) or the Makassar Straight (between the Indonesian islands of Borneo and Sulawesi, a longer detour but also deeper water).

The authors also look at the possibilities from opening two new trade routes. If ships could pass freely though a Northwest Passage, it would be possible to move trade between the Atlantic and Pacific Oceans without either going through the Panama Canal or around the southern tip of South America. A proposed canal in Thailand across the Kra Isthmus would potentially be quicker than the Strait of Malacca or its alternatives–but would also be a huge infrastructure project.

In a global economy with near-instantaneous communication and rapid air travel, it can sometimes feel as if the details of geography, like chokepoints for ocean shipping, don’t matter all that much. Which is true enough–until they do.

 

Tim Sablik acts as interlocutor in “Interview with Christiane Baumeister,” subtitled “On measuring the effects of oil shocks, changes in global energy markets, and forecasting tail risks” (Econ Focus: Federal Reserve Bank of Richmond, Third Quarter 2026). Here are some of the comments that caught my eye:

On her career choice:

My father was a high school economics teacher, and I loved to spend time in his office browsing through his books. … When I had to pick my field of study in high school, I picked economics, and I never looked back.

On a pass-through of higher oil prices:

When thinking about the passthrough of oil prices to consumer prices, you can divide that into a direct and an indirect mechanism. Given that households do not directly consume crude oil, the first stage of passthrough really happens in oil-related products. The price passthrough is reflected in energy goods and services that form part of the consumer basket, and price developments in these oil-related products then are summarized by the energy component of consumer prices. These effects tend to show up very quickly, typically within the same month of the shock, and they also drive up headline inflation, roughly one-for-one with the share of the energy component.

Indirect inflationary pressures are the result of higher energy prices increasing the cost of inputs for firms. As a result, the oil shock can also have an effect on the production of non-energy goods and services. If firms decide to pass those costs on to consumers, that will show up in core inflation. This component follows a more staggered process, since not all firms raise their prices at the same time. Historically, it can take about three to six months to reach the peak response.

On the current shock to oil prices:

Typically, an oil price shock is the result of different drivers, and what matters in a crisis episode is the relative importance of these various determinants. Sometimes supply dominates, sometimes demand, and every historical event is different. But I think what we’re experiencing right now is probably the cleanest example of an oil supply shock that we’ve had in decades. It really follows the blueprint of a classical supply shock: There’s a war in an oil-producing country or region where production facilities and energy infrastructure get destroyed, and, in this case, a major waterway gets blocked. That leads to a loss of oil output, which then induces a spike in oil prices. What sets the current crisis apart is the sheer size of the supply disruption and the fact that it has affected all the countries in a region. … Looking at the longer run, I expect prices to stay elevated for a prolonged period, even after the reopening of the Strait of Hormuz. Not only will it take considerable time to start production and exports up again — think of all the energy infrastructure that has been destroyed, and all the oil tankers that are somewhere else in the world — but oil inventories will have to be refilled. So, there will be delays in getting more oil online, and at the same time there will be sustained demand from two sources: current oil consumption and stock rebuilding. I think those forces will bolster higher oil prices for a considerable period, at least until the end of 2027.

On the importance of elasticities:

 Throughout my entire journey of researching oil markets, the one thing that I came away with is that elasticities are really key. I think a lot of progress has been made to estimate them better, but there’s room for more. And this is where my thinking has evolved. It is really important to shift our focus from the aggregate to the disaggregate and study heterogeneity across countries — how oil producers and oil consumers adapt to oil shocks. Understanding the differences in country-specific supply and demand elasticity is very important in the beginning of an oil shock, but also for understanding the transmission to the macro economy. How does an oil shock propagate through the economy at the sectoral level? There’s a lot of heterogeneity hidden in the aggregates that we tend to look at, and to really understand the aggregate dynamics, it’s important to dig deeper and look under the hood at what’s happening at the firm and consumer level.

“Progress” is a word that often generates both a lot of positive vibes, and also a lot of pushback? Progress toward what? At what cost? So it’s perhaps useful to specify that when I refer to “progress,” I’m referring to an overall movement toward good things of life: in no particular order, longer and healthier lives; a rising standard of living, especially for the poor; more education for more people; environmental protection; leisure time; personal safety, resources of time and money for people to build community with family, friends, neighbors; and more. Addressing these and other problems of society requires “progress.” Of course, the specifics of how to address social problems are always controversial. But I’d argue strongly that if the solutions are envisioned as a zero-sum game–that is, all about taking from some groups to benefit others–lasting progress is hard to achieve. If the resources of a society are growing, and the question is how to guide and shape the fruit of that growth, progress becomes easier.

