Unenumerated

The many traditions of non-governmental money (part i)

2018-03-23T10:54:00.001-07:00

The central bank of the United States, the Federal Reserve, has put out “educational material” on Bitcoin for teachers and students (including a quiz!). The Bitcoin parts are odd enough, but this and a subsequent blog post will focus on the following statement: “traditionally, currency is produced by a nation's government.“ Is that a fair representation of monetary traditions? At the very least it is quite incomplete. This two-part series will proceed back in time, showing some of the many examples non-governmental money, in order to fill in some of the gaps.

Privately issued IOUs and privately minted coins are covered here in part (i) of the series. These IOUs can more specifically be described as bearer promissory notes, and even more specifically, when issued by banks, bank notes.

The Bitcoin public blockchain implements a global settlement layer ("layer 1" in bitcoin parlance). The closest historical analog to the Bitcoin settlement layer is not to the bank notes, nor even to the coins (despite its name), it is to the monetary metal that for most of monetary history from ancient civilization to the 20th century ultimately underlay the IOUs. This "metal layer" of historical money systems will be covered in part (ii) of this series, as will some even more ancient forms of non-governmental money.

Bank notes

Higher layers of the bitcoin ecosystem, which can include exchanges (centralized or decentralized) as well as more trust-minimized systems such as Lightning, correspond most closely in our rough historical analogies to checking accounts (which, although often counted by economists as part of the money supply, and not created or managed by governments, will be so familiar to most readers that they will not be covered in this series) and to private bank notes. In these higher layer monetary systems, a more computationally (or for bank notes physically) efficient medium is substituted for a less efficient medium (for bank notes, often the underlying metal), usually (as is the case with checking accounts, bank notes, and centralized bitcoin exchanges alike) at the cost of increasing trust and thus vulnerability and risk in the system.

Bank note (bearer promissory instrument) issued by the North of Scotland Bank, 1945. Many banks besides central banks have issued bank notes that circulated as currency. George Selgin and Lawrence White among others have done extensive work in this area. Knowledge of the long history of non-governmental money was one of the inspirations of the original invention of trust-minimized cryptocurrency. This practice continues to this day in Hong Kong and Scotland.

Stockholms Enskilda Bank note, Sweden, 1876. Critics have said that decentralized note issue, following the same principles of fractional reserve and maturity mismatch as central banks, were just as or more prone to runs on the bank. Defenders have argued that competition between note-issuing banks formed a peer-to-peer system where banks could redeem competitors' notes, making it more reliable and robust form of fractional reserve banking than a central bank run or managed fractional reserve.

Hong Kong & Shanghai Banking Corporation (HSBC) bank note, 2009.

Ipswich Bank, a "country" (non-London) bank in England, 1820s (this instance unissued). Traditionally country banks, like the Bank of England, redeemed for specie, i.e. the official coin, which contained a standard weight of monetary metal (usually in this era silver). After 1833, Bank of England notes became legal tender which holders of country bank notes had to accept in lieu of specie.

Bank of Prince Edward Island note, Canada, 1871

Mechanic’s Bank note of 1856, Augusta, Georgia. Before our Civil War, most paper money in the United States was privately issued.

Boone County Bank note, Lebanon, Indiana 1858. "During this era the U.S. had no central bank and paper money was issued by a variety of private banks. Some was even issued by manufacturing and retail companies. This money was backed by gold, silver, real estate, stocks, bonds, and a wide variety of other assets. You can no longer cash them in, but they are now worth often substantial sums as collectibles...the note designs were more varied and creative than modern money, and were remarkably free of politicians' faces." Source

Bank of De Soto note, De Soto, Nebraska, 1863. Critics have called this era of U.S. private bank note issue the "wildcat banking" era. Collectors sometimes call surviving private bank notes "broken bank notes", because notes from banks that were quickly or never redeemed are much more likely to have survived in reasonable to excellent condition.

Hagerstown Bank note, Hagerstown, Missouri, 1850s (this instance unissued). Some other scholars within the Federal Reserve remembered the private note-issuing era in the United States; their central bankers' view of it can be found here.

Jiaozi, a bearer promissory note from the Song Dynasty. The earliest jiaozi were issued in Sichuan province by merchants to relieve their fellow merchants of the high costs of transporting the heavy government-issued iron coins.

Gordon Tullock wrote of bearer promissory notes in an earlier time and different part of China,

By A.D. 700-800 there were shops in China which would accept valuables, and, for a fee, keep them safe. They would honour drafts drawn on the items in deposit, and, as with the goldsmith's shops in Europe, their deposit receipts gradually began to circulate as money. It is not known how rapidly this process developed, but by A.D. 1000 there were apparently a number of firms in China which issued regular printed notes and which had discovered that they could circulate more notes than the amount of valuables they had on deposit. [Source]

Coins

A brass half-penny issued by grocer Edward Nightingale, probably dating from the early 1670s. [Source] While in most times and places, coinage was a royal or otherwise political monopoly, there were a number of important exceptions where coins were minted privately and successfully circulated as currency. Per monetary historian Glyn Davies, during the English Commonwealth, Protectorate, and early Restoration occurred “a vast issue by merchants, manufacturers, and municipalities, between 1644 and 1672, of copper tokens, mostly of farthings and halfpence.” [Davies p243]

Anglesey & Mines druid half-penny, England, 1788. "From 1787 to 1797, private merchants and industrialists issued 600 tons of custom-made 'commercial' copper coin, which was more copper coin than the Royal Mint had supplied during the previous half century." [Source].

Ironbridge coin, minted by Coalbrookdale Works, Shropshire, England, 1782. In the industrial revolution, factories had to attract workers with frequent pay that could be spent at bargain shops. The Royal Mint was not producing low-denomination coins, so factories minted their own or used the coins minted by another firm. A good review by Jeffrey Hummel of George Selgin's excellent analysis of this era here.

Privately minted coins from Sichuan province, China, 1912. While the minting of private coins, especially imitations of official coins, was often banned in order to secure a royal or other political monopoly, the industrial revolution was not the only time or place where private entities minted. Private coinage was by no means even limited to the Anglosphere. Nevertheless, the vast majority of coins in the numismatic record were minted by or under the license of kings, emperors, elected officials, and other kinds of political leaders, and these are also the kinds of coins prized by political historians as the most durable records of a leaders' reign.

In part (ii) of this series we will explain and give a few examples of the monetary metals themselves, usually mined and processed by private entities. For most of monetary history, from ancient civilization until recent times, the monetary metals were the ultimate "O" in the IOUs -- the substances that bearer promissory notes were most often redeemed for -- and constituted the most common contents of the coins themselves. The various forms into which monetary metals could be shaped, including coins, were sampled and assayed for their metal content when used outside of the locale where they were issued or covered by legal tender laws.

Part (ii) will also explain why these metals, not any of their particular forms, are the closest analog we have to Bitcoin in monetary history. Finally, we will cover some the many other forms besides coins that these metals could take, the monetary and quasi-monetary functions of these forms, and get some glimpses of even more ancient forms that were the common ancestors of modern money and modern jewelry. Part 2 can only scratch the surface of this vast topic and will refer the reader to more in-depth works including those of this author.

