No, a myriad of new silk roads will not rise up to replace the old one

The State’s war on Dark Net marketplaces will result in previously trusted marketplaces being replaced by riskier and less trustworthy ones. Honest people operating on a reasonable risk/reward calculation will increasingly abstain from using them. The likely consequence is that the confidence level of DarkNet c-to-b transactions will begin to resemble that of traditional c-to-b transactions, with the additional negative repercussions of being more riskier to the buyer than the traditional c-to-b model.

By now, I’m sure anyone reading this post is aware of the sentence handed down to Ross Ulbricht(aka,”Dread Pirate Roberts”). The purpose of this post is not to extend a commentary on the barbaric character of the sentence.1 That will be for another time. Instead, I want to counter the conventional postscript that concludes virtually every postmortem of the drug war.

“Just another example of an irrational,failed drug war. Take one down, fifteen will rise up to take its place…”

Nope. Not the case. Particularly, in this instance.

First, we should accurately report the full sentence Ulbricht received. It was life imprisonment and a 185 million dollar fine. The State rolled up money laundering charges in the conviction, in no small part because the United States government now “recognizes” bitcoin as a legitimate medium of exchange.2The financial penalty of bitcoin money laundering appears to be the total transactional value that can be pieced together through a forensic analysis of the public blockchain.

Secondly, public court documents and testimony regarding the fed purchases of product from the original silk road marketplace indicate an abnormal level of reliability in a c-to-b(consumer to business, or, if you prefer, user to dealer) drug transaction. Documents indicate you had about a 95% level of confidence that you were actually getting what you thought you were buying. Trust me, that level of confidence is not the norm in traditional c-to-b drug transactions. That’s the real story. The “reduction in violence” argument is not. Frankly, if you made the argument, it is a good indication that your only knowledge of the drug trade comes from watching tv/movies and reading state media sources.

Unfortunately, the effect of barbaric sentencing and draconian money laundering penalties will serve to introduce quite a bit of fraud into Dark Net drug marketplaces. Yes, knock one down, and perhaps fifteen will rise up to take its place. But the level of confidence of a c-to-b transaction confidence will begin to approach the traditional level and indeed may even fall below what you can expect on “the street.” In addition, the confidence level of “dealing with a narc,” on either side of the ledger(consumer or supplier), begins to exceed what you can expect “on the street.” So while there will be replacements, they won’t be exactly the same version as the previous ones.

Frankly, anyone who engages in a repeated pattern of buying or selling on Dark Net sites can only expect to be busted. You may as well just send out an email to the pigs for all intent and purposes. This is opposed to the traditional model where only the dealer following a repeated pattern faces a probable certainty of being prosecuted.

Bitcoin has its uses, but in terms of buying contraband, you are better off sticking to the old-fashioned human p2p network of your reasonably trusted inner/outer circle.

Unfortunately, that conclusion doesn’t exactly make for a “failed war on drugs,” now does it?

1 I’ve read many characterizations that described it as “tragic.” Its not tragic. Its barbaric.

2 Another demonstration why the dipshit “libertarians” at George Mason University campaigning for a “bitcoin regulatory regime” are mortal enemies of libertarianism. The argument that a “regulatory regime” carves out a “legitimate space” in a space that would otherwise be treated wholly as “criminal” actually introduces a far more punitive criminal sanction regime.”Legitimacy” allows the feds to wield the weapon of “money laundering.” And the blockchain is not anonymous. It is only pseudo-anonymous. The crime of operating a website can now carry the financial penalty of any applicable transactional value of the duly recorded transactions in the public blockchain.

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Desperately Rent Seeking Servitude

A recurring theme of this blog is that politics can be rationally modeled. This view leads one to dispense with the oft repeated exasperations regarding irrational policies. A prime example would be the drug war. No the drug war is not insane. Nor irrational. Instead we treat it as something that can be rationally predicted. In the context of social and political science this means we attempt to ascribe a consistent rational method or choice to agency action to derive predictable patterns of behavior. Rationality in this context does not mean “a” should be preferred to “b” or “b” preferred to “a.” That is, rationality is not assigned to preferences. Instead it is assigned to the pattern. So what would be irrational is a pattern that, say, gives us “a” > “b” AND “b” > “a.”

The application of Rational Choice to the patterns of politics and government is usually credited to the Chicago and Virginia schools associated with classical liberalism. Both schools apply the model of methodological individualism to political and state actors that is similar in treatment to actors in the economic arena. In this sense, Rational Choice gives us no such thing as the State itself. A minor hetereodoxy is Bryan Caplan’s “Rational Irrationality” that shifts the agency responsible for patterns of government to the individual voter. Caplan’s motivation in part was to explain the failure of the standard treatment to reliably produce a rational pattern. But to accept Caplan’s method would be equivalent to saying there is no such thing as the politician or the bureaucrat.

Frankly, Rational Choice would offer an unreliable model of government if not for the possibility of a third alternative. This alternative says, by golly, there is such a thing as the State. If we assume the State1, then how then could we expect this thing to rationally behave(in the sense outlined above)? Anthony de Jasay should be credited as a pioneer in this third alternative. He gives a ready rational pattern of this thing, the State: a Firm that maximizes discretionary power.

It can’t be over-emphasized how much our third alternative is a radical departure from the standard treatment. We are dispensing with the methodological individualism of individual actors(like politicians, bureaucrats and lobbyists) usually assumed to be maximizing their own utility by a method entailing calculating the benefits against costs. Instead, the fundamental unit actor is The Firm. And our maximand quantity–the power to be used at one’s discretion–defies the usual neoclassical treatment of profit or Von Neumann utility.

If you are familiar with mathematical or computer science concepts, the third alternative more or less forces you to adopt an entirely different schema(meta constructs) to model(or make sense of) the patterns in the world. Hence, you avoid referring to such things as the banning of pressure cookers as irrational or stupid. No doubt, it would be stupid under the standard schema of neoclassical economics. But not under our alternative schema. Under this, it follows a rational and predictable pattern.

In de Jasay’s model, the discretionary power eventually dissipates into the “security of maintenance,” which means the use of power to simply stay in power. Writes de Jasay:

“Like the firm in the perfectly competitive industry that makes no profit, the state ultimately achieves only its own survival, and no one is satisfied by this relatively pointless result.”

I have dubbed this type of model by the shorthand name, “The Firm.” The extent of the departure of the political economy of The Firm from standard, neoclassical treatment requires an alternative vocabulary to adequately convey the schema at play. Things like “regulation” do not mean in The Firm what they mean in the neoclassical model. Public Choice concepts like “regulatory capture” are almost nonsensical when translated over to the model of The Firm. To see this, consider the neoclassical meaning of regulation: to internalize negative externalities so as to promote a regular functioning market. The public choice meaning of regulatory capture is to produce regulations that capture artificial rents by creating barriers of entry to competition. But the more appropos term when translating over to The Firm would be something like “docility,” which means something more along the lines of “yielding to submission.” Indeed, we can propose the following model translation:

regulation ————> docility
regulatory agencies —-> docility agencies
regulators ————> docilitators(we’re inventing a noun)

Under this language, the nonsensical nature of regulatory capture, translated to “docility capture,” becomes more readily apparent. It makes little sense. It seems to imply rent-seeking not as a power act but rather as an act of subservience. But nonetheless there is a rational pattern being hypothesized: any power accrued from rent-seeking docility rules will be dissipated via the “security of maintenance.” And there appears to be a bitter irony at play first noted by Orwell in his tract, “The Theory and Practice of Oligarchical Collectivism.” Oligarchical Collectivism produces a de facto peace. Following de Jasay, it may also produce a similar de facto end to the rent-seeking State.

Perhaps it would be instructive if we play a little language game with our model translation and apply it to this recent Reason article on Bitcoin authored by Jerry Brito, a senior fellow specializing in technology policy at Mercatus. Brito provides us with the classical rational choice defense for Bitcoin regulation. Ostensibly, he is treating the rationality of regulator in the standard way. This apparently leads him to formulate a dual struggle between an intransigent old guard of early adopters vs a dynamic new guard entrepreneurial class willing to bargain with regulators in order to launch a next gen Bitcoin application platform.

Writes Brito:

If the message wan’t clear enough, the Bitcoin Foundation—which helps organize Bitcoin’s development on the same model as the Linux Foundation—announced that it would be hiring a full time lawyer in Washington to represent the community’s interests. The thinking is that Bitcoin businesses and users are going to be regulated even if the protocol itself can’t be, so it’s time to engage the regulators and policy makers before they make any hasty moves.

This willingness to lobby and work with regulators, however, was not well received by many of the old guard. As one exasperated Foundation member tweeted, “I got into Bitcoin to improve this miserable planet and ESCAPE the iron grip of privileged moneyed interests, not JOIN THEM!”

But the fact is that Bitcoin is growing up. Its revolutionary potential is greater than most have yet understood. Entrepreneurs and venture capitalists are seeking to professionalize and legitimizing the network, and to do that regulators will have to understand and accept it.

It’s true that Bitcoin could continue to operate even if it was outlawed outright, but then it would only serve as an underworld currency, and its development would not doubt be hampered. The more subversive path may well be to let regulators create their rules for what at base is an uncontrollable system.

Translated into the model language of the Firm:

If the message wan’t clear enough, the Bitcoin Foundation—which originally organized Bitcoin’s development on the same model as the Linux Foundation—announced that it would now forego that model in favor of one predicated on hiring a full time lawyer in Washington to represent the Bitcoin Foundation’s interests. The thinking is that Bitcoin businesses and users are going to be docilely compliant even if the protocol itself can’t be, so it’s time to engage the docilitators before they make any hasty moves.

This willingness to be subservient to docilitators, however, was not well received by those who reject docile compliance. As one exasperated Foundation member tweeted, “I got into Bitcoin to improve this miserable planet and ESCAPE the iron grip of privileged moneyed interests, not JOIN THEM!”

But the fact is that Bitcoin needs to outgrow any revolutionary potential before it becomes widely understood. Thus Entrepreneurs and venture capitalists are seeking to create a professionally compliant network that can be easily understood and accepted by the docilitators.

It’s true that Bitcoin could continue to operate even if it was outlawed outright, but then it would only serve as an underworld currency, and its subservience would not doubt be hampered. The more subversive path, in contrast to the subservient one, may well be to let docilitators create their rules for what at base is an uncontrollable system.

Of course, the likes of Brito would read my translated version as satire. Fair enough. But I read his version as satire. The indisputable facts that even Brito would have to concede is that Bitcoin “regulation” has nothing at all to do with “regulation” and everything to do with compliance to an existing power authority. So what we have is a bargaining game between an open rent-seeking agency and an agency representing the maintenance and continuance of a power authority. But this type of bargaining is not actually in the standard rational choice/public choice literature. Remember, the standard treatment assume methodological individualism on the part of our regulators. There is no agency or agency representation of power on their end. Otherwise, we would be admitting the State or its agency thereof.

Interestingly, it would be well to point out that an agency like a “Bitcoin Community” is voided in the standard public choice literature, too. There are individual players, each competing for rents. Any coalition, at best, is temporary(straight from the bible of Public Choice, “The Calculus of Consent”). “Sticky” coalitions, to remain within the explanatory model of standard theory, can only persist by resorting to drastic inefficiencies/opaqueness in the rent-seeking technology(straight from the Encyclopedia of Public Choice)2. But this thing with Bitcoin is far too transparent. Rent-seeking coalitions do not host open forums as an evangelist platform. For someone like Gordon Tullock, this would be the monkey wrench of all monkey wrenches.

So, to be clear, what I am pointing out is that Jerry Brito’s commentary at Reason regarding Bitcoin has no substantiating theory of political economy. It is purely a language game relying on buzz words to convey a rational argument. Words like “new guard,” “old guard,” “dynamic entrepreneurial class,” and “revolutionary application platform” don’t mean a damn thing in and of themselves. If pressed, Brito will almost certainly reduce his argument to something like it is rational to be subservient in order to have a legal market for a potentially revolutionary platform. But that’s just a premise begging for a rational method to justify the conclusion. And Brito has no method. Instead the very premise plays into de Jasay’s rational method of the State as a firm. The conclusion from this method is simply the maintenance and continuation of State power.

Finally, I would be remiss not to point out the pessimistic implications de Jasay’s method for the prospects of anarchism. Unlike classical liberalism, anarchism/libertarianism typically does not dispense with the agency of the State as some sort of fiction. However, the “standard class model” usually views the raison d’être of this agency as means to procurement of artificial rents. The State is the means and the “rents,” and the power resulting thereof, are the ends. So if we have a political economy, in this case a digital economy, where the marginal cost of digital goods approaches zero, the State is viewed as some inevitable dying order because its enforcement agency is doomed to obsolescence.

However, if we have a rational method that seems inclined toward the State as both means and ends, and our maximand quantity of this thing turns out to be simply discretionary power, then the thing that is supposed to kill it poses the possibility of being its eternal fountain of youth. The obvious weakness of “the internet as liberator” is that it is not a “decentralized network.” Rather it is a small network that follows a power law distribution. The very property that allows it to be a distribution channel approaching a zero marginal cost of digital goods3 also allows it to be a perpetual channel for social control. Rather than undermining the State, revolutionary ideas in digital economy, to the extent that a rational method entails them to rent seek subservience, is the very thing that persists the modern liberal state. Revolutionary opportunities follow a rent-seeking pattern that dissipate into a security of maintenance.

We should be reminded that in Orwell’s version of things, Big Brother wins. de Jasay’s rational method of political economy gives us the equally sorry prospect of the Entrepreneur as Emmanuel Goldstein.

1 IMHO, the State as a Firm can actually be micro-economically derived by introducing frictional waste into rent-seeking.

2 The industry of rent-seeking does not refer to the industry itself, that is, to the actual production of the widget or service, but rather to the industry of seeking special privileges for the production of the widget or service. So inefficient rent-seeking technology does not mean the production of the widget or service is deliberately made inefficient; rather, it means the process by which special privileges can be obtained is deliberately made inefficient. This then can explain the barrier of entry to others competing for the special privileges. Remember, the constraint or boundary condition of the Standard Theory is that outlays >= rents.

3 The efficiency of the internet is a product of a great deal of centralized coordination of standards(manufacturing and protocol) up and down the stack. It is not a spontaneous order. The more accurate description would be an efficient Hayekian Hybrid Constructivist Order as a sort of unintentional consequence of “planned competition.” The neoclassical consequence is a major unbalancing of the equation between marginal cost and marginal labor. Zero marginal cost should imply an end to wage labor. But it is an entirely unjustified assumption to think that the n degrees of standardized informal compliance, and in some cases, formal compliance, would persist if everyone became their own firm. If not, there goes your small network and with it, this zero marginal cost manufacturing base. If you think interoperability between windows and mac, or even different versions of windows is a drain of your modern life, you might want to rethink the degree of connectedness you would have if we had an unplanned shift that equilibrated marginal cost to the marginal product of labor. The point being made here is that you can’t assume the small network in anarchist pronouncements of technological triumphalism. If we are to assume the persistence of the small network, a more rational conclusion might be the expropriation of this “Hayekian Constructionist Order” for a more dystopian end than typically envisioned.

Bitcoin and Agorism

We are working with the government to make sure indeed the long arm of the government can reach Bitcoin
Jeff Garzik, Bitcoin Developer

Two days ago, on the show, What’s Trending, Bitcoin developer Jeff Garzik remarked that despite the opinions of the libertarian user base of Bitcoin, the success of Bitcoin required cooperation with government regulation. This echoes the opinions of Bitcoin technical lead, Gavin Andresen. Here, “regulatory cooperation” specifically refers to “regulatory compliance” of Bitcoin exchanges. A Bitcoin exchange is where government fiat money is exchanged for the Bitcoin “free market” fiat money and vice versa. Regulatory compliance means reporting the details of each of these transactions, including the user identities linked to a Bitcoin address for each exchange transaction, to the Government.

It’s not like the Bitcoin development team has nefarious motives. Even though the original whitepaper by “Satoshi Nakamoto” was perhaps ideologically motivated by crypto-libertarianism, the development has since been turned over to a team more concerned with practical adoption than ideological ends. A fiat currency requires a “network effect” to ultimately succeed. Since Bitcoin “mining,” that is the creation of new bitcoins, is (1) an incentive reward for a clearinghouse node completing a proof-of-work requirement for verifying the current block of unverified transactions and given (2) that the increase of CPU power of the Bitcoin network(i.e., the addition of new nodes) dictates that clearinghouse nodes specialize(following a “division of labor” hierarchy) as “number-crunchers,” so most nodes now will no longer participate in block transaction verifications(they will “turn off” the Bitcoin mining option), it follows that (3) most new entrants(new “nodes”) who want to acquire bitcoins will do so by buying them from a currency exchange.

Hence, the Bitcoin development team’s position that the network effect(wide-spread adoption) depends on “white-market” currency exchanges as entry points. Without regulatory compliance, these exchanges won’t exist and/or continue to exist. The Bitcoin development team consider themselves acting in the capacity of entrepreneurial agents, not ideological agents. In other words, they have an entrepreneurial interest in wide-spread adoption(the “network effect”). But the means here conflict with the original ideological intent. This is an example of why I am not a Rothbardian Agorist.

In Rothbardian agorism, you would have:

(1) no white-market currency exchanges. You would acquire bitcoins by exchanging a product of your labor. In other words, if you wanted a product/service being offered in bitcoins, you would have to discover and offer a product/service that others would be willing to pay for with bitcoins. In the limited Bitcoin ecosphere, this would likely entail huge opportunity costs. These opportunity costs are exactly why the libertarian economist Walter Block dismissed agorism as being “economic suicide.”

(2) you could have grey-market exchanges. Agorist theory would require “protective agencies” to evolve, in an entrepreneurial capacity, to defend these transactions. However, we are seeing that the entrepreneurial actions of the Bitcoin development team working against this outcome. From a practical sense, you can see why. “Conspiracy” in US Law is totalitarian. A grey-market exchange + “a bitcoin market trading in illegal services/goods” = criminal conspiracy that could land anyone associated with the project in jail.

Bitcoin, Laissez-Faire and Bureaucratic Compliance

Bitcoin fantastically illuminates the distinction between “regulation” and “compliance.” Statists rely on conflating the two concepts. In the “Laissez-faire” tradition, the entrepreneur is a “regulatory mechanism” and the bureaucrat a “compliance mechanism.” Statists will call Bitcoin an “unregulated monetary ponzi scheme.” But what they really mean is that it is simply “non-compliant” with the lawlessness of the US Political economy. What Statists call “unfair advantage of early adopters” is simply the entrepreneurial reward for resolving a coordination problem. There is no need for “regulation” because it works quite regularly as expected, according to the rules adopted.

A fair, non-compliant(!=unregulated) exchange between government fiat money and free market fiat money resolves the opportunity cost problem outlined above, and absent that constraint, it’s likely that the free market fiat money would experience it’s network effects. However, compliant(!=regulated) exchange between government fiat money and free market fiat money is not likely to result in any network effects. It should be realized that if the State, particularly one that has “oligarchicalized money and credit,” particularly one whose currency serves as the global reserve, lost it’s monopoly on money, it would likely collapse. So, it’s a bit naive to think that the State would comply with such an outcome.

A valid criticism of the Bitcoin development team would be stop using the term “regulate,” and instead use the more accurate term, “compliance.” Compliant Bitcoin Exchanges would have to be considered “Snitch nodes” on the Bitcoin network. Snitch nodes obviously compromise your anonymity in terms of participating in the Bitcoin network, but whether this is sufficient, along with other techniques, to compromise your anonymity for any given transaction, is another matter.

What’s clear, in observing the rapid appreciation of Bitcoin on the exchanges the past 30 days, is that this matter is soon coming to the fore…