Joel Mokyr (Nobel ’25) raises these kinds of questions in his Nobel lecture, “The Past and Future of Innovation: Can Progress Be Sustained?” with the video and slides freely available from at the Nobel website, and a text version now published in the July 2026 issue of the American Economic Review (which requires a library or personal subscription for access). Mokyr’s explanations generally defy attempts at condensation, but here are a few points that caught my eye:

What are the basic underpinnings of economic growth?

[G]rowth can be driven by four different economic phenomena. One is simple capital accumulation, which by definition raises income per capita … . Another is what is known as “Smithian growth”—the gains from trade and specialization. A third is “Northian growth” which occurs when institutional change, more efficient factor markets, and improved property rights make the allocation of resources more efficient. … Finally there is “Schumpeterian growth,” driven by technological progress: making goods cheaper, making them better, or coming up with altogether new goods. In practice, of course, there four processes interact in a myriad of ways and in most cases reinforce one another. But at least logically they are separable.

The problem is that the first three sources of growth all run into diminishing returns–that is, they are not sustainable.

The first three share an important characteristic that I will call the “curse of concavity,” which is a poetic way of thinking of what economists have traditionally called “diminishing returns.” For capital accumulation this is immediate under the standard assumptions of almost any reasonable production function. But the same is true for the gains from trade. When trade is opened up between two nations (or regions) that were not trading before, there are immediate gains. As trading costs fall further, trade widens and deepens and further gains are secured, but as trading costs keep falling the marginal gains keep declining and theoretically further gains go asymptotically to zero as trading costs fall further. The same is true for improved allocations: Once a nation already has “good” institutions, further institutional improvements that make the allocation of resources ever more efficient will yield declining rates of growth. Any economy that depends solely on those three forces eventually will experience a slow-down in its rate of growth. Is the same true for Schumpeterian growth? Is there evidence that economic growth driven by the expansion and diffusion of useful knowledge may peter out?

A standard metaphor for those who worry about progress slowing down is that the “low-hanging fruit” has already been picked. A difficulty with this metaphor is that we aren’t picking fruit here. Instead, it is at least possible that scientific improvements might allow picking large quantities of high-hanging fruit.

To return to the metaphor of low-hanging fruits, in the absence of advances in the underlying understanding of natural phenomena, eventually the picking will become leaner and leaner. But advancing science provides ladders to reach higher and higher into the tree, and the high-hanging fruits may be of higher quality. In various fields, discrete scientific breakthroughs have provided opportunities to altogether new technological breakthroughs.

Once you start thinking along these lines, possibilities open up. What possibilities might become possible with quantum computing? Genomics and biotech? Research into clean energy or battery storage? A new idea is often important because it leads to other ideas. The new AI tools may turn out to be less important in the workplace than they are for generating not-previously considered but fruitful ideas for innovation. For a 20th-century example of an innovation leading to many applications, Mokyr offers the laser:

Perhaps the most versatile tool developed in the twentieth century to help do science (apart from digital computers) was the laser, a true scientific general purpose technology (GPT), which was applied to scores of very different areas of research. One of the most notable scientific breakthroughs driven by this technology was the success of the Laser Interferometer Gravitational-Wave Observatory to confirm the existence of gravitational waves, long predicted by Einstein but not proven till 2015. But the application of lasers to scientific discoveries has been wide ranging, and includes among others MALDI, matrix-assisted laser desorption/ionization (used in mass spectrometry in for instance analytical protein chemistry); LIDAR (light detection and ranging) technology that has application in geology, seismology, remote sensing, atmospheric physics and archaeology. Especially versatile is laser-induced breakdown spectroscopy (LIBS). In addition to multiple industrial uses, it is deployed in analyzing deep-sea sediments or hydrothermal vent fluids, studying elemental composition in unusual environments such as the Mars rover rock analyzer, as well as detect trace elements in nutritional, protein analysis, and material sciences.

As Mokyr points out, it’s perfectly plausible that individual people can find it harder to master the extraordinary realms of knowledge. But this problem arises because the amount of knowledge continues to rise, not because knowledge is levelling off. Ultimately, Mokyr is an optimist about the possibilities for progress, but more pessimistic about human institutions. Here’s his conclusion:

