[Williamson 1973] Markets and hierarchies: some elementary considerations

Economics
1

ABSTRACT: The principal purposes of this paper are to examine the factors which induce a shift of transactions from market to internal organization and, within internal organization, to explain the types of hierarchical relations that predictably emerge. It is generally acknowledged that a prima facie case for the development of nonmarket (or quasi-market) forms of economic organization can be said to exist whenever the market, if used to complete a set of transactions, experiences “frictions.” But this is only a rebuttable presumption.

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.366.1246&rep=rep1&type=pdf

2

Are you planning a review of each of these papers (and their relevance to crypto and/or Eth), or are you just throwing them out here? In the latter case, a single “readings in cryptoeconomics” thread might be more helpful…

3

I kind of just burst into this space on the wings of morning Ritalin and started playing uninvited curator before getting a sense of the forum etiquette and letting the pinned guidance on posting norms sink in. So “planning” is a strong word for any next steps in this series of posts. I have really acute impostor syndrome (just kidding, I actually just don’t know very much about anything) so doing the equivalent of wall text for each post seems either:

  • premature at this stage of collecting papers of primarily historical interest
  • a suboptimal approach where the second-best of each reader filtering for personal preference, and/or letting passion take the wheel and drive them to contribute their own posts, would be better than tacking on a static “relevance” justification as a kind of discursive fixed header
  • even more solipsistic / Reddit-tier than just PDF-spamming
  • some combination of the above

I don’t want to chill the overall site with clutter in getting a feel for either the intended or emergent UX, and think your intuitions on the single thread would be especially right on - except I’m posting with the sense that platform effects between expert networks have a lot more power than my vision for a series of connections to histories of thought.

A corollary to that is that the typical codex - an aggregation of blog postings, compiled into a list and posted on Medium - is a form that amounts to a refusal to leverage existing technological development in the form of theory and documentation, both narrative and technical. That’s a long and pretentious way of saying that I hope people here are so much smarter than I am that they can collectively rise above the personal Not Invented Here syndrome that compels me - maybe by the narcissism of small differences, maybe by frustration - to act out a praxis of deference to established wisdom by posting objective classics in respectful silence. That is - until the charm of community qua community takes hold, and something like the excitement of watching this category called “Economics” take form, starts to kick in.

So, I have no idea, but here are some ideas:

Optimistically, a reminder of sometime uncertainty of purpose in reading and posting online may inspire a useful development, or at least serve as a reminder what’s so magical about the unknown in social science?

Realistically, I don’t know, and the rate limit of new topics precludes what I would have thought the most creatively enabling mode for a wide-open space in search of a collective habitus: shotgun threading on psychostimulants.

Theoretically, you could consider that a Williamsonian boundary problem in its own right, and I’m glad you chose the paper that lends itself most readily of those posted to accessible metahumor at this intersection of disciplines.

Quite literally, hope that helps. Maybe good faith would require me to soul-search, and admit to having hoped to play kitsch cryptoeconomic canon Ozymandias in a para-academic setting while the serious institutional economists are writing publishable papers, while the serious computer scientists and cryptographers are writing software. Maybe the communicative gas limit cabining my discretion is a reasonably optimal second-best. But I’m not familiar enough with the regret auction literature to cosplay someone who knows how to finish this setup about the distinction between uncertainty and opportunism with a punch line.

I think the cryptoeconomic term for that is “the Jonestown dilemma.”

tl;dr Girls Just Wanna Have Fun

4

One advantage of hierarchy (as opposed to egalitarianism) that I’m surprised the article didn’t talk about is the single marginal claimant argument. That is, if there is a single identified “leader” who has both large influence over the group’s strategy and themselves earns an additional $1 for every $1 the group earns (assuming everyone else is paid a fixed wage), then the leader has an optimally sized incentive to seek out and implement such improvements, whereas if a group’s profit is evenly split among 20 people there’s a public goods problem in doing so.

5

The Coasean lighthouse came a year later, so I guess what conclusions one draws and at what level of abstraction might depend on whether you think of “NIE” as a characterization/category as a principal, a meme as an agent for a community, a school of thought as a planned economy (or internal capital market, but that seems kind of “endogenous growth” in this context), etc.?

Accounting for behavior is…a more recent sort of trend, I feel like

6

Also, quick summary of Alchian & Demsetz 1972 on, like, process threading ($10 on JSTOR):

http://www.kellogg.northwestern.edu/faculty/hubbard/htm/research/ec174/lectures/4alcdem.htm

And then this absolute banger that, at least by extrapolating the, uh, emerging standard of atomicity, deserves its own thread by my estimation (though maybe if we’re being Greenspun’s 10th about our interfacing, threads at the level of the three categories proposed on Twitter could make for a good OP type of sets of ordered posts in the Medium-LISP style? “Styling and profiling”)

7

On the matter of the margin (with or without apologies to Smith, Berle & Means, Fama & Jensen, etc.)

[Olson 1993] Dictatorship, Democracy, and Development
https://www.jstor.org/stable/2938736 [free as in free beer on JSTOR]

See also Cowen 2006 (but incomplete Cowen, because link rot or transaction costs or whatever)

8

Ultimately I’m not sure that economic models can be that easily applied to actions of dictators; Cowen is right that dictators could be maximizing all sorts of things and are probably motivated by social status even more than comfort (as personal comfort does max out pretty quickly with a decent sized mansion, first class flights including to Switzerland for health care, a few dozen servants, a few mistresses and a high speed internet connection). Though there are different kinds of status maximization: one’s own power within one’s country, one’s own status in the world, one’s country’s status in the world, etc etc. This probably applies to billionaires with secure anti-competitive moats as well (and what is a dictator but a billionaire with a really big moat, especially in the days when practically speaking anyone from most dictatorships can just leave and go somewhere else if there’s a somewhere else just takes them?).