Collecting metal: the inner and outer worlds of jewelry, coins, bullion bits, and odd shiny things

2017-03-29T00:25:00.000-07:00

Millions of millennia ago, in our own Milky Way galaxy, but far upstream of where we are today, two neutron stars spiraled around each other, each embodying the mass of a sun but smaller and faster than a speeding planet. Each of these tiny gigaworlds, millions of times denser than our sun, had been produced, not by a mere exploding star, but by a far more powerful supernova. Each supernova, burning a nuclear fire with a far greater power density than a normal star such as our sun, had besides a neutron star also produced a cavalcade of new elements. For elements lighter than iron, this nuclear fusion releases energy; but for elements heavier than iron, including copper, silver, and gold, nuclear fusion requires a net energy input as well as astronomical power densities. Our supernovae were powerful enough to create many metals, including copper and silver, from the fusion of lighter elements. But they were not powerful enough to create gold. Gold awaited the current, far more powerful and rarer event.

Our two stars, fortuitously set into collision course by two separate supernovae, approached each other and then, captured by each others’ gravity, entered a death spiral. They collided in an unimaginable explosion, unleashing a power density far greater than that of a mere supernova and trillions of times greater than if a mere mountain-sized asteroid had hit the earth. The collision was so intense that it created a black hole and a burst of extremely high energy light called gamma rays. Escaping the black hole along with the gamma rays was a spray of new, heavier metals, including gold. This gold-rich cloud in part expanded and in part coalesced, participating in the subsequent formation of new solar systems, including our own. Due to this collision of rare intensity, our unusual solar system was seeded with astronomically rare heavy metals such as gold along with the more common supernova products such as copper and silver. [Source]

Copper (Cu), Silver (Ag), and Gold (Au) sit on top of each other on the periodic table, sharing many electrical, chemical, and material properties that enhance their durability and divisibility. Gold, the heaviest, required the most extreme conditions and energy to form, as all elements were generated, from lighter elements. Copper required easier conditions to form and is thus much more common, with silver in between.

Billions of years later, naked apes evolved with hypertrophied brains and clever hands, living on a planet in this gold-dusted solar system. They dug out the gold and silver they could find and separated it from the more common earth. Other more common metals were more useful for concretely usable tools; instead they fashioned the precious metals into what looks to our eyes like jewelry. They formed these precious metals into shapes both repetitive and unique, bragged about them, displayed them, stored them as “treasure”, “wealth”, and “money”. They fashioned gold and silver into wearable objects, transferred them to each other or stole them, even injuring or killing each other in pursuit of them. They used the gold and silver to pay each other compensation for those and many other injuries. People transferred gold and silver to each other in order to satisfy important obligations as well as to obtain items of more direct and obvious use. Since the most important such obligations happened at many of the most fitness-critical junctures of life – marriage, death, injury, war – gold and silver, as treasure and as money, came to be greatly desired.

Some metal collectibles came in a wide variety of artistically skilled forms. Others came in the form of coins: labeled, mass-produced pieces of metal stamped by the blow of a hammer or cast in molds, whereby a mostly-trusted brand named their alleged value. Still others came in forms that look odd to us, resembling neither coins nor fancy jewelry, but rather utilitarian-looking pieces that manage to make precious metals ugly, and that might have been worn but that look, long before the era of factories, like they were mass produced. . People around the world wore gold jewelry proudly, and globe-straddling monetary systems, on which economies were said to be based, were defined around gold and silver objects and debts denominated in weights of those metals.

We can think of collectibles as coming at us at two levels, like railroads and trains, or like pipelines and the oil they carry. At the most basic or “inner layer” is the metal itself that constitutes the substance of the collectible: occasionally iron, more typically copper or bronze for the less valuable collectibles, and the precious metals, especially gold and silver, for the more valuable money and treasure.

The “protocol stack”, or distinct layers of cultural understanding, for objects made out of precious metals: the natural, rare, and durable substance itself, versus the particular forms given to it as artwork, jewelry, coins, etc.

So important is the “lower layer” of the traditional cultural understanding of gold and silver, the natural substance itself, evaluated by its weight rather than by any value added via the craftsmanship or its form, that Europeans of earlier generations evolved a word for it: bullion. Bullion is the metal itself, considered and valued only for its substance. Jewelry, coins, and other ways of shaping precious metals are just various forms of the underlying bullion.

The famous gold/silver ratio (exchange rate) operates at this basic level. The cost and supply of precious metals, given the technological similarity of the means for mining and processing each, are dominated by their natural origins in the stars above and the geology below.

Viking hoard unearted in Watlington, Scotland: silver coins, small ingots, and jewelry. Why were were coins (“money”) so often stashed with jewelry (“ornament”)? And what is up with those lumps? [Source]

Besides their different origins in neutron star collisions and supernovae respectively, once our solar system had formed, the way our earth and its moon were formed may have also been important: when another planet collided with an earlier form of the earth, and the resulting debris clouds reformed into the earth and moon as we know it, heavier metals tended to stick with the heavier body while the lighter ones (which don’t include precious metals) tended to stick with the moon. Another theory holds that this collision did not matter: practically all the mineable concentrations of gold sunk to the center anyway; the gold we mine today came from a spate of later asteroid bombardment, said asteroids also being formed in the gold-rich dust of our early solar system.

More local geology also played a role in where we have found gold and silver: equatorial Africa was formed with more gold than Europe, and Europe and Bolivia with more silver than China. As a result, the value (in terms of other kinds of goods) of gold and silver could vary significantly across the planet, as well as the exchange rate between the two precious metals. Only with modern transportation and ubiquitous markets has the gold:silver price ratio, as well as the exchange rates between precious metals and other goods, converged on ratios that hold the world over.

Spheres of transfer and local distinctions

In 1959 Paul Bohannan [1] coined the phrase “spheres of exchange” to refer to moral or legal distinctions made between different types of exchange. Often one set of collectibles was expected to be used in one kind of exchange, and another distinct set in another. Since there are several important kinds of wealth transfer besides exchange, we can generalize Bohannan’s idea to the concept of spheres of transfer. In Western cultures (and many other modern cultures under their influence), for example, we make a strong distinction between money, meant for the rapid turnover of earning and spending, and heirlooms that are expected to stay in the family for generations, with feelings of guilt or shame occurring if we have to sell a family heirloom. But it’s fine to use an heirloom ring for a marriage. Similarly, we make a strong distinction between stocks and bonds on the one hand and decorative wealth objects such as jewelry and artwork on the other. So strong is our taboo that if a Western archaeologist finds a wearable (as in forager days they mostly were) collectible, it is automatically and dogmatically labeled “ornamental” or “symbolic”, with wealth-related uses seldom considered. (It also doesn’t help that shells, often scarce and precious treasures in indigenous environments, look like cheap tourist knick-knacks to modern eyes).