Is economic growth sustainable? My answer is that it is not only sustainable but in fact inevitable if humankind is to cope with the threats that are facing it. The threats of climate change and demographic transition, despite their different features, share three characteristics. One is that they are inexorable, relentless, and in all likelihood irreversible. A second is that they are global in nature: These are not local or regional crises but worldwide ones. Of course their severity is heterogeneous, but practically no part of humanity is exempt of some of its effects. The third is that both are in some way an unintended consequence of economic modernization. Beyond that, these threats are similar in that their respective impacts will be extremely expensive, and thus create heavy pressure on government deficits and the fiscal requirements to deal with them. Yet adapting to these shocks can be and will be possible, if their role as focusing devices will lead to accelerated technological change directed to adapt to the urgent needs of a changing world. There can be little doubt that if the appropriate decision makers will recognize the urgency of the needs, the useful knowledge needed to adapt to a changing world can be generated, given the rapidly expanding frontier of science and the possibilities of integrating robotics, machine learning, and similar general purpose technologies. The real question is whether the institutions—both public and private sectors—will recognize the pending disasters in time and respond appropriately. There is no guarantee that they will.

How much does federally funded R&D benefit the economy? Sheila Campbell, Jaeger Nelson, Eli Schrag, Heidi Williams, and Caleb Wroblewski work through some ways of answering that question in “Estimating the Economic Effects of Federally Funded R&D” (Congressional Budget Office, Working Paper 2026-08, July 2026). (Full disclosure: Among her other roles, Williams is editor of the Journal of Economic Perspectives, and thus my boss.)

The authors use two alternative approaches to estimate the value of federal R&D investment. The “capital stock” approach views R&D like it was an investment in additional physical capital, knowing that both physical capital and knowledge have a payoff over time and that they depreciate over time. The “R&D components approach” looks at how federal R&D expands the number and education level of scientists and researchers.

The capital stock approach is “top down,” in the sense that it looks at total R&D spending. The R&D components approach is “bottom up,” in the sense that it builds up from the researchers. Both approaches require a bunch of additional assumptions, which you can read about in the paper. The approach here is not to try to decide on a single “correct” approach, or a single set of perfect assumptions, but instead to consider a range of plausible possibilities. As one example, it matters whether additional R&D funding is funded through higher government budget deficits, or whether it is done through some combination of other spending cuts and tax increases.

The authors consider a scenario in which federal R&D spending would rise by $30 billion per year over 10 years, and then use two approaches and a range of assumptions to estimate the outcome. They write: “Over a 30-year horizon, if federal funding for R&D was increased, the present value of GDP would increase by $3.57 or $3.82 for every federal dollar spent on R&D for the deficit-financed and deficit neutral scenarios, respectively.”

Here’s a figure to illustrate the results. The “capital stock” has little effect in the near term (because the overall stock of R&D capital in an economy is slow to change), but then builds up to larger effects over time. The “R&D components approach” has larger effects in the short term (because the number of researchers can increase in the short-term), but then has smaller gains over time. Using either method,, a deficit-finances approach (solid line) does slightly worse in raising GDP, because higher budget deficits will tend to reduce long-term growth.

Let’s put all this in some perspective. The US GDP is about $30 trillion in 2026 (actually a little higher, but round numbers are useful here). Thus, the thought experiment of spending $30 billion more per year involves a spending increase of about 0.1% of GDP per year–and sure enough, after about 10 years, it raises per capita GDP by about 0.1% using either approach. This may look like a wash. But notice that the estimates here are based on increasing R&D for only a 10-year period, while the benefits are projected out over 30 years. To put this another way, the current costs of an overall boost in R&D spending–like long-term investments in physical infrastructure–are more than repaid over an extended period of time. But to get the long-run payoff, you need to pay the short-term costs.

Tyler Cowen serves as interlocutor in “Joel Mokyr on Clans, Corporations, and a Culture of Growth” (Conversations with Tyler, July 8, 2026). Mokyr (Nobel, ’25) has a genius for looking at broad trends, and then sorting out kinds of explanations are most plausible. Here are a few points that caught my eye.

Mokyr has a new book out called Two Paths to Prosperity: Culture and Institutions in Europe and China, 1000–2000, written with Avner Greif, and Guido Tabellini. Thus, some of the interview focuses on the question of how economic prosperity in Europe overtook that of China during these centuries.

[I]f you look at the world, say, around 800, at the time of Charlemagne, the difference between Europe and China isn’t very large. At some point, during the Middle Ages, you can see this divergence getting started. What’s happening is that, in Europe, there is more and more of a decline in the extended family or the extended kinship group, we call it clan, and instead, people get together and cooperate with other people to whom they are not related and with whom they do not share an ancestor.