That said, to bring the discussion closer to cryptoeconomics, there is one place where these arguments do have some relevance: transaction selection. The “anyone can make transactions, and some mechanism decides which transactions get into the next block” paradigm in PoW and PoS is basically saying “transactions are included into the history by a dictator, we expect and accept that the dictator will maximally rent-seek (ie. charge fees) while they have the privilege, but the dictator changes every 15 seconds”.

Is this optimal, or are there better strategies that could have stronger properties without sacrificing on the current incentive properties? Ideally I would like to reduce block proposers’ ability to engage in micro-front-running activities. Additionally, in the case where block proposal is highly concentrated (eg. one actor has more than 33%), I’d like to find ways to disincentivize monopolistic supply restriction.

1 Like
9

On the first point, the Olson paper is, I think, almost more interesting as an example of the expansion of a vocabulary of heuristics than as an example of a readily applicable model of human behavior with resources constrained by the physics engine of meatspace. The ground truth of a strongly typed language for warlord status evaluation is not what makes it fun in a cryptoecon setting; if anything, the semantic slippage in reducing it to “are you a stationary bandit if you’re sitting in the driver’s seat of a lambo but it’s moving” is only as interesting as the capability to introduce models of “vehicles in the park,”¹ by my view of things, anyway. The more salient, and more general magic words in American dictatorship jurisprudence (public law) are “arbitrary and capricious.”² The really fun part, for the type of participant drawn to cosmopolitan implementations of emerging fintech, is seeing just how polycentric and dynamic the federated database of “status” is, besides.³

I don’t think that the realism in Olson is lacking where it matters: as a memetic technology in its own right, remarkable for its applicability to, e.g., discursively herding the cats that would enable the kinds of steps toward substantial justice without hand-wringing over specious moral hazard. Oversimplifying storytelling about bandits is not as remote an application from practical “cryptoeconomics” as it may seem, but I doubt I have to talk about the organizational/leadership challenges bound up with any moral imperative to, e.g., make Parity accident victims whole without blowing up the EIP channels with cargo cult civics.

As to the problem you are characterizing in terms of formal incentive design, I would have to think more about the idea of stationarity as it relates to market-inalienability, memory “corruption,” “reasonable” investment-backed expectations, logrolling, and the problematics of the revolving door in agency regulation. Are you describing term limits?

I don’t do real-world networks but this seems like a hard problem to solve in a governance system that is effectively dark money by design. Dasgupta & Maskin have a paper about majority rule and a concept of “anonymity” that might be illuminating, though.⁴

Apologies for having to disable links, but “new user” constraints. “Applied code is enforcement.”
(e: restored. Basic!)

¹ http://www.nyulawreview.org/sites/default/files/pdf/NYULawReview-83-4-Schauer.pdf
² See generally https://en.wikipedia.org/wiki/Standard_of_review#Arbitrary_and_capricious; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=290181; “shareholder oppression” is a related but not equivalent notion in pooled decision systems styled as private. https://en.wikipedia.org/wiki/Shareholder_oppression
³ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2773689 - so good.
⁴ Some kind of “Footnote Four.” https://scholar.harvard.edu/maskin/publications/reprinted-american-economic-review-98-3-2008-pp-567-76-also-reprinted-russian-pr; see also https://en.wikipedia.org/wiki/United_States_v._Carolene_Products_Co.#Footnote_Four

10

Also, I think I’d be remiss not to include Padgett & Ansell 1993 in any sufficiently advanced discussion of parvenu networks of patronage.

ABSTRACT: We analyze the centralization of political parties and elite networks that underlay the birth of the Renaissance state in Florence. Class revolt and fiscal crisis were the ultimate causes of elite consolidation, but Medicean political control was produced by means of network disjunctures within the elite, which the Medici alone spanned. Cosimo de’ Medici’s multivocal identity as sphinx harnessed the power available in these network holes and resolved the contradiction between judge and boss inherent in all organizations. Methodologically, we argue that to understand state formation one must penetrate beneath the veneer of formal institutions, groups, and goals down to the relational substrata of peoples’ actual lives. Ambiguity and heterogeneity, not planning and self- interest, are the raw materials of which powerful states and persons are constructed.

11

[Hansmann 1988] Ownership of the firm

ABSTRACT: In modern economies, large-scale enterprise exhibits a variety of ownership forms. Most common and familiar is ownership by those persons – individuals or organizations – that supply the firm with financial capital. Other forms of ownership are important as well, however, including employee ownership (as in partnerships of professionals), ownership by suppliers of other factors of production (as in farm marketing cooperatives), ownership by customers (as in consumer-owned utilities, mutual insurance and banking companies, condominium housing, and business-owned wholesale, supply, and service cooperatives), nonprofit firms, and governmental enterprise. This essay briefly explores three questions raised by such a diverse pattern of ownership: First, to what extent do underlying economic factors account for variation in ownership forms across industries, across societies, and across time? Second, what is the influence of law upon these patterns? Third, to what extent has law, and particularly organizational law, adapted to facilitate the formation and management of the forms of ownership that have evolved?

https://web2.uconn.edu/ciom/ownership.pdf