Re: relevance to Hayek research?

[Robert Hettinga <rah@shipwright.com>]

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Date: Mon, 19 May 1997 11:21:28 -0400
To: Gregransom@aol.com
From: Robert Hettinga <rah@shipwright.com>
Subject: Re: relevance to Hayek research?
Cc: austrianecon@agoric.com, VPostrel@aol.com
Bcc:
X-Attachments:

Greg Ransom just set my subscription to Hayek-L to "review" because of the
DCSB announcement I sent both there and to AustrianEcon. Since I figure
that this posting probably won't see the light of day on Hayek-L, I'll just
send it here to AustrianEcon instead. :-). Of course, I'm not complaining,
really. Greg can do anything he wants with Hayek-L. I mean, he owns it; the
internet being alloidial, and all. But, I thought I'd clear the air here a
little bit about why I thought the June DCSB meeting would be useful to
people both on AustrianEcon, and, even :-), Hayek-L.

At 7:29 pm -0400 on 5/17/97, Gregransom@aol.com wrote:

>  Can you motivate this posting to the Hayek-L list for
> me?

Wow. I feel like a method actor or something. Say hello to Mr. Stanislawski
for me, would you, Greg?

> It is important that all posting to the
> Hayek-L list be relevant to Hayek and his work, appropriate for the research
> community, and not overly promotional or commercial in nature, nor in the
> vein of advertising.

Yeah. Anything that smacks the least bit of capitalism should be strictly
avoided in such an academic setting. Hey, even *I* understand that one.
;-). If it's any consolation, DCSB really *is* just a bunch of people who
get together to have lunch on first Tuesday of the month. It's not like I'm
leveraging the old Harvard Club membership to create a massive personal
fortune, or something. :-).


I do confess that I sent the announcement to both place, and mostly on
impulse, because I thought people in the Austrian economics trade would
want to hear about a relatively unique economic phenomenon on the net,
particularly as it reveals interesting things about how the net's
decreasing the "latency" of money changes, or at least better defines, all
kinds of transaction processes, and, maybe, the underlying economics of
same.


Not only do the type of instantaneous, continuous, digital cash-settled
recursive auctions that Fred Hapgood is going to talk about at the June 3rd
DCSB meeting have the potential to remove any need for copyright law on the
internet, which I'll get to in a moment, but they're the tip of the iceberg
for something waaay bigger.  The technology behind the digital cash these
recursive auctions will eventually use is all by itself a nation-state
killer. In the long run, anyway.

<and now, for a few blatantly commercial messages...>

Since the strongest form of David Chaum's "ecash"
<http://www.digicash.com/> digital bearer certificate transaction
settlement protocol doesn't require book-entries, it doesn't require the
force monopoly of a nation-state to backstop its transaction clearing
process. There's a quote which might be useful here. It's from FC97, the
first conference on Financial Cryptography, which we held in Anguilla this
February and (plug, plug) a conference I had the good fortune think up ;-)
<http://www.offshore.com.ai/fc97>. Doug Barnes, a fellow cypherpunk and now
the Marketing VP for C2Net, a pioneering financial cryptography company in
Berkeley <http://www.c2.net/>, said, during the legal session, "It's a bad
idea when your internet payment protocol, in one of its terminating steps,
says, 'and then you go to jail'".  See my web page,
<http://www.shipwright.com/>, for more details about this kind of stuff if
you're interested. Also, see the debate I had in March with someone from
the American Banking Association about the subject of digital bearer
certificate technology. It's on HotWired's Brain Tennis site,
<http://www.braintennis.com/>. Remember that, due to to the structure of
the debate, he got in the last word, though. :-).

<we now return you to the heresy trial, currently in progress>


Now you can see why the war cry for most of my cypherpunk crypto-anarchist
financial cryptography developer friends is "write software, not laws."
That sounds pretty Hayekian, I'd say.


Last September I was on the law enforcement panel, of all things, at the
Institute, nee Office (go, Newt!), of Technology Assessment's "Symposium on
the Regulation of Digital Cash". This thing was held in a conference room
deep in the bowels of the Capitol Building. Yech. Talk about the lion's
den. Anyway, they had me speaking, dead last in the whole symposium,
immediately after the Justice Department's brand-new, wet-behind-the-ears
and freshly-lobbied-for-by-the-EFF Assistant Attorney General for "computer
crime", whatever that is. And, before him, and more to the point for our
discussion here, spoke the Assistant Director of FinCEN. FinCEN stands for
the Financial Crimes Enforcement Network, a truly amazing government agency
which has the ability to tell anyone with a credit card or checking account
not only what his current bank balance is, but, through perfectly legal
"administrative requests" to his bank, what his, say, total clothing and
grocery expenditures were last year, categorized by store. Couple that with
those wonderfully subpoenable scanner cards at your supermarket, and I
would say that Orwell almost has his revenge with us, eaten very cold
indeed, for being so far behind schedule with '1984'.

Anyway, there I was, at ground zero, in the very belly of the beast, and,
if I do say so myself, I was a wonder to behold. I scared them so bad that
the everyone's eyes actually bugged out. Their jaws really bounced on the
floor a few times in true Tex Avery fashion. Proving, once again, that
cartoon physics really is the only kind of science they allow inside the
Washington Beltway.