Whereas in China, it moves exactly in the other direction. In China, you get more and more people getting organized by their extended family. The reasons for that are fairly complex. In Europe, it’s particularly the Catholic Church that played a major role here. This was argued quite a while ago by a guy, an anthropologist called Jack Goody, but your own colleague Jonathan Schulz wrote, what I think is one of the best papers on the subject, who pointed this out in great length and actually provided a fair amount of systematic evidence for this. In China, there is no Catholic Church. The imperial bureaucracy is more and more in cahoots with local clans to whom they actually outsource a fair amount of the things that they were supposed to do. As you move on out of this period of the Song dynasty into later dynasties, you see this thing growing. The problem in Europe is that the nuclear family, which became the fundamental building block of society, is too small to provide local public goods. You need to cooperate with others. What emerges in Europe, and quite spontaneously, is a bunch of things that provide these local public goods that you just don’t see in China.

For instance, we have something called universities. We have monasteries. We have autonomous cities. All of those things are what we call corporations. What it is, is people who are not related, but what they share is not an ancestor but an objective. Guilds have one kind of objective, universities have another one, and so on and so forth. That divergence in social organization turns out, in our view, to be one of the key components of the divergence between Europe and China. …

[W]hen you look at Europe in the 16th and 17th century, you can see that the capability of expanding the set of useful knowledge, including science, is just growing very rapidly. … That’s not just Newton and Galileo. There’s a whole body of work that is emerging. There’s really nothing parallel like that in China. China is a very sophisticated society in many ways. The literacy rates are high. They have a well-funded and well-organized system of education, but they don’t really continue their earlier forays into science and into new technology. Somebody actually went out and looked at Joseph Needham’s many volumes on Chinese technology and science, or Science and Civilisation [in China], as he called it, and he discovered something—which I guess we all knew, but they put numbers on it—almost nothing that Needham pointed out as an innovation happens after 1400. There’s complete stagnation setting in and some of the things that they knew how to make in earlier times, like the sophisticated clocks that they built in the 11th century, they disappear.

Here’s Mokyr in answer to a question about why the Romans did not have an industrial Revolution.

[B]oth Roman and Greek civilizations were, in many ways, creative, but the creativity did never really extend very much into the technological realm. Insofar that they did science, they were mostly uninterested in applying that science to day-to-day problems. That insight, the kind of knowledge that we have about nature, physics, chemistry, biology, astronomy, and so on and so forth, that should be applied toward material improvement, that’s not an immediate and obvious insight, nor is it an immediate and obvious insight that progress, as we understand it today, is feasible and/or desirable.

These are all insights that arose in Europe in the 16th and 17th centuries. … [I]n Rome, what you see is a whole bunch of clever people, but they’re not that interested in technology. Let me give you one specific example, Tyler, that I have always found particularly intriguing, although I don’t have a good answer why it happened. … The Romans, certainly the upper class, were literate people, and they had glass, but they never invent spectacles. They don’t have optics, and they’re not interested in optics. There’s this passage in Seneca in which he looks at a glass that has water in it. He says, “Hey, it is interesting. The stuff that’s behind the glass actually is magnified.” But they never take the step of coming up with eyeglasses. You wonder why, because, clearly, if necessity is the mother of invention, this was a necessity. They never do it.

The only thing that you see happening in Rome, and even that was very constrained, is they do come up with water mills, but the water mills remain, by and large, tools for grinding wheat, wine, and corn. They don’t actually take it to the kind of extremes that Europeans did in the Middle Ages, turning it into sawmill and fulling mills, which is why factories were known as mills. They never do that. I think the reason is because the people who made things, the artisans, the workmen, and the people who knew things and studied things, which is the scientists and the mathematicians and the teachers, never talked to each other.

What’s more, the scientists essentially looked upon hard work and manual labor with a great deal of contempt. Both Plato and Aristotle make these points, but the Romans took it over. It was a slave society. Slave societies often look at manual labor with a great deal of condescension. In the end, I think that’s what stopped them. The other thing is, I think that if you don’t have a concept of progress and you don’t think that by studying things and investigating things and doing what we would call research in order to make the world a better place, at least from a material point of view, if you don’t have that concept, there’s not going to be an Industrial Revolution.

A primary task of the Federal Reserve, separate from using monetary policy to set interest rates, is that it carries out bank “supervision”–which refers to taking a close look at a bank’s finances and record-keeping to be sure that the bank isn’t taking on too much risk. Often, this process is resolved by not giving the bank a top-level ranking in certain categories, but still saying that the bank financials are overall satisfactory. But when the situation at a given bank is more dire, the Fed has power to bring enforcement actions against the bank to require compliance. A look at the data leads Aaron Klein and Cameron Connell to ask: “Why is bank enforcement declining?” (Brookings Institution, July 8, 2026). They offer this figure on the number of enforcement actions brought by the Fed each year.

