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The Nakamoto Consensus — How We End Bad Governance

April 3, 2015

“Can we seriously say, that a poor peasant or artizan has a free choice to leave his country, when he knows no foreign language or manners, and lives from day to day, by the small wages which he acquires? We may as well assert, that a man, by remaining in a vessel, freely consents to the dominion of the master; though he was carried on board while asleep, and must leap into the ocean, and perish, the moment he leaves her.”

— David Hume, Of the Original Contract

“The hand-mill gives you society with the feudal lord; the steam mill, society with the industrial capitalist.”

— Karl Marx, The Poverty of Philosophy

“And Covenants, without the Sword, are but Words, and of no strength to secure a man at all.”

— Hobbes

Let’s start with some basic questions of political philosophy. What is good governance? If you accept the Washington Consensus on both the left and right you’ll draw up a list that includes such things as free and open elections, transparency, stability in the rule of law, checks on executive power, sound monetary policy, and perhaps many more.

Ok, what’s bad governance? Easy, question, right — No elections. Concentrated power. Secrecy. Unpredictable rules. Agencies serving private interests.

Just about any reader of the New York Times can tell you this, but I’m here to tell you they’re wrong.

Let’s start with the consensus worst — dictatorship.

Workers under a despot can make different rules, but everyone and anyone can be overridden by one man at the top. He has the power to make all the laws himself. No one outside of this governance structure has any say what the laws are or who makes them. This government doesn’t even have to rig elections because the public doesn’t have a right to vote. There are no public hearings, elections, or referendums on what this government does, ever.

Second, this government can arbitrarily change its laws on a whim. Lawmaking takes place in secret. And the thousands of laws that are in force today might be repealed or changed tomorrow. Many of the laws change on a daily basis without anyone’s notice. A visitor to this territory has only a vague guess what the laws will be during their stay and only finds out what they are when inside. On any visit, the laws are certain to be different from last time.

Third, this government blatantly ignores the public interest. All its laws are made to put as much money into its pockets as possible. And they don’t even try to keep it a secret. There is widely shared public evidence they have been enriching themselves over decades. The amount of money they collect increases every year, but they’re so greedy, only a tiny fraction makes it to people outside of the organization.

You might be wondering if any government has been this bad. You might think Germany under Hitler, but they still had elections for a while. Stalin? He wasn’t very good at making money.

Neither of those dictatorships was structured as I just described.

But Apple is. Whole Foods is. Each product and price is a strict law declaring you must pay x dollars to get y. Every employee is subordinated to a private CEO who is not publicly elected. The organization sets all of their prices and designs its products by themselves in secret. Prices and what’s on offer change every day, every quarter, every year. And they set prices to make as much money for themselves as possible and their earnings are open to public view. In fact, all of your favorite companies are structured like tyrannical dictatorships (or better, constitutional monarchies). But they are not poorly behaved at all.

The same cannot be said of lawmaking territorial governments, even those obedient to the Washington Consensus and the characteristics it finds desirable. How can this be?

How can a vast bundle of goods and prices produced by a visibly dictatorial, unpredictable, and greedy Apple government be any good at all? What is their organizational secret? We can rule out democratic features because they have none. We can rule out adherence to transparency and time-tested stable law because Apple offers neither.

It turns out there’s only one thing that guarantees production of good laws. The people bound by the laws have to agree to be bound by them. Not hypothetically or tacitly, as in some imaginary will of the people or behind a veil of ignorance. Consent must be real, transparent, and continuous. No law can bind a single person unless that person consents to be bound by that law. All laws must be strictly opt in. Lawmakers could be saints, devils or monkeys on typewriters — doesn’t matter. The opt out-opt in system lets only good laws survive. Bad laws are driven out of production.

Bad laws can only inflict harm and destroy wealth up to the cost to opt out of them. We can underthrow the state one contract at a time.

We see this effect on a microscale with the adoption of smartphones and ride-sharing services like Uber and Lyft. The old regime — a medallion based taxi system — is being replaced by an on demand system based on reputation and credit. Users opt out of old, poor governance and into the new.

Enamored with the German postal system, Vladimir Lenin once wrote, “To organize the whole national economy on the lines of the postal service, so that the technicians, foremen, bookkeepers, as well as all officials, shall receive salaries no higher than a ‘workman’s wage,’ all under the control and leadership of the armed proletariat — that is our immediate aim.”

The post office is indeed a model for the future, but not the way in which Lenin expected. Billions have opted out of papermail for email. Millions opt out of USPS for FedEx. And so on.

The next 15 years will not pit the Washington Consensus against the Beijing Consensus — or other authoritarian models — but both of these against the Nakamoto Consensus. The diffusion of the smartphone, strong crytpography, and peer-to-peer decentralized public ledgers will weld individuals, networks and voluntary hierarchies into single units of sovereign power capable of opt-out and opt-in governance without precedent. Today about half the world’s adults owns a smartphone. By 2020 80 percent of adults will have a supercomputer in their pockets.

Some hyperbole — if the Rust Belt has come to define the hollowed out industries surrounding the American Great Lakes, in the next twenty years the Paper Belt will come to define the paper-based industries scattered along the north east coast from Washington DC to Boston. In Washington, the government prints money, passports, visas, regulations, and laws on paper. In Delaware, companies incorporate on paper. In New York City, the New York Times and Wall Street Journal print stories and ads on paper. And in Boston, Harvard and MIT print diplomas on paper. Imminent technological advances could very well burn the paper belt to the ground.

What will replace it?

For over 350 years Westphalian sovereignty has rooted its authority and expressed its power along territorial borders, lines demarcating a state’s monopoly on the legitimate use of violence. Space and time are its key coordinates. Any x and y for longitude and latitude determine which laws apply. Citizens have by and large remained stationary, hemmed in or locked out, albeit with some in and out flow. But over time those in power have changed. Government actors vary after some duration, either by coup, by annexation, by succession of the throne, or by — the current best case — the preferences of voters in elections.

We are entering an era when governance and citizenship will decouple from location. And because of that, the purveyors of bad laws will fade away and good laws will surface to dominate the law market in the century ahead.

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