Blockchain Distributed Governance

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This is a cross-post from the blog of the Centre for the Study of Governance & Society at King’s College London.

Over the last two decades online services have transformed from a product of a multitude of enterprises to being dominated by a handful of corporate-owned platforms such as Apple, Microsoft, Facebook, Google and Amazon. They specialize in connecting media producers to users. These are often mutual interactions with users both producing and consuming content. These platforms play an increasing role governing commercial exchange, as well as civil discussion, with plausibly pernicious implications for liberal democracy. As I propose in a recent paper ‘Markets for Rules’, blockchains offer a promising solution to this danger by helping to displace corporate ownership in favor of common platforms sustained by users themselves.

Corporate concentration has produced enormous efficiencies and innovations, improving user experiences and boosting investment in hardware and infrastructure. But it has also had several bad consequences. These enterprises face extremely low marginal costs and network effects whereby additional users add value to an existing user-base. Some of these effects are explained by these platforms’ business models of collecting personal data to target advertising more effectively at customers. The more interactions on a single platform users have with each other, the more useful the data for advertisers. The result is overwhelming returns to scale and a winner-takes-all competition for profits.

This has troubling implications for economic inequality, especially if we end up with a handful of corporations taking a bite out of every conceivable transaction. Of greater concern is the way owners exert control over who can join and what people are allowed to do on their platforms. Content producers can be demonetized or banned, effectively denying them access to a user-base or revenue. Online sellers can find themselves frozen out of a platform payment system without legal remedies. Controversial or unpopular producers survive at the whim of executives or, at best, a patchily enforced official policy.

This reliance on private governance is a problem for consumers, producers and ultimately citizens. But it is also a challenge for executives who find themselves mediating acrimonious personal disputes and political debate. With all the data in the world, they struggle to judge consistently what belongs on their platforms. The fact that these corporations have ended up functioning as unofficial censors and wielders of sanctions has led some commentators to propose regulating these platforms as public utilities or, more radically, nationalizing them so that access to them is decided democratically. These solutions have their own perils because any centralized system of monopoly control, whatever the underlying democratic credentials, can produce authoritarian outcomes. Liberal democracies up until now have been sustained by an independent civil society constituted by overlapping and competing spheres of governance, not the monopoly of either democratic or corporate government.

The prosecution of the CEO and founders of Backpage, who failed to exclude sex workers from their platform, illustrates the reliance of these private enterprises on government support on controversial policy issues even in relatively free societies. The combination of privately-developed data-collecting networks with over-arching state control is arguably reaching a nadir in China which is rolling out an unaccountable surveillance system of ‘social credit’ that can identify political dissidents and automatically exclude them from significant spheres of civil society.

Is there a way that blockchains can help navigate around the centralising and authoritarian impetus of technology-facilitated governance? Blockchains emerged from two pre-existing technologies – public ledgers and asymmetric cryptography – to produce a way of sharing data across a network that is resistant to manipulation by unauthorized actors. Initially conceived as offering alternatives to state-backed currencies, blockchains are now used to build decentralized autonomous organizations (DAOs) and dapps (decentralized apps). They can supply similar functions as corporate platforms but without an overall owner.

These systems are sustained by rewarding network participants with tokens (through completing intensive computing processes called mining). Tokens are convertible into ordinary currency, albeit currently at volatile rates. The entrepreneurs that build these platforms typically reward themselves and investors a large stake in those tokens but once the network is launched, they do not have control over how it is utilized. The rules of each network are self-enforcing. These rules can be changed, either through the original (or new) developers launching a rule-set that others may choose to switch over to (a fork). Alternatively, the rule-sets might contain provision for amendment. Such amendment schemes are, of course, open to manipulation as is the case for all political processes. Nevertheless, what these schemes offer is a way of interacting and exchanging at large distances without an overarching ruler. Instead, conduct is permitted on the basis of fixed rules enforced mechanically by people’s decisions to participate in the system. One way of looking at these schemes is that they have decentralized properties of communal norms, combined with the possibility of more deliberate design and experimentation of more formal rules and institutions. I call this common government.