The story here is clearly not a standard “Democrats regulate, Republicans don’t” story. There’s a modest decline in Fed enforcement actions from the tail years of the Obama administration into the first Trump administration. Bu tthe big decline happens with the pandemic in 2020, and then continued through the Biden years and into the second Trump term.

Broadly speaking, there are two possible explanations for less enforcement. One is that there is less need for enforcement: in this case, perhaps the financial regulations imposed in the aftermath of the Dodd-Frank of 2010 have led to banks taking less risk, and so the regulators have less to do. The other possibility is that the bank supervisors aren’t looking closely enough or moving fast enough: for example, Fed bank supervisors were still gearing up to start enforcement actions against Silicon Valley Bank when a bank run drove the bank into insolvency in 2023. Without inside information into bank balance sheets and some combinatino of perfect foresight and perfect hindsight, it’s hard to prove which explanation holds a greater share of the truth.

But Klein and Connell come at the question from another direction. You see, the Fed does not supervise all banks, and is not the only regulatory agency that does bank supervision. Some banks and thrifts are chartered by the national government and regulated by the Office of the Comptroller of the Currency (OCC); the Fed supervised bank holding companies and some of the banks that are are chartered at the state level; and the Federal Deposit Insurance Corporation supervises banks chartered at the state level that do not choose to be members of the Federal Reserve system. The issue is that the patterns of enforcement actions for the OCC and the FDIC don’t match those of the Fed. Here’s what their number of enforcement actions look like over time.

The other two enforcement agencies see a decline in enforcement actions in the late 2010s, although it’s a considerably smaller decline for the OCC. However, the other agencies also see a rise in enforcement actions in the last few years, although it’s a bigger rise for the OCC. Klein and Connell sum up:

Enforcement actions against banks by federal regulators are declining. By this measure, bank supervision has become more lenient in the past decade. Declines in enforcement vary substantially between regulators, with the Federal Reserve standing out for substantially laxer enforcement. The Fed’s nearly 50% decline in enforcement actions since COVID leads one to wonder whether the banks they regulate are that much more compliant or whether the Fed is choosing not to issue formal enforcement actions. Given the natural similarity between the generally smaller, state-chartered banks the Fed and FDIC share authority over, it is hard to imagine that the state member banks the Fed regulates are behaving that differently than the state non-member banks the FDIC regulates. Nor that issues are being resolved prior to the need for an enforcement action at that much of a different rate.

There’s a lot of talk about “digital currency,” but as far as I can tell, my bank account and retirement account, along with my credit cards and mortgage payments, have already been maintained in digital form for many years now. I benefit from greater speed, less paperwork, and probably greater accuracy, too. The genuinely new idea at present is “tokenization.” Tobias Adrian dispassionately lays out the potential risks and benefits in “Tokenized Finance” (International Monetary Fund, Note/2026/001, April 2026).

In the current conventional form of digital currency, money flows between institutions and their balance sheets: my credit card company pays the restaurant for my meal, at the end of the month my bank pays my credit card bill, my employer puts money into my bank account, and so on. The institutions in this system provide checks and balances, making sure the payments are correct. For example, maybe 2-3 times each year year I get an email from my credit card company asking if I have authorized a certain transaction. My answer is often “yes,” but sometimes “no.” As Adrian writes:

In traditional architectures, trust is embedded in regulated intermediaries, layered institutional processes, and the sequencing of settlement over time. … Financial sector policy frameworks have evolved around institutions, balance sheets, and markets that operate with temporal frictions: end-of-day settlement, batch processing, and delayed reconciliation. These frictions are not only costly to end-investors, but they also provide temporal buffers that allow exposures to be netted, liquidity to be mobilized, and authorities to intervene before settlement becomes final.

In the current form of digital money, the safety of transactions involves each main party having their own account, or “ledger,” which records payments made and received. Maintaining and checking these records involves a behind-the-scenes series of delays and double-checks, which imposes costs and fees. But tokenization is different. As Adrian writes:

Tokenization enables financial claims—including money, securities, and derivatives—to be represented as programmable digital tokens recorded on shared ledgers. This capability allows for real-time atomic settlement, collapsing multiple stages of the traditional financial value chain into a synchronized process … Tokenization challenges crisis management and resolution frameworks that are built around nationally domiciled institutions, territorially bounded infrastructures, and jurisdiction-specific legal authority. In tokenized systems, transactions are executed on shared ledgers spanning multiple jurisdictions, allowing assets, liabilities, and collateral to move across borders at machine speed and without a clear geographic anchor. This creates a fundamental mismatch between the global, continuous operation of tokenized finance and resolution regimes that rely on jurisdictional control over institutions and locally situated assets, as the key levers of control may instead lie in governance keys, consensus mechanisms, or smart contract logic operating across borders.