I told the assembled unholy host of legislative aides, beltway bandits, and
various other corridor-crawling symbionts to Le Infame Moderne that David
Chaum's blind signature patent created  fully anonymous digital cash
(issued by private free banks, mind you), something they vaguely knew
already and were gathered there to try to stop. But, even more frightening
to statists everywhere, it was quite a simple matter, really, to use the
same cryptographic protocol to create anonymously held digital *bearer*
forms of any negotiable instrument you could care to imagine: bonds,
stocks, futures, or any derivative thereof. I told them Perry Metzger's
joke about "Gold Denominated Burmese Opium Futures". That was good for a
titter or two of nervous laughter...

Remember, of course, that, and increasingly so, most assets are financial,
and thus completely convertable to digital bearer form if the transaction
protocol for them turns out to be significantly cheaper than the book-entry
settlement methods of the status quo. After all, it wasn't too long ago in
financial history that paper bearer certificates were the norm. There's a
lot of cultural memory still there. The word "coupon" as a synonym for bond
interest is a perfect case in point.

Then came the real bombshell. The guy from FinCEN absolutely agreed that if
the transaction costs of digital bearer certificates proved to be an order
of magnitude (or, say, three) lower than book entries, which I claim they
will be (without proof, of course, just yet ;-)),  FinCEN would be pretty
much out of business. The whole "crime" of money laundering would become
the equivalent of a "legislated" value for Pi. An example which, I might
add, proves Avery's Laws of Cartoon Physics, um, reigns, in legislative
bodies the world over, and not just inside the Beltway.

"Actually, it's worse than that, ladies and gentlemen," I said, quoting
myself. "Virtually *all* of the current tax infrastructure is based upon
book-entries and the necessity of audit trails to verify tax compliance:
capital gains, income and sales taxes, even import duties. Those audit
trails are there primarily to prevent non-repudiation in the execution of a
transaction protocol, that is, all the double-entry bookeeping between the
buyer and the seller and the financial intermediary(ies) underwriting the
trade. Those audit trails are *not* there to enforce taxes, believe it or
not." They didn't get the point, so I drove it home. I said, "Without the
requirement to prevent non-repudiation (and, I ask you, when was the last
time you had a cash transaction fail to clear?), the marginal cost of tax
compliance will become unsustainable over time. Uncle, and his relations
elsewhere, are all going to have to figure out something else to tax, in
other words. Now, *what*, exactly, do you need all that money for?"

I had all the right people standing up and yelling at me at question time,
so I knew I was on to something. :-).


So, somewhere, Greg, I think Dr. Hayek must be laughing out loud.

That's why this kind of stuff might be important to your readership.


Oh. Yeah. I forgot. The actual topic of this missive. What's a "recursive
auction"?

Jason Cronk, who subscribes to AustrianEcon, by the way, did a talk on them
at the rump-session of, you guessed it, FC97 in Anguilla. Ian Grigg, a
major free banking fan, and also a subscriber, presented an idea which is
exactly the obverse(?) for *his* paper, which was accepted for the main
conference session. Ian's paper dealt with a way to organize the "buy" side
of the same process.  Springer Verlag will be publishing the conference
proceedings sometime this summer, and I'll announce that here, if there's
interest.

Anyway, a recursive auction market, for lack of a better analogy, is kind
of like institutionalized software piracy. I create something new and
digital. I go on the net, and I sell the first copy to the highest bidder.
Then I sell the next copy to the next bid, which, of course, is probably
lower than the first. I keep on doing this until people stop bidding. Of
course, everyone who buys what I'm selling can turn right around and sell
it to someone else in turn, probably at a lower price than they bought it
from me.  This is the only instance I can think of where buying high and
selling low makes you money. ;-). Well, on an item-price basis, anyway.
Obviously, the total return is higher on the sell side than the buy side,
or nobody would be foolish enough to buy anything from you for resale.

Just by forgetting the whole quasimystical issue of "rights" to electronic
intellectual property (which, like the current "intellectual capital"
craze, is, at best, a polite regulatory fiction), timeliness of content is
rewarded, as is novelty, which keeps people who create new stuff right on
cranking it out. A person who's invested in a big switch and bandwidth, or
who has the most valuable use of any other kind, can afford to pay more for
earlier, "fresher", copies of something than someone without the same
net.resources. Because, for instance, in the case of the person with all
the bandwidth, he can resell copies faster than anyone else. A person who
doesn't need something badly can wait a while and pick it up at a lower
price after the initial feeding frenzy's over.  Finally, the person who
continually invents something new gets paid as soon as something he makes
becomes usable to anybody at all. The things which get sold can be anything
from a jotted down brainstorm, to the first draft of a novel, to more
perishible "content", like an hour of teleoperated surgery, say.

So, for works of art, whatever that means, copyright law becomes
superfluous. More to the point, given sufficient attention to such matters,
*all* parties in recursive auction transactions can be completely
anonymous, and everything still works. I mean, when was the last time you
had to produce identification for a cash transaction? Okay, besides at the
bank, and even then for deposits greater than $10k. That's the very
exception which proves the rule, obviously. Cartoon physics comes to
banking. Remember, again, book-entries cause book-entry taxation and
regulations, not vice versa.


Anyway, whether at the increasingly hysterical legislative cartoons, or
because of the now sandy foundations of the nation state, again, Hayek,
somewhere, *must* be laughing, Greg.



Cheers,
Bob Hettinga
Moderator,
The Digital Commerce Society of Boston
(among other things...)



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-----------------
Robert Hettinga (rah@shipwright.com), Philodox
e$, 44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
The e$ Home Page: http://www.shipwright.com/