The implications of this new technology and kind of governance might turn out to be very far-reaching, approaching that of the development of the Internet itself or even the printing press. But what could it mean for familiar Internet platforms in the medium-term? First, participating in mutual platforms might better align the incentives of users and platform designers. Right now, platform owners rely on squeezing as much data out of users as possible in order to sell it on to advertisers and to sell additional services. Mutual platforms, without responsibilities to shareholders, can experiment with different funding models. Individual users might elect to sell access to their profile to advertisers but the data itself can be made more secure as it will be a property of an encrypted network rather than a profile stored in a central private database. Privacy can be better assured than private management with public regulation.

Second, the networks can be more robust both to natural and political perturbations. Under decentralized protocols, ordinary users help store and serve content to each other. With the addition of blockchains, these users can be compensated for making their idle computer resources available for network use. This means that data doesn’t have to travel so far as is currently the case from host to user and the network as a whole can better cope with outages from particular nodes without data loss. Without a central controller, there is no particular agent that a government can coerce or punish for allowing specific interactions over a platform. Governments would then face the more difficult choice of permitting or prohibiting Internet communications altogether. It is thus more robust against arbitrary government censorship and manipulation of trade.

The relationship between users on a platform is mutual. The relationship between users and platform owners, however, is presently hierarchical – a private dynamic that government agencies can exploit. What blockchains may eventually permit is the provision of relatively efficient networks reliant neither on a single public agency nor private owner.

Learn more about Nick’s work here.

Britain’s Pornographer and Puritan Coalition

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Brexit isn’t the only ridiculous thing happening in the United Kingdom. In April, the British government is rolling out statutory adult verification for pornography websites and content platforms. This requires all adult content providers to have proof of age or identity for all their users, whether a passport or a credit card (or more ludicrously a ‘porn pass’ that Brits wishing to browse anonymously will have to buy from local newsagents). The government plans to require internet service providers to block pornography websites that are not in compliance with adult verification once the system is in place. For those with university institutional access, Pandora Blake has written a timely explanation and critique published in Porn Studies: ‘Age verification for online porn: more harm than good?’.

Technical challenges with rolling out the system have led the dominant pornography search platform owner, MindGeek, to develop proprietary solution, AgeID, in cooperation with regulators. This cooperation between the dominant commercial pornography platform supplier and a Conservative government publicly intent on restricting access to pornography might appear surprising. However, it can be explained by a particular pattern of regulatory capture identified in public choice theory as a Bootlegger and Baptist coalition. Bruce Yandle observed that throughout the 20th century, evangelical Christians in the United States agitated for local restrictions on the sale of alcohol with the avowed aim of reducing consumption but with the secondary effect of increasing demand for alcohol for illegal bootleggers. Hence both interest groups, apparently opposed in moral principle came to benefit in practice. We now have a classic British case study. In this case, MindGeek is not acting as a literal bootlegger. It intends to be fully legally compliant with the filtering regime. However, the law will block all non-compliant competitors without a comparable verification system. They can gain a competitive advantage with a proprietary technical solution to the barrier introduced by the government.

Introducing identity verification systems has high fixed costs and low marginal costs. It is costly to develop or implement but easy to scale once integrated. The larger the pornography enterprise, the more easily these costs can be absorbed without the risk that it will not be worthwhile to serve the British market. For many smaller international pornography websites, without in-house legal advice or technical expertise, it might prove uneconomical to serve British users directly. So MindGeek’s platforms could become the least-cost legal gatekeeper between small enterprises producing pornographic content and the British public. The government is raising transaction costs to accessing pornography in a way that impacts larger and smaller platforms asymmetrically and favors one dominant platform in particular.

Both the premise of this policy and its likely impact on the market for pornography is unpromising. At its most benign, this could be a characterized as a ‘nudge’ against the consumption of pornography and reducing access of inappropriate content to minors. But these limited benefits have costs for both producers and consumers. On the consumption side, it increases risks to data security and privacy because it will plausibly tie records of pornographic access to verified identities, with a clear likelihood of being to infer an individual’s sexuality from private browsing. This could represent a particular vulnerability for LGBTQ identifying individuals who live in communities where there is still stigma attached to minority sexual orientations.

On the supplier side, it takes what already appears to be a market with strong tendencies towards a winner-takes-all model, and then augments it so that a dominant platform has a legally enforceable competitive advantage over potential rivals in the market. Ultimately, it threatens to further strengthen the bargaining position of a single corporate pornography platform against the sex workers who supply their content.