As Adrian puts it, the fundamental shift here is that instead of financial transactions being carried out, monitored, and double-checked by an interlocking set of institutions–each with their own ledger–a tokenized financial system would shift these responsibilities to the programming and infrastructure behind the tokenized system. There are obvious concerns about such an approach, which Adrian enunciates clearly:

As financial logic migrates into smart contracts, governance must extend beyond institutions to algorithms. In tokenized financial institutions, smart contracts calculate margin requirements, execute collateral transfers, and initiate default procedures. These functions are central to systemic stability, yet they are increasingly encoded in software. Therefore, the governance challenges concern not only code quality but also the processes that design, validate, modify, and, if necessary, override code.

Algorithmic risk differs from traditional operational risk in important aspects. Errors can propagate instantaneously and autonomously, without human intervention (FSB 2024). A faulty price feed or coding error can rapidly trigger cascading liquidations before authorities respond. The very features that make smart contracts efficient—speed, determinism, and automation—can also amplify the consequences of design flaws or data errors.

Therefore, effective governance requires multiple layers of control. Formal verification and independent audits should be mandatory for systemically important contracts. Change management processes must be transparent and subject to regulatory approval. Crucially, tokenized systems should incorporate clearly defined ex-ante intervention mechanisms in governance frameworks that allow contract execution to be paused or adjusted under predefined emergency conditions.

Tokenization embeds governance in code, which could be referred to as “code is law.” In important financial entities, legal mandates for stability must ultimately prevail over automated execution. Embedding this principle into technical design is one of the central policy challenges of tokenization (see Garrido 2023). When assets exist as tokens on a distributed ledger, questions arise regarding the applicable law, the location of the asset, and the enforceability of claims in insolvency.

Legal uncertainty is a major barrier to scaling tokenized systems beyond pilot projects. Market participants require clarity on whether tokenized records constitute a definitive proof of ownership and whether the settlement finality achieved on a ledger is legally recognized. Without such clarity, tokenized markets risk remaining fragmented and peripheral. A dual-layer legal approach is likely to emerge as best practice. Smart contracts define operational rules, whereas traditional legal agreements establish rights, obligations, and dispute resolution mechanisms. Legislators and courts must clarify the relationship between these layers, ensuring that legal certainty is preserved even as execution becomes automated.

I admit to skepticism about a broad-based shift to tokenized finance in the near term. I can see the potential benefits of a dramatic reduction in transactions costs, especially for transactions that are small, or international, or both. But trying to set up a single global financial ledger with a “code is law” framework seems to me a utopian project, with the stability of national and global economies at stake. Perhaps this just confirms my status as a 20th-century fuddy-duddy. But I’d prefer to see tokenized finance bubble up through the private sector first, and if and when it shows viability, scaleability, resilience, and stability in that context–or in response to the specific and limited problems that arise–then we can talk about possibilities for making tokenization more widespread.

The most recent Federal Reserve Payment Study has published data for 2024 on “core noncash payment methods used in the United States by consumers, businesses, and governments, including payments by general-purpose and private-label cards, automated clearinghouse (ACH) transfers, and checks. This release also covers ATM cash withdrawals.” 

One way to summarize the results is to look at the value transferred by different method; another is look at the number of noncash payments. You would expect these to be quite different. For example, imagine a person who has their paycheck automatically deposited at their bank and has their mortgage payment made automatically by a transfer from their bank. that person might quite likely have a greater number of credit card payments and checks than those two big bank transfers, but the amount of value in the two big bank transfers could be greater than the total value of credit cards and checks.

Here’s a figure showing the value from different noncash transactions. Again, this includes consumer, business, and government noncash payments. The value of bank transfers is way up over the last 25 years or so–and in particular transfers received as a credit to bank accounts. The value of noncash payments by check is gradually falling. It’s striking to me that the total value of credit card payments looks so small in this graph.

Here’s a figure showing the number of noncash payments made by these different methods. It was unexpected to me that the number of transactions made via non-prepaid debit cards was so high: I suspect many of these debit cards make payments directly from bank accounts. Credit card payments are also up, especially since the pandemic. The fall in the number of checks is especially apparent–indeed, the number of checks is now well below the number of bank transfers. The number of banks transfers is low, although the average value of such transfers must be high to account for the figure above.

In this study, the Fed is just estimating value and volume of non-cash payments–not doing policy recommendations. But it’s important to remember that with every non-cash payment involves, some party is being paid a small amount to make that payment. When you talk about several hundred billion payments for trillions of dollars, those transactions fees received by the parties carrying out the payments can add up to large numbers.