The transition from shell to metal: beads fashioned from copper (dark) and from Spondylus (spiny oyster) shells (light). The shells, transported by foot (probably by many feet and many hands) hundreds of miles from the Aegean Sea, had for thousands of years been popular in the Danube river basin when the world’s earliest metal artifacts were invented there. The first copper and gold artifacts were beads fashioned to substitute for the Spondylus beads in Danubian jewelry. [Source]

Legal or moral sanctions discourage transfer of objects from one sphere to another. In feudal European societies it was shameful and often even illegal to sell or mortgage land: a lord’s duty was to preserve his land and devise it intact to his eldest son. In modern Western society, weddings are one sphere of transfer (where a gift of a finger-ring is expected, as well as some household items from the guests and a feast or party thrown by the parents), whereas commerce and legal remedy in civil law is another (where payment of money is expected). Some aspects of our bodies (such as ownership of humans or payment for sex or body organs) are off limits to monetary compensation – one is expected to donate an organ, not to sell it – while many others are not (most health care, for example). All of these spheres can involve transfers of objects of substantial value, but it is disgraceful and/or illegal if they are the too obviously the wrong ones for the given sphere.

The world’s oldest gold artifact – a small bead from the lower Danube river basin (4,600-4,500 BC). [Source]

In the modern West, we consider the realm of jewelry and the realm of money to be very separate spheres of transfer. It is considered either a shameful betrayal or a grim necessity if the winner of an Olympic or Nobel Prize medal or a Super Bowl ring sells it to raise money. The finger-ring is a central feature of modern weddings, but few things would offend a typical modern bride more than being paid a bride price, she or her kin being indemnified by money as if she, as we would see it, were a prostitute on long-term contract. Meanwhile, our economists obsess over money while touching on the subject of jewelry hardly at all, and certainly not as any sort of form or variant of money. We moderns can hardly imagine confusing such seemingly very different things, and indeed the very idea offends our sensibilities. But in many non-Western and earlier Western cultures this was far from the case. For them the fundamental protocol layer, the substance itself, is cherished for its own sake, and forms the great majority of the value of the item, while its protocol layer two, the “outer layer”, the particular form it has been fashioned into, while often of considerable interest, is usually quite secondary in determining its value for purposes of the display and transfer of wealth.

Recycling of gold jewelry in the United States: usually to be recast as bullion bars for central bank and gold exchange-traded-fund (ETF) reserves, or for export to Asia for making jewelry for which the gold content is far more important than in the West. Occasionally cast into gold coins for “gold bugs” and collectors.

This modern Western restriction involves the more culturally local aspect of gold and silver, namely the particular form it takes (jewelry vs. coin), even though these objects are made out of the same underlying substance, and traditionally were mainly prized for the content by weight of that substance. Even in our own culture we have businesses that serve to transfer gold and silver from one sphere to another. Nevertheless, economists and other academicians often act as if money and jewelry are scientifically and objectively very distinct objects, when in fact this is a cultural convention that is largely confined to the modern West.

Globe-trotting gold dealer Roy Sebag has [described] the differences between Asian and Western views of jewelry. As he describes it, over $2 trillion worth of jewelry is owned by about 2 billion people in India and China alone, constituting a much larger fraction of their wealth on average than in the West. The metal content of the gold jewelry constitutes the vast majority of its sales price and its assessed value as collateral, as it also does in Brazil, Russia, and most other countries outside of Western Europe, the British Commonwealth, and the United States. In the latter countries, precious metal content constitutes only a small fraction of the sales price or pawning value of jewelry. “Jewelry is money” is how Sebag summarizes his observations of the modern Asian jewelry market.

In cultures without a strong distinction between decorative jewelry and money, they often didn’t even bother melting it down to switch from coins to lower velocity but more displayable forms of wealth. Roman gold coin minted c. 400 AD, converted in the 7th century into an Anglo- Saxon pendant: [Source] [See also]

While the “lower" or "inner" layer of the metal collectible “protocol stack” is its natural substance, its “upper" or "outer" layer is the particular form it takes. Sometimes it is mass produced (as in coins and common bead shapes) and sometimes it is a unique work of exquisite and rare craftsmanship. Form and style is the “protocol layer” of gold artifact most highly valued and distinguished in modern Western jewelry; but it is far less valued, compared to the natural substance itself, in the vast majority of Asian and pre-modern Western jewelry. As with [pre-metal forms of collectibles], the form of metal collectibles can be sub-divided, in a way generalizable across nearly all known cultures, into treasure (typically of high value and not as an object fungible or divisible, unless melted down destroying the particular object) and money (objects such as coins that are meant to be efficiently transferred and combined with other such objects to create the particular amount of value needed).

Metal or metaled treasure has taken the form of gilded objects, sculptures, various utilitarian objects enhanced artistically and made out of the scarcer metals, as well as jewelry. Treasure was, and sometimes still is, typically used for heirlooms, displays of wealth, as collateral for loans of money, and for large wealth transfers. In traditional societies these wealth transfers usually accompanied fitness-critical events. They often occurred at marriages, deaths, to satisfy obligations entered into to end wars, and as compensation for major injuries, as well as in helping to facilitate trade.

The Stollhoff hoard – copper spirals and axe blades as well as gold discs from the upper Danube river watershed (modern Austria), c. 4000 BC. Spiral armbands were among the earliest large items worked from native copper, in the middle Danubian basin (modern Hungary) c. 5000-4500 BC.

Money as this work defines it, on the other hand, can be distinguished from treasure by its fungibility and divisibility. In our Western tradition metal money and coins are practically synonymous, but with cross-cultural observations, as for example in [2] and [3], and even in modern Asia as Sebag has observed, the distinction between money and jewelry is far less clear-cut – with the proviso that in his mind, as well as in the minds of the jewelry customers and suppliers he observed, it is the divisibility and fungibility of the substance itself, not its form, that is paramount. Nevertheless, a significant fraction of the forms jewelry comes in, such as beads and constant-width wires, could be treated by their users if they so desired as fungible and divisible without destruction of even the form of the object. Indeed, such forms in jewelry, especially in the archaeological record, are more common than would seem likely if solely artistic and never monetary considerations had been involved in their original design. As a result of bringing their cultural assumptions to bear, endless energy has been wasted by Western observers trying to distinguish non-Western “money” or “primitive money” from non-Western “jewelry”.

Boringly standard, divisible, and fungible, in its particular form as well as in the underlying metal, but boasting neither the kings and dates on coins desired by historians nor the fine craftsmanship of unique work beloved of museums, and categorizable by the dominant academic ideologies as neither money nor art nor ornament, so it sits packed in boxes in the cellar of the Danish National Museum, like many other such mundane but important artifacts underneath museums around the world. About 2,000 small gold spirals were buried in a fur-lined wooden box in Denmark between 900-700 B.C. [Source]

Law and “money”

Western (roughly speaking, European-derived) law, which now dominates the world, can be very flexible when it comes to applying itself to money. When supporting money with legal institutions, it tends to take a definition far more narrow the “medium of exchange and store of value” definition beloved of economists. When discouraging undesired forms, amounts, or velocities of money, on the other hand, law sometimes takes in a far broader scope of objects than Western economists think of as money.

