Sunday, March 29, 2015

Bitcoin Nodes, Central Planning, Coase, and Freedom Firms

Justus Ranvier has a good post in which he tackles some supply and demand arguments being kicked around in relation to block size limits and the costs and incentives of operating full nodes. For those not familiar, Bitcoin nodes store copies of the blockchain and relay transactions and valid blocks throughout the Bitcoin network. Nodes contrast with miners, who, after successfully fulfilling Bitcoin's proof of work requirement, take the transactions they've been relayed and add them to a new block, which is then relayed back throughout the network by the same nodes.

Ranvier sketches out a set of features to be added to the Bitcoin protocol that would effectively allow nodes to operate as toll booths, negotiating a sliver of each transaction fee with (1) spenders and recipients who need to have their transactions relayed and confirmed, and (2) miners who wish to maximize their revenue by including more transaction fees in each block.

His analysis is worthwhile, and I recommend a full read of it for anyone interested in addressing the problem of blockchain bloat while still preserving a decentralized system of nodes. And although I believe his proposal to be a good one and deserving consideration by Protocol decision makers, once again I quickly find Ranvier's and my differences in bias revealing themselves in how he justified his arguments.

Central Planning


Not too far into his post, he heads a section with "Markets are better than central planners." Such a statement sounds nice to those of us with libertarian tendencies, but unfortunately it just ain't true.

It's not that its converse is true...that central planners are better than markets. It's that each has its place.

I was personally introduced to the operative concept here while listening to the old Robert LeFevre tapes, in the context of monopoly and antitrust. LeFevre points out that the term monopoly is meaningless without a defined scope. For example, McDonald's does not have a monopoly in the scope of selling hamburgers, but it does have a monopoly in the scope selling the Big Mac.

Similarly, McDonald's does not have a monopoly on selling goods and services in general (obviously), but it does have a monopoly on selling goods and services inside the stores it controls. Burger King employees may not stroll into a McDonald's and start selling food with the rationale that they are furthering free market competition. I hope that even the most hardened free market advocate would not grant Burger King license to do such a thing.

Extending the same pattern of thought to central planning, again, such a concept has no meaning without scope. Would we argue that a given McDonald's franchise is necessarily misallocating economic resources (as "centrally planned economies" supposedly do) simply because Herr Kommandant McManager centrally plans how his employees go about providing quality service with a smile each day?

No. Unless you believe that a modern McDonald's would somehow be outperformed by a burger joint consisting of a dozen sole proprietors who show up somewhere each day, each with his own factors of production, and trade their prepared burgers, mcmuffins, and freedom fries with one another, all presumably through multiple competing cashiers brokering orders from customers and trading with the kitchen.

The McDonald's corporation no doubt has scads of MBAs fine tuning the amount of competition and cooperation among its human capital, adding and subtracting layers of management and the degree of control each manager has over his downstream employees. If it were obvious that eliminating all management and instructing each employee to "Do as you please. It's a free market!" provided superior, cheaper service to customers, they would have done so by now.

Coase


The question then becomes: when is central planning a superior strategy to using markets? This is well worn terrirtory, and described neatly in Nobel laureate Ronald Coase's 1937 paper The Nature of the Firm. In it, Coase attempts to "discover why a firm emerges at all in a specialised exchange economy."

Coase's entire paper is quite brief, and the bit that's relevant to why Bitcoin should or should not add a feature to support node tollbooth functionality is even briefer:
The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism. The most obvious cost of "organising" production through the price mechanism is that of discovering what the relevant prices are.
And shortly afterward:
We may sum up ... by saying that the operation of a market costs something and by forming an organisation and allowing some authority (an "entrepreneur") to direct the resources, certain marketing costs are saved.
I suggest therefore, that as miners, core developers, and other stakeholders consider the proposal to build a set of features to allow nodes to collect fees, they approach it not from Ranvier's apparent ideological perspective of "centralization equals bad", but instead one that fully recognizes the cost of creating and operating a new market for fees and the specialization that will be necessary for it to operate smoothly, and whether the flexibility it creates outweighs those costs.

As I was drafting this post and collecting my thoughts, it occurred to me that I often hear precisely the same arguments from anarcho-capitalist friends and colleagues about the necessity of competition to provide a so-called free society. These friends begin with the correct belief that markets are excellent mechanisms for solving certain complex problems. They then extended the idea as far as it would seem to logically go, to the idea that the only way to foster freedom is for every transaction to be made voluntarily between two individuals or their voluntarily selected agents.