Thomas Jefferson wrote out the first draft of the Declaration of Independence, but he did not do so alone and without guidance. After all, he had been a member of the Continental Congress that summer, listening to the discussions about what a Declaration should say. Jefferson was also part of a five-person committee that also included John Adams, Benjamin Franklin, Roger Sherman, and Robert R. Livingston. After the committee produced a draft, additional changes were made by the Continental Congress before a final version was created.

Back in the 1950s, a professor named Julian Boyd worked back through the documentary record of edits and changes–which include handwritten notes inserted on top of Jefferson’s early draft–to create the “original Rough draught” of the Declaration. These day, of course, one can run the original draft of the Declaration available through the Library of Congress and the final version available from the National Archives through the “Track Changes” command in Word. Some of the changes are just capitalization and punctuation. Some are more meaningful. Here are the opening paragraphs of the Declaration of Independence in Track Changes:

When in the courseCourse of human events, it becomes necessary for aone people to advance from that subordination indissolve the political bands which they have hitherto remained, &connected them with another, and to assume among the powers of the earth, the separate and equal & independant station to which the lawsLaws of nature &Nature and of nature’s godNature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the changeseparation.

We hold these truths to be sacred & undeniable;self-evident, that all men are created equal & independant, that fromthey are endowed by their Creator with certain unalienable Rights, that equal creation they deriveS rights inherent & inalienable, among which are the preservation of life, & liberty, & these are Life, Liberty and the pursuit of happiness; thatHappiness.–That to secure these ends, governmentsrights, Governments are instituted among menMen, deriving their just powers from the consent of the governed; that, –That whenever any formForm of government shall becomeGovernment becomes destructive of these ends, it is the rightRight of the peoplePeople to alter or to abolish it, &and to institute new governmentGovernment, laying it’sits foundation on such principles & organising it’sand organizing its powers in such form, as to them shall seem most likely to effect their safety & happiness. prudenceSafety and Happiness. Prudence, indeed, will dictate that governmentsGovernments long established should not be changed for light &and transient causes:; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. butBut when a long train of abuses &and usurpations, begun at a distinguished period, & pursuing invariably the same object,Object evinces a design to subjectreduce them to arbitrary powerunder absolute Despotism, it is their right, it is their duty, to throw off such government &Government, and to provide new guardsGuards for their future security. such.–Such has been the patient sufferance of these colonies; &Colonies; and such is now the necessity which constrains them to expungealter their former systemsSystems of government.Government. 

OK, maybe you have to work as an editor (like me) to appreciate this kind of stuff. But I do find it fascinating. The first sentence originally refers to “advance from that subordination,” which is changed to “dissolve the political bands.” No admission that Americans were ever subordinate!

The opening sentence of the second paragraph refers to “sacred” truths, but in a time when readers took the connection from “sacred” to the text of the Bible quite seriously,this is altered to “self-evident. ” However, in the first paragraph, “laws of nature” is amended to include “Nature’s God,” which in a way replaces the reference to the “sacred” that was cut. Similarly, Jefferson’s first draft just refers to humans being “created,” which is changed to “endowed by their Creator.” The last sentence of the second paragraph starts with a call to “expunge” the former system of government, which is amended to “alter.”

One of the biggest changes from the rough draft was that in the list of grivances against the King of England, Jefferson included this entry in the rough draft:

he has waged cruel war against human nature itself, violating it’s most sacred rights of life & liberty in the persons of a distant people who never offended him, captivating & carrying them into slavery in another hemisphere, or to incur miserable death in their transportation thither. this piratical warfare, the opprobrium of infidel powers, is the warfare of the CHRISTIAN king of Great Britain. determined to keep open a market where MEN should be bought & sold, he has prostituted his negative for suppressing every legislative attempt to prohibit or to restrain this execrable commerce: and that this assemblage of horrors might want no fact of distinguished die, he is now exciting those very people to rise in arms among us, and to purchase that liberty of which he has deprived them, & murdering the people upon whom he also obtruded them; thus paying off former crimes committed against the liberties of one people, with crimes which he urges them to commit against the lives of another.

The passage is notable in a number of ways. It shows that there was a considerable anti-slavery sentiment among those attending the Continental Congress. It is a clanging historical irony that a slaveholder like Jefferson was writing fierce moral denunciations of slavery. It’s historically accurate when Jefferson blames the existence and persistence of American slavery in 1776 on King George III and previous kings of Great Britain, who after all had ruled over the area for decades. It’s intriguing that Jefferson mentioned British efforts to weaponize the slave population.