One of the more common modern legal definitions of “money”, used for laws that facilitate and support financial interchange (such as contracts for goods, checks, collateral for loans, etc.), is that money can only be an official government currency (see for example). By definition, no substance or form of matter or pattern of information of any kind, regardless of how it functions or how it is used, can be money, if has not been authorized or adopted by a government. You cannot write a legal check in any of the United States for ounces of gold or Bitcoin, because gold and Bitcoin are not, per the Uniform Commercial Code, “money”.

Such definitions, while quite necessary to understand if you hope to deal with money in the majority of modern countries with such laws, are hopelessly specific to a certain kind of culture and politics, as well as being scientifically unsound as a basis for reasoning about even just the role of money in exchange even in cultures living under such laws, much less its actual much wider role in wealth transfers and in other cultures without such laws. Thus outside of this section we will neglect such official definitions of money in this work. Instead we use the objective definition presented here. This is certainly not the only possible definition of “money”; many far wider, far narrower, and very conflicting definitions of this word have been used in the ethnographic, anthropologic, archaeological, and economic literatures, usually implicitly rather than consciously, thereby causing the reader to join the author in being hopelessly confused about the subject.

Thus when enforcing rules for modern financial institutions, modern law uses a very narrow definition of money; the many other ways of storing and transferring wealth are not allowed to benefit from these advanced institutions. But when cracking down on alleged abuses of money, law often restricts a far wider array of objects used to store and transfer wealth. A great illustration of the monetary nature of jewelry is given by the current (as of this writing) Indian demonetization law. The crackdown includes gold and focuses on its natural substance, not its mere form as coin (“money” to modern Western eyes) as opposed to jewelry (supposedly “ornament” not “money”). Under Indian law it is all subject to stringent controls alongside the notes and coins:

…the rules governing when tax officials could seize gold: Nothing would happen “if the holding is limited to 500 grams per married woman, 250 grams per unmarried woman and 100 grams per male.” It also said that there would be no limits on jewelry “provided it is acquired… from inheritance.” [Source]

When Mongol conqueror Kublai Khan issued paper currency in late medieval China, to make this poorly trusted scheme work his government confiscated gold and silver, jewelry and coin alike, gems and pearls as well as gold and silver, in a forced exchange for the paper notes. [7]

Bullion bits and odd shiny things

Divisible and fungible metal forms such as coins, small thin ingots (hack-silver), arm-rings and wire, and beads have to a greater or lesser extent, depending on the culture, been used for small or frequent payments made to people who commonly need to make small acquisitions (such as the wages of soldiers and laborers), as well as to round out a value of a large wealth transfer to a specific desired value, that otherwise mostly constitutes treasure, indivisible and of a unique value somewhat different than the value desired, via custom, law, or negotiations, for the wealth transfer.

W.B. Dickinson observed the ubiquity, both as archaeological artifacts in many far-flung parts of Eurasia and in widespread use in East Asia and Indian Ocean regions, of precious metals (bullion) in wire, coil, and arm-ring, in bullion forms that looked more utilitarian than decorative, and noted the wear on such artifacts indicating that at least some had probably passed from hand to hand with a velocity more coin-like than treasure-like. He observed that their existence extended

throughout countries extending from Syria, Arabia, Egypt, Socotra, the Persian Gulf to Ceylon, China, Japan, Siam, and the whole East, to the south-west coast of Africa, to the north of Europe, to England and to Ireland. That the people of so many places, and in so various ages, should have formed their bullion and other metals into this particular form solely for the purpose of barter, without attaching to it any monetary character, seems a conclusion very difficult to arrive at…these forms were to all intents and purposes the money of the respective lands.[4]

Larger ingots, and modern central bank gold bars, and ingots of intermediate value, such as the medieval Chinese silver sycee, also called 元寶: “primary treasure”. Originally “sycee” was Cantonese for “fine silk”, when that costly cloth was a main form of treasure; later it was superseded as treasure by the boat-shaped silver ingots, which inherited the word “sycee”, since it by then had become the generic term in Cantonese for “treasure”.

Even though large ingots come in a standard form, divisible and fungible at large granularities of value, they can by our organizational scheme more properly be categorized as treasure than as money, since they were typically used like treasure in larger wealth transfers and as collateral for loans or (during the recent historical gold standard era) issues of debt-money.

Silver stamped sycee ingot. [Source]

Our distinction between treasure and money, it should be apparent, is not clear-cut and is not of crucial economic or political importance. More important and much more scientifically observable is the distinction between collectibles like coins, beads, and works of laborious or uncommon craftsmanship on the one hand, and non-collectibles of concrete utility or trivial decoration on the other. I have described this distinction with many examples and much explanation in Artifacts of Wealth and Shelling Out: The Origins of Money.

The collectible continuum – more like money as we go towards the top left, more like treasure as we go towards the bottom right.

The main differences between ingots and traditional treasure were that the latter were also used as displays of wealth, whence their highly varied forms, which served to show off often high levels of craftsmanship as well as the precious metal itself. A great variety of very subtle and clever techniques were developed for maximizing the surface area covered by a given weight of gold or silver, more bling for the buck, since the metal was the main feature of the show.

A great many cultures were observed to use non-coinage metal objects as money (by our definition), or treasure, or both, and a great many more probable such cases are implicit in the archaeological record. We can only mention a fraction of these as examples in this work.

In Viking Iceland, silver rings (by weight) were used along with cloth and cattle to pay wergeld (compensation for injuries) and bridewealth, as well as a standard of value for exchange:

Frithof breaks his ring in pieces and distributes it to his followers, so that they shall not be impecunious in the underworld. Rings were used in marriage payments and wergeld, the latter being estimated by haugatal or ring tale. A silver ring weighing 12 ounces was the compensation for the loss of a thrall, 100 rings or 100 head of cattle for a freeman. ([2] p284)

Ring-money and hack-silver were also made and used in the rest of the pagan European north, including Scandinavia and early Anglo-Saxon England. In Celtic Ireland, “rings” in the form of divisible coils of gold or bronze were used along with cattle and slaves in injury compensation and bridewealth. ([4], [2] p287, [3] p238).

In Homeric Greece, injury compensation, slave sales, and bridewealth often included gold by weight. ([5] p27, [11], [3] p91). In Rome before the introduction of coinage, bronze or copper ingots were used, per the Twelve Tables, to pay compensation for injuries.

Non-coinage silver was also common until recent times in the vast Indian Ocean trade region as well as a number of inland cultures of south Asia. In Burma silver by weight was used for exchange and bridewealth:

anybody wanting to transact business on the market must be provided with a lump of silver, a hammer, a chisel, weighing scales and weights.. he then quotes a price in weight. Thereupon they proceed to cut off from the lump of silver a corresponding piece which is then weighed. Often the operation has to be repeated several times until the correct weight is achieved. ([3] p95)

In Siam, gold and silver “flowers” and “leaves” were used for bridewealth and tribute. ([2] p215, 219); various weights of silver “lumps” (small ingots) were also in widespread use ([3] p93).

In the Hormuz and Lars in the Persian Gulf, and in some other parts around the Indian Ocean, were made the “fish-hook money” or silver larins used widely in the far-flung Indian Ocean trade. Such silver wires were accepted by weight across a dizzying variety of cultures. [2] p192-196

Larins, or silver wires bent double, and often stamped by maker; current in the very extensive Indian Ocean trade before and during the Age of Exploration. “If any suspect the goodness of the Plate it is the Custom to burn the Money in a fire red hot, and so put it in water; and if it be not then purely white it is not Currant Money.” ([2] p196) Such a technique would have worked for assaying a wide variety of wire-, coil-, or ring-like silver objects.

