Emergent Centralization, a motivated history of


#1

Hello all, I’m an Econ PhD-turned-founder and I worked on behavioral theories of centralization and division of labor. I’m especially interested in the history of production in market economics. Is there interest around here for a write-up on this sort of thing? I’m using it guide my thinking on my own project.

My guiding question is: how and why did centralized firms and factories emerge out of a decentralized market system? What mental models does this provide for thinking about crypto? Here are some behavioral angles:

  • Cognitive costs. Should we imagine a ‘sphere of indifference’ where it’s too costly/annoying for people to contract? Relevant for DAOs and DPoS, probably for prediction markets and futarchy as well.

  • Culture/Values. Groups can forms around shared values and some centralization emerges for coordination, messaging, reinforcement etc.

  • Power/authority. Once centralization exists incentives can change, analogous to Chris Dixon’s graph.

  • Commitment, teamwork, and agency problems. Effective division of labor starts requiring a number of workers that can’t be found in a family or even community, trust becomes a scarce resource.

Happy to discuss/collaborate.


#2

“Centralize for efficiency, decentralize for autonomy”

Systems centralize for efficiency reasons. Since they can provide goods and services cheaper, they outcompete decentralized systems. Decentralized systems will stay niche until their efficiency improves to close the cost gap.


#3

counterpoint: decentralized capital allocation seems to be more efficient at allocating capital than centralized capital allocation


#4

You’re definitely right to a degree, bharathrao, but I think this invites the question “why and when is centralization efficient”? I assume most of us think that centralization becomes inefficient at some point-- for instance, command economies.

In economics this question is typically formulated as “what are the boundaries of the firm”


#5

I think a consideration of some political-economy aspects would also be key to this kind of research. This could also allow for more global applicability to the research, given nations like China and India which contain massive portions of the worlds populations and only began to liberalize their markets much more recently than the U.S. and others.

Personally, I’d argue that, there has never been a true global market (yet), since so much of the world for so much of history lived under strong, economically illiberal, regimes. I’d argue that colonialism prevented a true market system from emerging, and though the world has moved in that direction, as a whole we aren’t there yet.

Basically, my question might be “how and why did a decentralized market system originate out of centralized firms (and governments)? Is the market trending towards centralization or decentralization? What role can Ethereum (and other cryptos) play in this changing dynamic?”


#6

That’s markets, not organization.

Markets work best on autonomy and therefore planned markets usually are disasters. Any co-ordinated effort works most efficiently centralized.


#7

I would definitely be interested.


#8

Would absolutely be interested. The Master Switch (Tim Wu) made some interesting arguments around the cycle of centralization/decentralization in information industries, might be useful to check out if you hadn’t already


#9

I would be interested in having a standards document by which the conventions of organizational literature informing the “boundaries of the firm” construct could be harmonized with, or translated back and forth between, the notation in specs like the Yellow Paper. [Edited to note @jonchoi 2017’s CAPM / fixed income modeling, add section 0.1 after looking at notation in some recent posts, retract my cheap talk about cheap talk about “centralization,” and ask please excuse the overwrought distraction, my bad.]

As “extremely not an econ PhD,” personally, I’d find it absurd to be pedantic about playing the hits below, as it were. They are the product of [e:] effort processing [/e:] your characterization of efficient centralization as a boundaries of the firm problem. As a noncontributing member of the peanut gallery, I wonder whether and how building on, or mapping to, items 2 and 3 (universality & modularity) in the whitepaper design principles might (or should, as a matter of economic historiography) instrumentalize a model of industrial development.

  1. [Structures/Setups] (JEL: D21, D80, D86, L15, L2_, L69)
    Arrow 1973
    Milgrom & Roberts 1990
    Fortunato & Hric 2016
    Aghion & Holden 2011
    Jones & Romer 2010
    0.1
    Schrijvers, Bonneau, Boneh, Roughgarden 2016
    Milgrom 2000
    Black 1976
    Jackson 2010 // [WorldCat]
  2. [Cognitive Costs/Market Frictions] (JEL: D8_, D91, O17)
    Holmstrom & Milgrom 1991
    Greif & Mokyr 2017
    Aoki 2009
    Romer 2015
    Aghion & Bolton 1987
  3. [Culture/Values] (JEL: E14, E22, E26, L14, Z00, Z1_?)
    Lazear 1995
    Jackson 2018
    Pedraza-Farina 2017
    Granovetter 1985
  4. [Power/Authority] (JEL: D02, G32, H32, P26, P48)
    Coase 1937
    Jensen & Meckling 1976
    Demsetz 1983
    Aghion & Tirole 1997
    Grossman & Hart 1986
  5. [Commitment/Teams/Agency] (L2, O31, D23)
    Holmstrom 1982
    Kandel & Lazear 1992
    Klein, Crawford, Alchian 1978