Before I argue why I believe such reasoning to be mistaken, we first need to pin down the meaning of freedom. I personally conceptualize a free society as one which generally (1) maximizes the aggregate opportunities available to its inhabitants and (2) only employs systematic violence or the threat thereof predictably, in ways well understood by the inhabitants before the fact.

For those of you who view freedom as the absence of a formal master or the absence of systematic aggression, I suggest you have succumbed to the same fallacy as Heinlein's worker who quit his make-work job and purchased his own brass cannon to polish. You are seeking the symbol of what you desire rather than the thing itself.

But hey, who am I to stop you from chasing your dreams? If that really is your highest end, above mundane things like physical safety, plentiful food, and vibrant culture, it seems like the best solution to your problem would be to just buy a boat and go live in international waters.

Moldbug, per usual, has a much more trenchant criticism of such an approach to life, so I defer to his and Patri Friedman's brief 2009 back and forth on the matter. But I will leave you with the summary that giving up one's fealty to Bushitlerobama to become a permanent subject of King Neptune probably leaves one more subjugated, not less. And especially if you're willing to anthropomorphize Neptune, it should be completely obvious that you're still the subject of a cruel and fickle master, as much you might try to convince yourself otherwise.

Freedom Firms


We can now ask whether the most effective way to provide freedom is to insist that every transaction everywhere be voluntary, or perhaps instead consider the possibility that there might be some sort of zen approach wherein a "firm" (i.e. government) run by "entrepreneurs" is somehow able to direct resources to provide greater amounts of freedom, even if they possess both the formal and actual ability to withhold any and all of them from us on a whim.

Applying Coase, is it possible that the costs of operating a market for every single life choice is prohibitively high? Might such markets be so complex and insufficiently trained that their price signals are worthless, and far outweighed by their costs? Perhaps, would the imposition of certain cultural or legal constraints reduce the complexity of the markets to the point that their price signals once again become worth more than their social costs?

I leave it to you to answer all those questions for yourself, but when I look around the world, I see "entrepreneurs" bundling and offering up sets of constraints of all different shapes and sizes. I see "firms" like Singapore under the centralized planning of the iron-fisted, tourist-caning, freedom-crushing Lee Kuan Yew achieving far more economic success than and offering far more of the freedoms I personally value than its less-well managed competitors. I also see Singapore's retained earnings account growing accordingly.

Granted, Singapore's product offering might not be to your taste. Your inner pot-smoking graffiti artist might prefer the bundle of freedoms offered by a Netherlands, or a Uruguay, or maybe even a North Korea. Or maybe none of them suit your tastes. It might be the case that nobody is offering exactly what you want at a price you're willing to pay.

That, may I remind you, is the downside of markets.

Personally, I want an online classifieds marketplace with a UX that isn't crap, but the hippies over at Craigslist got there first, have no apparent intention of changing, and the barriers to entry are too high for anyone who values UX to enter and compete. Likewise, existing sovereigns have already scooped up and monopolized all of the decent real estate on our humble planet, and their product offerings are pretty mediocre in most places.

But unless you can afford to launch your own sovereign (or start your own Craigslist) we're both stuck having to choose the least bad product on the market.

Conclusion


As I have argued before, the only important thing I believe Bitcoin might be capable of achieving is serving as the inner core of a fixed supply global monetary standard. Generalized distributed consensus might be interesting, but Bitcoin must first win as a currency before it can perform that function too.

All other political ideals being attached to Bitcoin, such as empowering the unbanked are hot air, except insofar as they're useful in helping Bitcoin evade the same ideological antibodies used by Progressives to stave off a return of the gold or any other "exploitative" hard money standard.

In order to preserve its hard money quality (which is the only thing Bitcoin has going for it), Bitcoin's miners and nodes must remain decentralized. If either is captured by a single party or colluding group, we will be no better off than under a central bank.

So yes, Ranvier correctly sees that sufficient numbers of nodes must have incentive to operate honestly. Whether or not a software mechanism must be designed and deployed to solve that problem is unclear to me, but I hope that the debate will occur soberly, not with special interests making disingenuous arguments on one hand, and market fundamentalists doing the same on the other.

More broadly, I hope that people can discuss general societal governance problems constructively, identifying both the value and limitations of markets in debates such as net neutrality, and even all the way up to the nature and design of those hallowed institutions themselves which we describe as possessing monopolies on the use of violence.

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