It’s no longer the economy, but we are still stupid

Motivated Reasoning, Public Opinion, and Presidential Approval‘, an interesting new paper forthcoming in the journal Political Behavior (summarized here), by Kathleen M. Donovan, Paul M. Kellstedt, Ellen M. Key, Matthew J. Lebo finds that support for sitting presidents has become increasingly misaligned with national economic expectations. Rather than being a sign of voters realizing that presidents play little role determining economic performance, they attribute this to increased partisan polarization.

I think this is a compelling account. All I would add is a potential causal mechanism. My current favorite dimensions for analyzing democratic trends in the developed world is demography. Voters are ageing. When retired, they tend to have much less direct involvement with the productive economy than when they were working. On average, the elderly are quite rich and living off entitlements they have acquired during their working lives. So they are both less reliant on current economic opportunities and less knowledgeable of them. This means their personal costs of partisanship, relative to good policy, is lower than it used to be. And this is what lets all the culture-war nonsense creep into people’s decision functions.

Obscenity law liberalised

2014 Protest outside parliament for sexual expression. Photo by BeeMarsh BeePhoto
December 2014 Protest outside parliament against sex censorship. Photo by BeeMarsh BeePhoto

This is a cross-post from my contribution to the Adam Smith Institute blog.

Last week the Crown Prosecution Service published updated guidance for prosecutions under the Obscene Publications Act (1959). Legal campaigning has brought about a big change: the liberal tests of harm, consent and legality of real acts are now key parts of their working definition of obscenity. The CPS explain:

… conduct will not likely fall to be prosecuted under the Act provided that:

  • It is consensual (focusing on full and freely exercised consent, and also where the provision of consent is made clear where such consent may not be easily determined from the material itself); and
  • No serious harm is caused
  • It is not otherwise inextricably linked with other criminality (so as to encourage emulation or fuelling interest or normalisation of criminality); and
  • The likely audience is not under 18 (having particular regard to where measures have been taken to ensure that the audience is not under 18) or otherwise vulnerable (as a result of their physical or mental health, the circumstances in which they may come to view the material, the circumstances which may cause the subject matter to have a particular impact or resonance or any other relevant circumstance).

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John Rawls had good reason to be a reticent socialist and political liberal

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John Rawls: Reticent Socialist by William A. Edmundson has provoked a renewed attempt, written up in Jacobin and Catalyst, to link the totemic American liberal political philosopher with an explicitly socialist program to fix the problems of 21st century capitalism, and especially the domination of the political process by the super-rich. I found the book a powerful and enlightening read. But I think it ultimately shows that Rawls was right not to weigh his philosophy down with an explicit political program, and that socialists have yet to respond effectively to James Buchanan’s exploration of the challenges of non-market decision-making – challenges that bite more when states take on more explicit economic tasks. The large-scale public ownership of industry at the core of Edmundson’s democratic socialism is plausibly compatible with a stable, liberal political community in some circumstances but it is unclear how such a regime is supposed to reduce the scope of social domination compared with a private-property market economy in similar circumstances once we look at public institutions with the same skeptical attention normally reserved for private enterprise. A draft review is below.

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Rent isn’t a four-letter word

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Inspired by the publication this week of NYU scholar Alain Bertaud‘s critical new book Order without Design: How Markets Shape Cities (MIT press), Sandy Ikeda‘s pre-book development series Culture of Congestion over at Market Urbanism, and London YIMBY, here is a note on housing reform.

Classical liberals see the economic solution to housing as relatively simple: increase supply to better meet demand. By contrast, the political economy of housing is almost intractably complex. The reason for this is that there are endless externalities associated with new housing: access to light, picturesque landscape, open space and uncongested roads just for starters. These gripes and grievances are the bread and butter of local politics. Unlike consumer product markets, housing cannot be disentangled from these social, political and legal controversies. A successful market-based housing policy must establish institutions that not only encourage housing supply growth but navigate around these problems while doing so.

Policy reform proposals that deliberately favour increasing owner-occupied single-family homes, as tends to be the focus among market liberals in the UK (and to some extent in the US), are currently self-defeating. As justified as they were in the past to achieve a more market-friendly political settlement, they are now a barrier to achieving plentiful, affordable housing. This is because every new homeowner becomes an entrenched interest, a potential opponent to subsequent housing development in their area. They impose more political externalities than renters. I propose we cut the link between support for home ownership and housing supply policies. This would free up policymaking to focus on expanding provision by all available market-compatible means.

This should include greater encouragement of institutional landlords, especially commercial enterprises. Commercial landlords have more incentive and capability to expand supply on estates that they own, while long-term renters (unlike homeowners) have an interest in keeping rental costs low. The lack of private firms dedicated to supplying housing in England compared to much of the rest of the world is startling and yet often overlooked even by friends of free enterprise.

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Populism versus Constitutional Democracy

What is the difference between a conservative and a reactionary? A conservative knows when she has lost.

A conservative respects the status quo for the sake of stability. The reactionary rebels against it. Unfortunately, it is the reactionary impulse within Brexit that now threatens to hem in the liberties of British citizens, and threaten the rights of foreign residents, for a long time to come. A looser but productive relationship that Britain could have had with the European Union was lost, first at Maastricht in 1992, then again at Lisbon in 2007. A conservative recognizes this loss and adapts her politics to the new landscape. The reactionary tries to reconstruct those lost pasts in vain as the chaotic debates in Britain and the increasingly disappointing outcome illustrates.

Does this mean that referendums are bad? Do they only embolden radicals and reactionaries? It depends. If referendums are used to rubberstamp the decisions of a party in power, or as a way of deferring political judgement, then they are useless at best, dangerous at worst. By contrast, if they are part of the fabric of a democracy, and act as a real veto on constitutional change, rather than a populist rallying point, then they can be enormously valuable. They act as an additional check on the political establishment that might be irrationally fixated on some new governance structure. It ensures that every major change carries with it some level of majority support.

Ten years ago, I wrote a monograph Total Recall: How direct democracy can improve Britain. I advocated supplementing representative democracy with a norm or statutory requirement for referendums on constitutional issues and new local initiative powers. I focused on direct democracy in US states that mean that US state elections often involve both voting for representatives and on propositions. Referendums are required for state constitutional changes. In some states, citizens can initiate new legislation through propositions.

There are parallel constitutional requirements in force in parts of Europe, particularly in Switzerland, Norway and Ireland. It is hardly a coincidence that direct democratic mechanisms have slowed down European integration wherever they have had statutory rather than merely advisory force. Ireland had to go to the polls several times to get the ‘right’ answer but at least this meant that a majority of Irish eventually accepted the new EU arrangements. By contrast, Switzerland and Norway, against the wishes of their political establishments, took European integration only so far before settling with generous trade relations and much more limited political integration. The cost-benefit calculus of their arrangements are up for debate, but few would deny their legitimacy. Britain’s future position, by contrast, may turn out to look much worse and all because its people never had the chance to say ‘no’ until long after the facts on the ground changed.

It’s the ability to say ‘no’ that’s important, with the implication that the status quo must still be a viable option. A people cannot be legislators. Mass votes can’t add up to complex judgements to inform actionable law. Hence the Brexit referendum for leaving the EU for an unknown alternative was bound to lead to chaos which, in the long run, may undermine the legitimacy of representative government, let alone popular democracy, rather than strengthen it. There is no status quo ante to return to.

At the time I was writing Total Recall, the spirits of referendums never voted on haunted British politics. Referendums were promised on adopting the Euro and the European Constitution. Both were abandoned when the Government realized they would almost certainly lose. So we stayed out of the Euro but signed what became the Lisbon Treaty. This turned out to be a deadly combination that eventually led to Brexit. The Euro is quite badly managed as an economic scheme. As a political mechanism, however, it binds members of the Euro much closer together. Leaving the European Union, as Britain is doing, is perilous and costly. Leaving the Eurozone would be even more difficult as it would involve establishing a new currency from scratch. If New Labour had been serious about putting Britain in a federal united states of Europe, it should have gone all in with the Euro from the beginning.

So Brexit could have been avoided but not by ignoring majority sentiments. If British referendums were constitutionally mandated rather than the random outcome of internal (in this case, Conservative) party politics; if referendums were required to change the status quo rather than a mechanism for a belligerent minority to relitigate past losses, then, like Switzerland and Norway, we would be in a much better position now.

Will our political leaders learn this lesson for the future? That I doubt.