Monday, September 28, 2015

If Men Were Angels, We Wouldn’t Need the Blockchain

Yet something is happening out there.  Imagine Uber for the sex trade.  The suppliers would remain anonymous and so would the users.  Yet each party writes a review regarding the service.  Trust is now established and the majority of the trade quickly becomes extremely safe.  Access to the reviews would also be the first point of vetting.

This can be made as rigorous as the market will bear.  Better yet payment can be handled through such a system and taxes collected.

Best of all it can all disappear out of sight and stay largely there forever.  Most important, the role of pimp disappears completely.

Obviously a commercial revolution is taking place.  Air BnB allowed my daughter to gross  $10,000 this summer and my other daughter to gross $1700 while she was out of country.  That is the low hanging fruit and the taxi industry is crashing and burning.   Yet we have not really begun yet.

How about organizing with a farmer?  The system applies beautifully provided everybody goes the extra mile to provide some of the service provided by the middleman.
If Men Were Angels, We Wouldn’t Need the Blockchain

Does Human Freedom Depend on Replacing Humans in Governance?

“Don’t you think replacing humans is a bad idea?” an audience member asked Andrew Wagner after his talk on the future of blockchain technologies.

Wagner’s reply: “God, no. People suck.

Do we hear a crude echo of James Madison in Federalist No. 51?

If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.

"If men were angels, no government would be necessary." — James Madison 

Wagner was giving a talk on replacing human bureaucracies with what he calls decentralized autonomous organizations (DAOs). His focus was not on government bureaucracies specifically, but at least one of his arguments in favor of automation is quite Madisonian.

The Worst Rise to the Top

The full title of Madison’s essay, first published in 1788, is “The Structure of the Government Must Furnish the Proper Checks and Balances between the Different Departments.” As its title suggests, Madison argued for the importance of decentralizing coercive authority. The same human condition that calls for the existence of government — our nonangelic nature — also makes government’s existence a great danger to liberty.

As Robert Higgs writes in his own consideration of Federalist No. 51, “The most vicious people in society will tend to gain control of the state.”

Madison’s argument, Higgs contends, “does more than emphasize that human nature is something less than angelic.”

It also serves as a springboard that propels Madison directly into a consideration of “framing a government which is to be administered by men over men,” which is “but the greatest of all reflections on human nature.”

Because “people suck,” as Wagner puts it, a liberal government requires a structure that limits the unchecked concentration of coercive authority — a way to defang the vicious politicians and bureaucrats vying for power.

But what if government could be framed so that it need not “be administered by men over men”? What if blockchain technology can provide much of “the structure of the government” without allowing any faction of citizens to dominate the rest? If Wagner is right, Madison’s constitutional checks and balances could prove obsolete, and society can finally upgrade to a better system.

Decentralized Autonomous Organizations

Wagner’s vision challenges more than the state. A decentralization advocate and ardent techno-optimist, he champions replacing both government bureaucracies and their private-sector equivalents with DAOs.

A DAO is decentralized in the same way that bitcoin and other cryptocurrencies are decentralized: it doesn’t live in any one place online. DAOs are autonomous to the degree that they require no human decisions after the initial rules have been specified.

Some DAOs could even be independent: no single person or group would own or control them. Clients could seek their services based on the DAOs’ established rules and reputations, but no one would be compelled to use them.

Vitalik Buterin, co-founder of Bitcoin magazine, offers this example. Imagine “a decentralized self-replicating cloud computing service” that “would start off running an automated business on one virtual private server, and then once its profits increase it would rent other servers and install its own software on them, adding them to its network.

Buterin’s example has DAOs replacing corporations, or at least much of a company’s operations department, but the same sort of setup could supersede great swaths of government bureaucracy at all levels — from central banking to civil courts.

“Men under government,” wrote John Locke in his Second Treatise on Government, should “have a standing rule to live by, common to every one of that society … and not ... be subject to the inconstant, uncertain, arbitrary will of another man.”

Imagine rules without rulers. DAOs could finally free us from the arbitrary will of lawmakers and bureaucrats.

Reliable Governance

“From New Age spiritual types to paranoid conservatives, there are many people who fear the rise of technology,” Wagner writes. “These fears are not only unfounded, but ironically counterproductive to human progress.”

He offers three reasons why: 

Humans are slow.
Humans make too many errors.
Humans are corrupt. 

Reasons one and two are primarily technical, and if decentralized software can make routine business decisions faster and more reliably, we should expect to see the profit seekers in the private sector pursuing Wagner’s vision.

Reason three is the Madisonian point. People “not only make mistakes,” Wagner says, “but often err on purpose for a variety of reasons.”

"Even competitive, for-profit enterprises are mired in patronage and nepotism." — Andrew Wagner

He’s not just talking about political corruption. Wagner insists that “even competitive, for-profit enterprises are mired in patronage and nepotism.” Economists call this the principal-agent problem, in which decision makers within a company have individual goals that can conflict with the company’s overall goals, including profitability.

But private enterprise already contains a mechanism for punishing such behavior. As long as the company’s owners retain the ability to hire and fire the managers, there’s a constant pressure on management to limit the sort of mire Wagner has in mind. Madison tried to build similar checks into the structure of the US government, but while a division of power may slow the centralization of authority, the incentives faced by politicians and bureaucrats are fundamentally different from those faced by people in business (even though, paradoxically, business gets most of the bad press).

As Freeman writer Fred Smith notes,

The problem with trying to adapt business-like incentives to a government agency’s overall focus is … government. Government cannot utilize market mechanisms because it is a monopoly by definition, and that creates incentives unique to State actors. In government the distortion is built in.

But what if we could replace the state’s unique incentives with straightforward rules? That’s the promise of Wagner’s DAOs: achieving the Lockean vision with Madisonian angels.

Taking Out the Middle Man

If two people voluntarily agree to an exchange, why allow a third party to intercede?

Once upon a time, central records and central courts seemed necessary to enforce contracts and mediate disputes, but we are on the verge of a technological era that allows the services of governance to be digital — and completely independent of the state.

Even if scrupulous software can supplant corruptible mortals, however, we have only addressed half of Madison’s concern. The blockchain may allow digital angels to prevail over human government, but what of devilry among the citizens?

Cryptocurrency and other digital technologies are already making it easier to circumvent many of the state’s prohibitions. Think of markets for sex and drugs. Those may be victimless crimes — what philosopher Robert Nozick called “capitalist acts between consenting adults” — but what about real crimes? What if two people negotiate an agreement to violate a third person’s rights, as with contract murders or the fencing of stolen goods?

The Waning State

Blockchain technology by itself cannot replace all that we associate with government. Autonomous digital services will be able to enforce contracts, keep records, and facilitate financial exchange, but they can’t protect you from aggression. In the short term, they may prove to be the technology of the night-watchman state, reducing the government’s monopoly to the direct protection of people and their property.
Humans will still have to provide security and defense. Whether or not those humans will work for the government — and how much competition they’ll have — is an open question.

But all the extra activities of the nanny state could wane in a world where DAOs, the blockchain, and reputation markets allow peaceful people to make voluntary arrangements to improve each other’s lives.

That sort of automation won’t replace humans in everything we do, and it won’t put us all out of work. It will allow us to focus on providing services that really do count as services, not bureaucratic make-work or the busybody interventions we now suffer from the public sector.

The revolution in governance won’t happen through the political process, and it won’t look like political reform.

Wagner’s emphasis on the private sector, however, serves an important purpose. The revolution in governance won’t happen through the political process, and it won’t look like political reform. Its human beneficiaries won’t even necessarily see it happening. As private digital organizations outcompete the old-fashioned variety, we will simply rely ever less on human governance.

As digital technology makes it easier for strangers to trust each other in the pursuit of mutual gain, and makes it ever more straightforward to avoid or ignore interference from the strangers we don’t trust, Madison’s formulation could come to seem as quaint as the human republic that the Federalist Papers helped to create.

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