The practicalities of declaring treason against Great Britain ultimately drove the members of the Continental Congress to remove the anti-slavery sentiments. Benjamin Franklin may never have said: “We must, indeed, all hang together, or assuredly we shall all hang separately” — but the sentiment was nonetheless true. It’s unwise to be definitive about counterfactual historical scenarios. But if the northern eight US colonies had insisted on the anti-slavery language, but lost the support of some or all of the southern colonies, and then tried to declare independence on their own, the British would not have had to devote military resources during the Revolutionary War to, say, blockading the harbor at Charleston or dealing with guerilla warfare tactics led by Francis Marion and others across the South. The US Revolutionary War might well have been lost, and at least some of signers of the Declaration could have been imprisoned or executed–and mostly forgotten today by anyone but historians of the period.

I wrote this short essay about the “pursuit of happiness” for the editorial page of the StarTribune newspaper, where it was published on July 3.

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Opinion | What did the founders mean by the pursuit of happiness?

The authors of our founding document were deadly serious about a goal we might see as whimsical.

By Timothy Taylor

When the five-person committee that drafted the U.S. Declaration of Independence declared it to be “self-evident” that there was a right to “the pursuit of Happiness,” what manner of happiness did they have in mind?

In a declaration explaining why the signers felt compelled to commit treason against their existing government and to prevent “the establishment of an absolute Tyranny,” it seems unlikely that they were foreshadowing the whistling cheeriness of the 1988 Bobby McFerrin hit, “Don’t Worry, Be Happy.”

When you are announcing that you “mutually pledge to each other our Lives, our Fortunes and our sacred Honor” for the purpose of fighting a Revolutionary War, it seems unlikely that they were thinking of the giddy, throbbing happiness of the 1986 Beastie Boys hit: “You gotta fight for your right to party.”

The authors of the declaration — Thomas Jefferson, John Adams, Benjamin Franklin, Roger Sherman, and Robert R. Livingston — were not being playful, whimsical or ironic. They were deadly serious about “the pursuit of happiness.”

Drawing on a long philosophical tradition going back to ancient Greece, they believed that happiness was the result of living a virtuous life. Franklin wrote that “virtue and happiness are mother and daughter.” Jefferson later wrote: “Happiness is the aim of life. Virtue is the foundation of happiness.”

Naturally, any self-respecting modern American will quickly stand up and declare: “No virtue-monger gets to tell me what cookie-cutter set of rules I am obligated to follow.”

For 21st century Americans, this notion of happiness as virtue may seem self-contradictory. After all, isn’t virtue almost by definition dry and boring: that is, about discipline and abstemiousness, not the freedoms of fun and pleasure?

But as understood by the authors of the declaration, happiness isn’t about the feels. Instead, in a tradition going back to Aristotle, virtue was understood to be developed through a lifetime of practice. The goal is a deeper and richer satisfaction gained as a person grows into a full and flourishing existence. It’s about taking seriously the idea that you can pursue a version of your best self.

Of course, the pursuit of happiness may not succeed. Real life is messy. Personal goals can change. Families can quarrel. Marriages and friendships can crumble. Health and finances can go sour. Happiness, virtue and flourishing are never guaranteed.

The Nobel-prize winning novelist V.S. Naipaul, who was born in Trinidad in 1932 and lived there for 18 years before receiving a scholarship to Oxford and moving to the United Kingdom, offered a paean to “the beauty of the idea of the pursuit of happiness” in a 1991 essay, in which he wrote:

“Familiar words, easy to take for granted; easy to misconstrue. This idea of the pursuit of happiness is at the heart of the attractiveness of the civilization to so many outside it or on its periphery. I find it marvelous to contemplate to what an extent, after two centuries, and after the terrible history of the earlier part of this century, the idea has come to a kind of fruition.

“It is an elastic idea; it fits all men. It implies a certain kind of society, a certain kind of awakened spirit. I don’t imagine my father’s parents would have been able to understand the idea. So much is contained in it: the idea of the individual, responsibility, choice, the life of the intellect, the idea of vocation and perfectibility and achievement.

“It is an immense human idea. It cannot be reduced to a fixed system. It cannot generate fanaticism. But it is known to exist; and because of that, other more rigid systems in the end blow away.”

The Declaration of Independence proclaims the “Right of the People … to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”

Americans have disagreed for 250 years over how best to enunciate the foundational principles of their government and how to organize its powers, and it seems right and proper to me that such disagreement should continue. But the lodestar of such discussions is that people have a “self-evident” and “unalienable” right to pursue their own concept of their own happiness. The concept was radical then, and remains so today.

Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul.