Making the Agora Vanish

[Greg Broiles]

At 11:30 AM 4/15/2001 -0700, Ray Dillinger wrote:

>Nobody in conventional
>business is going to want to do a deal with someone when they can't
>create a legally enforceable contract.

This is a common refrain - especially among people who are pushing, for 
cultural or economic reasons, the adoption of a PKI system - but I think it 
suffers considerably from being overgeneralized.

Specifically, it's common to overemphasize the importance of the 
government-based legal system as a dispute resolution system, or as a 
righter of wrongs, especially private civil contract-based litigation where 
force multipliers like attorneys' fees awards, punitive damages, or 
widespread public scorn or embarrassment.

Even in a case where nothing goes wrong - e.g., both parties are subject to 
personal jurisdiction in the same place, they agree on the laws to be 
applied and the court which should apply them, and they have a clear 
pre-existing agreement covering their relationship - litigation is slow and 
expensive. On TV, it looks like a dramatic clash between two lone samurai 
attorneys fighting for the honor of their principals. In the real world, it 
looks more like WW I trench warfare, with expensive, slow, vicious, 
impersonal fighting over feet and yards of muddy, uninteresting terrain 
that's not good for much once the fighting stops.

One of the problems people have when they learn defensive shooting is that 
they expect criminal assailants to just fall down and die if they're shot 
once, because that's how it works in the movies. In real life, actual 
criminals have often been shot before - frequently several times - and 
lived without serious consequences, partly because they received prompt, 
skilled medical care, and partly because the people who shot them didn't 
select an effective combination of ammunition and firearm. Because of their 
experience with gunshot wounds, criminals no longer necessarily have a 
great fear of being shot, nor are they likely to respond to it as a 
life-threatening event. Consequently, a person defending themselves against 
people like that will need to use force sufficient to render them 
physically and medically incapable of attack - injuries which might 
otherwise have resulted in moral or emotional incapacitation are likely to 
be inadequate to end an attack.

Turns out the same thing happens with people and companies who use lawsuits 
instead of guns - they learn that it's not the end of the world if you get 
sued, and that suing someone (especially if they're an experienced 
defendant) isn't necessarily going to make them play nicely immediately.

We talk about people making decisions based on the abstract notion of "the 
law" or "the courts" - but it's more useful to break that down further into 
decisions based upon "the carrot" and "the stick", or "greed" and "fear" .. 
the labels aren't important, so much as is thinking about those two flavors 
of human motivation. The "legally enforceable contract" notion is meant to 
invoke fear of a powerful and unavoidable stick - ideally striking fear 
(and good behavior) into the heart of a potential bad actor. As things turn 
out, sophisticated actors - be they businesspersons, criminals, diplomats, 
or whomever - come to understand that the law's force as a stick is not so 
powerful and unlimited as it's frequently portrayed.

Does the failure of "the stick" doom us to lives of fear and hunger? No. 
Not at all - in fact, many of the people who enjoy themselves the most seem 
to be people who have learned to act on "carrot" motives, and to structure 
their negotiations and contracts with others so that they are operating not 
based upon fear, but upon mutual advancement and cooperation?

>   And "reputation capital"
>that would counteract that point to some extent depends on maintaining
>a consistent traceable pseudonym as someone who does something illegal,
>for decades, without getting linked to it.

No - it depends on maintaining a consistent identity, whose trades with its 
counterparties are considered by those counterparties to be both 
predictable and beneficial.

As Tim May writes in a message which arrived while I was composing this 
one, there are plenty of examples of reputations as the basis for business 
deals now - and business deals which occur despite the lack of reputation 
systems. Cross-jurisdictional trade is one - really, it's just an example 
of the general class of disputes where the cost of resolving the dispute 
exceeds the value in dispute. There's a vast amount of commerce which goes 
on - certainly the majority in terms of number of transactions, likely the 
majority in terms of transaction dollar value, as well - where the cost to 
the participants to adjudicate a dispute regarding the transaction is 
greater than the value of the underlying goods, but is perceived as smaller 
than the cost to either party of ending their relationship.

Easy examples of transactions without legal enforcement or reputation are 
street-level illegal transactions - e.g., purchases of drugs, sex, or 
forbidden information. At least initially, neither buyer nor seller knows 
if their counterparty is trustworthy -  but these transactions take place, 
because both participants think that the value they get from the exchange 
is valuable .. in fact, more valuable than the risk that their counterparty 
is going to swindle them, or turn out to be an undercover cop. Even 
higher-level or repeat transactions, where participants have some level of 
experience with one another, present each with an opportunity to injure the 
other while denying the other access to traditional legal means of 
redressing that wrong.

More examples about in the import-export arena - there are a number of 
private transaction patterns which have evolved to minimize risk and 
misunderstanding, but participants in international trade understand that 
there's some risk that they'll spend money to purchase unusable/unsalable 
product, or that they'll manufacture or reserve a specific quantity of 
goods for a buyer who may never appear .. and people doing business in 
those lines find that, most of the time, most people would rather conclude 
a deal well in hopes of gaining further business, either from that customer 
or via referrals.

It is true that there is a vast amount of almost-demand on the parts of 
risk-averse people who don't want to act for fear of being wrong - but 
there are a lot of people who have figured out how to get things done 
without depending on "the stick" that is the law, and are doing so already. 
It is the latter group of people whose needs must be met for a 
transjurisdictional commerce system to be successful - the former group can 
come along when they're ready, or not at all.


--
Greg Broiles
gbroiles at well.com
"Organized crime is the price we pay for organization." -- Raymond Chandler