Bronze bells manufactured in China were used to make high-value payments in several parts of the Chinese trading periphery, such as the Philippines. ([3] p84). In the Philippine lowlands, metal luxury goods (kettles, gongs, and jars) as well as gold beads were used for a variety of wealth display and transfer purposes ([2] p265). In China bells were the first objects that were uniquely metallic; other early metal objects such as knives, beads, etc. had been made out of other materials much earlier. Thus the Chinese adopted the word and pictograph of a bell 金 for metal (and even for gold in particular). Metal spades were styled 錢, which, via the spades that became stylized and stamped to invent early coins, became the Chinese term for “money”. [Source]

Among the early coins – defined as standardized metal objects stamped with a standard value -- were the Chinese bronze spade money, c. 475-221 BC [Source]

Copper crosses, rods, and similar shapes were popular forms of bridewealth and payment for exchange in the many cultures of the Congo ([2] p78-80). The Thonga, in what was then Portuguese East Africa, used brass rings along with mats, baskets, cattle, and beads for bridewealth, injury compensation, and fines. ([2] p104-5). The Ndebele and Nguni of Zimbabwe used brass rings and cattle for bridewealth and exchange. ([Source1], [Source2], and [2] p105)

The people of Alor, a small island north of Timor in Indonesia, used brass gongs, pigs, and (for small change / rounding out of a specific value) arrows for exchange, bridewealth, burial feasts, and “complicated financial transactions” to build large clan houses. ([3] p84-6). Brass gongs and beads were also used for bridewealth by some cultures in nearby Borneo ([8] p10). Such gongs were used for injury compensation, bridewealth, large exchanges (memorialized in ceremony), and in peace-making payments also among the hill tribes of Siam, Burma and India ([2] p204-6, ) Brass pots and metal knives, axes, and hoes formed the largest part of the bridewealth of the Lakhers and Maras of the Lushai hills in India. ([8] p207).

Most peoples indigenous to the Pacific Coast of America used shell beads as treasure or money (for example the Yurok). Among the few who also used copper were the Kwakiutl, who fished for abundant salmon and lived in villages in the Pacific Northwest. They used blankets and flat copper sheets (similar in form and function to hack-silver) for bridewealth, tribute, distributions to followers (roughly similar to wages paid to soldiers and laborers), and distributions at funeral ceremonies. According to the anthropologist Frans Boas who observed them, these copper sheets served the “same function as a high-denomination bank note for us [early 20th century European-Americans].” ([2] p15, 300)

In their elaborate marketplaces, Aztecs used as payment gold dust measured out by volume from bone vials:

The moment we arrived in this immense market, we were perfectly astonished at the vast numbers of people, the profusion of merchandise which was exposed for sale, and at the good police and order that reigned throughout…instruments of brass, copper, and tin [and] gold dust as it is dug out of the mines, which was exposed to sale in tubes made of the bones of large geese…The value of these tubes of gold was estimated according to their length and thickness, and were taken for exchange, for instance, for so many mantles [of] cacao nuts, slaves or other merchandise.[5]

The Aztecs also used metal money modeled on hoes (or axes) as a medium of exchange, along with cocoa beans for small change. Gold dust was also used for purchases in some parts of Siam.[3 p93].

Why did such a wide variety of cultures use, and in some cases independently invent, the use of copper and its alloys, silver, and/or gold as a store of and medium for the transfer of value? Copper, silver, and gold have the same outermost electron cloud, giving them similar electrical, chemical, and material properties, such as resistance to oxidization -- albeit due to subtleties in this cloud gold resists oxidization better than silver, which resists it better than copper. These properties enhance their durability and divisibility. Their malleability and low melting point allow them to be recycled and formed into desired shapes and makes them readily divisible. Heating the metals hot enough to glow, an ancient low-tech form of spectroscopy, allows the metals to be distinguished from fraudulent materials. (We know now that the electron cloud around each atom gives, unique for each element, off a pattern of light at unique wavelengths, seen by the eye as a unique color).

Coins

Metal stamped or cast with the brand of a highly reputable mint – often highly reputable because they were a large creditor that consistently accepted the coin in satisfaction of obligations -- had a significant, though not always decisive, advantage over other forms of metal money. Where the need for a fungible and divisible money that could change hands rapidly at low transaction costs was paramount, it came to displace other forms of metal money, and even significant amounts of treasure often ended up being recycled into coins. Coins could change hands in a reasonably secure manner with much less frequent need for weighing and assaying operations. Coins spread quickly, though not until modern times universally, from their origins in Greek and Chinese city-states. In the Middle East and Europe coins were stamped; in China they were cast.

Alongside coins grew marketplaces. As the Aztec gold dust, Persian Gulf larins, Burmese silver “lumps”, and many other examples too numerous to mention demonstrate, coins were not necessary for the existence of marketplaces, but they did help make them more efficient and widespread. The Greek conqueror Alexander the Great looted the treasuries of the Near East, converting low-velocity treasure to high-velocity coinage, making his soldiers and Near East tradesmen better-paid in the process. The subsequent Hellenistic, Roman, Persian, and Arabian empires were built on such coinage, as were medieval, Renaissance, and early industrial-era European economies. The European exploration explosion was fueled by the search for precious metals and their use to trade around the globe.

As Peter Swetz, translator of The Treviso Arithmetic observes that a favorite textbook example, the alligation problem, which involved the mixing of substances in various ratios, was exemplified by the reminting of coins. “[T]he value of money [coin] was not determined by its face value, but rather its content of precious metal…throughout the sixteenth century, chapters on alligation in arithmetic books were particularly intended for German mint-masters …[and]…Italian goldsmiths.” This was not the only use of alligation – it also could be applied to compounding medicines, the mixing of wines, and to metallurgy more generally – but it was the most valuable and compelling example of the technique. Here is one of the problems as set forth for the student:

A merchant has 46 marks 7 ounces of silver in which he knows there is 7 ¼ ounces of fine silver per mark. He wishes to reduce the purity of his silver to less than half [the example also serves to warn the apprentice merchant of such sharp practices], down to 3 ½ ounces of fine silver per mark. The question asks, “how much brass must be added to accomplish this”?

Thereafter follows multiplication and division using some Renaissance-era shortcuts suitable for this kind of problem. And voila, the minter’s coins have been successfully reduced in value (hopefully along with their stated face value – the textbook does not mention that aspect) and increased in number.

Touchstone and needles used by traditional European goldsmiths for assaying gold, silver, and copper, whether as coins or as jewelry. Each needle presents the visual difference made by different percentage compositions of the three metals.

Outside of this western Eurasian area, however, many non-coinage forms of money persisted and forms of debt and fiat money represented by paper were invented. When paper debt-money reaches the West, with bills of exchange to send money across hostile lands and later bank notes representing vaults hopefully full of gold, we have reached a more recent period of monetary history and our minds have ventured far beyond the origins of money. We will end here.

Non-Internet References

[1] Bohannan, Paul (1959). "The Impact of money on an African subsistence economy". The Journal of Economic History. 19 (4): 491–503.

[2] A. Hingston Quiggin, A Survey of Primitive Money: The Beginnings of Currency, Muethen & Co. Ltd., 1949

[3] Paul Einzig, Primitive Money in Its Ethnological, Historical, and Economic Aspects, Pergamon Press, 2nd ed. 1966

[4] W.B. Dickinson, “In Defense of Ring-Money as a Medium of Exchange”, The Numismatic Chronicle and Journal of the Numismatic Society, v. 16 (April 1853)

[5] Grierson, Philip (1977) The origins of money. London: The Athlone Press, University of London.

[6] Howard J. Erlichman, Conquest, Tribute, and Trade: The Quest for Precious Metals and the Birth of Globalization, Promethus Books 2010. Aztec gold dust quote on p97, quoting Bernal de Castillo in The True and Full Account of the Discovery and Conquest of Mexico and New Spain

[7] Weatherford, Jack (1997). The History of Money. Crown Publishing Group. ISBN 978-0-307-55674-5

Jurors examining gold coins in a recent Trial of the Pyx. This assay and audit of the British Royal Mint has been conducted periodically since the Middle Ages. Isaac Newton and many other luminaries have been involved. It is structured much like an actual court trial, with a presiding judge, a jury of laymen, and a second jury of expert goldsmiths. It also includes the most advanced assay techniques available (today including detailed spectroscopy). The purpose of this elaborate audit and ceremony is to ensure and to communicate to outsiders that the mere local cultural form is “pure”, i.e. that the coins accurately label and embody the actual amount of the actually desired natural substance. The British love their traditions and the Trial of the Pyx continues to this day.

Conflict and collectibles among the Yurok

2017-02-23T23:48:00.000-08:00

Until about 11,000 years ago all humans were foragers, living by hunting, gathering, or fishing. To study human evolution, and in particular the interest of this author, the long evolution of collectibles -- non-fungible treasure and fungible money -- we must try to reconstruct the nature of our ancestral forager cultures. The ancestors of the vast majority of currently living people lived in areas that, due to their relative ecological abundance, have for centuries or millennia since been given over to agriculture.

One possible way gather evidence about our ancestral cultures is to study what small fraction of their artifacts have been preserved by time and dug up by archaeologists. Fortunately one of the desirable features of collectibles is their durability, so that a disproportionate number of such artifacts survive. Another way is to study recent observations that travelers, missionaries, ethnologists, colonial officials, traders, and the natives themselves made and recorded about forager cultures that existed in recent times (albeit not ancestral to the vast majority of today’s humans, but “cousins”), before these cultures were too severely disrupted by the many global waves of disease and migration since Columbus.

With extremely few exceptions, forager cultures either did not undergo long-term recorded observation by ethnologists before severe disruption to their native institutions (e.g. most indigenous American tribes, Andaman Islanders, Ainu, west coast Australian aborigines), or lived in nutrient-poor wastelands beyond the main streams of human evolution (Kalahari desert, Australian outback, Arctic, American and Canadian Plains, etc.), living in cultures far more dispersed and mobile than is likely for the forager ancestors of most current humans. Some may have been young refugee cultures fleeing the effects of the Columbian Exchange (for example, the Pirahã may have lost some important language features common to practically all other human languages).

By the time of Columbus, the Americas were the only continents with foraging cultures living in rich ecosystems – all other rich ecosystems had been converted to agriculture (as had many, but far from all, in the Americas). Most American foragers were soon disrupted beyond recognition by the massive waves of post-Columbian diseases and immigration. The Yurok was a group of indigenous American foragers with shared language and customs. They lived in a rich dense ecosystem, yet furthest away from these biological and cultural tsunamis that had overwhelmed the rest of the post-Columbian Americas. The unique position of the Yurok and some of its neighboring language groups, especially the Hupa, and Karok or Karuk, (who occupied areas further up the Klamath River), and the Tolowa (who occupied the coast further northern into Oregon and the lowest reaches of the Rogue River) can be visualized by comparing the Yuroks’ territories (their population lived almost entirely within a few miles of the Pacific Coast and the lower Klamath River) at the end of the 19^th century to the growing American railroad network. The Pacific Northwest tribes more famous to anthropology had already been severely disrupted by the time they were studied by ethnologists. With no ongoing contacts with white immigrants until 1849, the Yurok and Hupa did not experience substantial disruption “until much later than other tribal groups in California and the United States”. Ethnologists such as Goddard and Kroeber were able to interview Yurok and Hupa people who had living memories of a minimally disturbed forager culture, including some who still practiced much of the lifestyle.

Railroads (red) within c. 300 miles of the Pacific coast of the United States in 1890, vs. the extent of the Yurok tribe (blue) at that time. The Yurok were among the last tribes in the rich ecosystems of the American Pacific coast to succumb to the overwhelming influences of Western immigration. As a result, recorded observations of the Yurok are almost the only ones we have of a forager people in a rich ecosystem in a nearly undisturbed and long-term equilibrium state.

The Pacific Coast of North America features uneven seasonal rain patterns that make it difficult to support early forms of agriculture. Thus, even in nutrient-dense environments such as those populated by the Yurok , this region was dominated by forager groups.

Even though the Yurok didn’t have agriculture they did have permanent settlements due to the rich salmon fishing on the Klamath River. When they finally encountered the post-Columbian wave of disease, immigration, and modernity in the mid 19^th century (possibly also encountering some of the waves of disease that hit the Pacific Coast as early as the 18^th century), almost every technology the Yurok and their indigenous neighbors had could probably have been encountered in similar form along many Eurasian coasts before the dawn of agriculture over ten thousand years ago, and perhaps even twenty or more thousand years ago. Yurok was one of the very few such cultures, quite possibly similar to cultures that existed as long as tens of thousands of years ago, whose old customs were observed and recorded before they converted to modern law, money, and technology.

The closest 19th century railroad to the Yurok was hundreds of miles away, in contrast to the more famous tribes of the Pacific Northwest, which were much more disrupted by immigrants and their new laws before their customs were carefully observed and recorded. The Yurok were one of the very few forager cultures living in an abundant ecosystem, yet observed within recent memory of a probably largely undisturbed long-term equilibrium cultural state, and the recorded observations of this culture will almost surely remain among the very few such records.

The Yurok lived in permanent but very small villages. In 1900 their population was probably (per Kroeber) around 2,500 people living in over 50 such villages: a handful of families per hamlet. This represented a population substantially reduced by immigrant-introduced disease. Since this is estimated to have killed off 75% of the Yurok population in the second half of the nineteenth century – compared to the 95% death rate of other indigenous Californians -- the original population may have been around 10,000.

The plurality of the Yurok diet was salmon; they also caught steelhead trout, lamprey eel, sturgeon, and candlefish on the lower Klamath River. Yurok also gathered acorns and shellfish and hunted large game (elk, deer, and sea lion). Salmon were caught by nets, and during the height of salmon migration in temporary weirs. They were finished off with long spears.

The aboriginal territory of the Yurok people encompassed riparian lands along the lower forty miles of the Klamath River, from its confluence with the Trinity River, its major tributary, to the Pacific Ocean. It also included coastal lands from a few miles north of the river's month south to Trinidad. … The river was their world. North, south, east, and west did not exist for them. The only directions were upriver or downriver. [Lufkin]

Lacking animals or vehicles to ride, the Yurok often walked. But their main way to travel long distance was by canoe, in both ocean-going and river-borne forms. The two most strategic locations for the Yurok were Welkwaw, at the mouth of Klamath River, and Qu’nek, at the convergence of the Klamath and Trinity rivers.

What the Yurok could not eat during the spring and fall salmon migrations they preserved by open-pit smoking. Food and other goods were stored in the many baskets weaved by Yurok women. Salmon smoking, combined with the other abundant food sources of the lower Klamath River and ocean environments, made their diet reliable year-round, despite the boom-or-bust nature of the salmon migrations, and let them settle in permanent and relatively dense habitations, in contrast to inland foragers, recently surviving examples of which lived in far sparser populations and generally moved once to several times per year to follow game.

The Yurok had no state, government officials, chiefs, or even clan heads. Among the highest income earners were shamans, usually elderly females, a role that might be best described in modern cultural terms as combining the role of priest with that of medical doctor. On the other hand, most important property was owned by and most important wealth transfers decide by individual adult males, generally not by females, no matter their earnings, nor by groups. These individuals sometimes owned fractional shares in some kinds of economic property, for example in customarily defined spots for salmon fishing.

Inheritances, and the minority of claims that were not simply individual, were distributed among variable groups of males defined by their kin distances to the deceased or the bride. There were no fixed kin groups; instead “a group of kinsmen shades out … and integrates with others.” (Kroeber p392). Exogamy and endogamy were also defined this way, with respect to the variable group that was one’s particular relative kin, rather than with respect to fixed villages, clans, or any other such groups sometimes found in other forager cultures.

Forager societies in general, and indigenous Californian societies in particular, were usually quite violent, particularly where populations were more dense. Next only to environmental nutrient density, violence was probably the main barrier to social scalability among foragers. Reducing and mitigating this violence so as to allow family and economic institutions to work was a predominant function of indigenous social institutions. Violence took every form from one-on-one to small-scale, gang-like wars, typically between small kin groups.

A leaderless and policeless social order like that of the Yurok depended more on custom and supernatural sanctions than modern legal systems do. Yurok law contained a multitude of specific and negative taboos. The common expectation that all sides should follow customary rules and, where appropriate, customary property valuations and exchange rates, reduced negotiations and arguments, and thus reduced disputes, and thus reduced the violence that was often engendered by disputes. “Both marriage and [injury compensation] were definite, commercial, negotiated transactions ; all property possessed a value fixed by custom, or by previous changes of ownership, but negotiations were a cause of much dispute, each side claiming as much as it dared, and usually ending in compromise.” (Quiggins p296)

The following kin had priority for inheritance of the largest pieces of property:

1. sons, but if none

2. brothers, but if none

3. brothers’ sons

Property rights included incorporeal property, often bundled with corporeal property. For example dance outfits, often made at great labor out of deer-skin and rare woodpecker scalps, demonstrating wealth as splendor and usually passed on as heirlooms, always came bundled with prayers and spells that only the owner of a particular dance outfit could use.

“[E]very invasion of privilege or property must be explicitly compensated”. Compensation usually arrived at by “negotiation of the interested parties and their representatives, and by them alone” – no chiefs etc., just strong custom and respect for agreements. “Revenge causes two liabilities [to be compensated in money and treasure] where one lay before.” (Kroeber p390-2).

For the purposes of customary exchanges, bridewealth, and compensation for injuries, the value of property was “either fixed by custom, or can be valued by consideration of payments made for it in previous changes of ownership.” (Kroeber p392) Yurok law was “almost fully resolvable into claims for property”. When faced with a judgment or agreement ending a vendetta, if a defendant could not cough up the specified value in property, generally in the form of dentalia money and non-fungible treasure, he or she became a slave of the plaintiff (the victim or a deceased victim’s next-of-kin).

Such debt slavery was the only way a slave could be created among the Yurok, since they took no male prisoners in the small-scale, gang-like warfare in which ad-hoc kin groups and allies sometimes engaged when disputes remained unsettled. They either adopted or returned the women and children prisoners as part of peace-making settlement (which indeed was not qualitatively distinguished from the settling of smaller instances of violence).

If a defendant in a dispute refused to either pay the agreed or adjudged compensation or submit to debt slavery, vendetta remained. The main outcomes of disputes were either continued violence, debt slavery, or (the most usual case) a final transfer of wealth that sufficiently satisfied the disputants, their kin groups, and third parties to bring an end to vendetta.

Yurok law was “almost fully resolvable into claims for property” (Kroeber 1925). If a defendant could not pay, he or she became a slave of the defendant or of a deceased defendant’s next-of-kin.

The Yurok had at least two common kinds of procedures for settling disputes. The first was direct negotiations between the disputants, usually including kin or allies. The second was a procedure whereby each side picked two jurors, who also acted as intermediaries between the two parties, who would not meet. The first method was more dangerous, as arguments often escalated into violence.:

(Quiggin p294)

Among the Yurok…as typical among less specifically organized people, the ‘court’ was less definite, but it was nevertheless there. An aggrieved Yurok who felt he had a legitimate claim engaged the legal services of two nonrelatives from a community other than his own. The defendant then did likewise. These men were called ‘crossers’; they crossed back and forth between the litigants. The principals to the dispute ordinarily did not face each other during the course of the action. After hearing all that each side had to offer in evidence and pleading as to the relevant substantive law, the crossers rendered a decision for damages according to a well-established scale that was known to all. For their footwork and efforts each [crosser] received a piece of shell currency called a ‘moccasin’. (Hoebel p25, citing Kroeber, ‘Yurok Law’, 22^nd Intl. Congress of Americanists, 1924, p 551).

Dentalia (terk-term in the Yurok language) was a fungible form of collectible – essentially money, and called such both by early Western observers and by the Yurok themselves when they translated their language into English. Most of the economic and legal functions of dentalia shells had been by the 20^th century either take over by dollars or obsoleted by the move to the Western legal system and the abolition of shamans and bridewealth.

Dentalia shells were counted individually or in groups of five. The value of a dentalium shell was judged by its length, longer shells being disproportionately rarer. The length of dentalia shells judged with respect to length between finger creases, or by tattoos which themselves had been made by shells of standard length. (p396). The technique was the same among the neighboring Hupa:

As all hands and arms are not of the same length it was necessary for the man on reaching maturity to establish the values of the creases on his hand by comparison with money of known length. He had a set of lines tattooed on the inside of the forearm. These lines indicated the length of 5 shells of the several standards. This was the principal means of estimating money. The first 5 on the string were measured by holding the tip of the first shell at the thumbnail and drawing the string along the arm and noting the tattooed mark reached by the butt of the fifth shell (Goddard, 1903, p. 446).

Mr. McCann [a Hupa, a language group upstream of the Yurok, with many similar customs] “measuring dentalium shell money against tattoo marks on his forearm. Photograph by Pliny E. Goddard, Hoopa, Humboldt County, 1901 (15-2947).” Credit: Hearst Museum Berkeley. [Source]

Collectibles served as money (fungible, divisible, and transferable wealth) or as treasure (displayable and transferable wealth). The chief collectibles of the Yurok were:

A splendid headdress featuring woodpecker scalps, from the nearby Tolowa people, 1924. [Source]

· Size-ranked dentalia constituted the most common media for satisfying obligations, a standard counter-performance for exchanges, and as a standard of value for determining the total value of a wealth transfer, usually from custom, sometimes by negotiation, or a combination thereof, for a given situation. Dentalia made up a substantial part of nearly all, but usually less than half of most, of the value of the largest wealth transfers (shaman or doctor fees, injury compensation, and bridewealth).

· Woodpecker scalps came in two sizes, exchanged at a 6:1 ratio. Besides a store of value they were used to add splendor to dance headdresses and regalia.

· Deerskins (used in dances; the very rare albino pelt was quite valuable)

· Large blades of obsidian or flint (the larger ones, either by being rarer or harder to make, could be quite valuable)

Yurok or Karuk obsidian treasure blades displayed at the Denver Art Museum. The Yurok and their neighbors, like most other indigenous American tribes, used obsidian in practical axes, knives, and arrowheads. But they also knapped blades out of rare large pieces of obsidian and used them for wealth transfer and ceremonial display [Source]

Hupa in dance regalia made out of albino deerskin, which was very rare, and thus valuable as a collectible. [Source]. Ethnographers themselves followed the collecting instinct: most ethnographic evidence was selected in favor of the rare and alien and against the regular and normal.

An unsettled vendetta could result in a disproportionate response leading to war. Yurok customary law made “no distinction … between murder and war.” (Kroeber p420). War deaths and murder were settled by the same injury compensation rules (blood money). Yurok peace settlements involved the same settlement dances and kinds of wealth transfer (albeit usually on a larger scale) as individual homicide cases,. They did not include tribute, which meant the victors often had to pay more compensation than the vanquished. Krober recounts one such war (p422):

Hupa arrows for fighting and hunting [Source]

“A feud of some note took place between [the villages of] Sregon and Ko’otep. When the leading man [richest man and leader of this war party – not a permanent official] lost his brother by sickness, he accused an inhabitant of [one of the small villages of] Wohtek or Wohkero of having poisoned him. The suspect was soon killed from ambush. After this a Sregon man was attacked and killed at Ko’otep, which is only a short distance from Wohtek. The act involved the people of Ko’otep, which was at that time a large village. After a time, settlement was proposed, and the two parties met at an open place below Sregon to conclude the negotiations. Each side was ready to make a customary [settlement] dance, when some one fired a shot. In the fight that ensued, a [village of] Meta ally of the Sregon people was killed. The headman of Sregon now went down river with his friends and lay in wait at an overhanging and bush bank near Serper, where the current takes boats close in to shore. When a canoe of his foes came up, he attacked it and killed four of the inmates. The feud went on for some time. Sregon, never a large village, fought, with only some aid from Meta, against Ko’otep, Wohtek, and Pekwan, but lost only 3 men to 10 of their opponents’. The headman at Sregon was sufficiently wealthy, when settlement came, to pay for all the satisfaction he had earned [i.e. the blood money for the 11 men killed by his side]. He once said with reference to this experience in this and other feuds, that open battles often took place without anyone being killed. Somehow men are hard to hit, he philosophized: arrows have a way of flying past a human being when a hunter is sure to strike a deer at the same distance….” (Kroeber p422)

Because dentalia was the main way to avoid violence and enslavement, win the best bride, and pay for spiritual and medical services, the Yurok in consequence had a strong desire to acquire dentalia:

They are firmly convinced that persistent thinking about money will bring it. Particularly is this believed to be true while one is engaged in any sweat-house occupation. Asaman climbs the hill to gather sweat-house wood always a meritorious practice, ... he puts his mind on dentalia. He makes himself see them along the trail or hanging from fir trees eating the leaves. ... In the sweat-house he looks until he sees more money-shells perhaps peering at him through the door. When he goes down to the river he stares into it and at last may discern a shell as large as a salmon, with gills Working like those of a fish. . . . Saying a thing with sufficient intensity and frequency was a means towards bringing it about. A man often kept calling ' I want to be rich ' or ' I wish dentalia ' perhaps weeping at the same time…(Kroeber 1925, p 41)

Tolowa man measuring a dentalia shell string “thumb to shoulder”. [Source]

Length of shell (estimated by length between finger creases or tattoo marks that had been measured from standard shells; translated into English inches)	Shells to a string of “thumb to shoulder” length (about 27 and ½ inches)	Rough typical value of shell in c. 2010s U.S. dollars, based on c. 1900 dollar value in trade with white immigrants and internal exchange after incorporation of U.S. money
2 ½	11	$150
2 5/16	12	$90
2 1/8	13	$30
2	14	$15
1 7/8	15	$7.50

The dentalia used by the Yurok and neighboring tribes came via repeated transfers from distant parts north. Dentalia are found on the Pacific Coast above the 49^th parallel. In the waters off the Vancouver and Queen Charlotte Islands, indigenous peoples dredged live shells from a sea bottom tens of feet below the surface. “They let down long poles to which are attached pieces of wood fitted with spikes or teeth, between which the shells become fixed.” Shells harvested live have, even many decades after having been killed, a different color than the dead dentalia shells that commonly wash up on many Pacific Coast beaches. The former were valued as scarce collectibles; the latter were not, and were not used by the Yurok or their neighbors. (Quiggins, p293-4)

Dentalia shell string and Northern California elk antler purse for holding it. Probably Hupa. 1800s. [Source]

Yurok cosmology – their view of the shape and size of the universe -- was largely bounded by their personal experience and defined by the topology of the Pacific Coast and the flow of the lower Klamath River and its immediate tributaries. Dentalia were obtained from transfers down the Pacific Coast, from tribes further north, including trade in various treasures and slaves with some Pacific Northwest tribes. “They speak in their traditions of … strange but enviable peoples … who suck the flesh out of the [dentalia] univalves.” (Kroeber p394) As dentalia percolated down the coast, their scarcity rose and their exchange rate strengthened. “In Northern Oregon or among the Yurok a slave was worth 1 string. Among the Nootka [who harvested the live dentalia off Vancouver Island], it took 5 fathoms to buy a slave.” (Einzig p173).

Primary (net) directions of dentalia shell transfers along the two topological axes of the Yurok: south along the Pacific coast and up the Klamath River system. The source of dentalia used by the Yurok as a fungible media for the satisfaction of obligations was far from local; the main source was probably the Vancouver Islands in British Columbia. (The long distance of users from the source ensured unforgeable costliness, i.e. a reliably and securely constrained supply curve, a pattern repeated with many other instances of shell and stone money).

As with the kula ring of Melanesia, the net flow of specific transfers of dentalia shells followed a geographical network, in this case from a source in the distant northern Pacific Coast to sinks further south along that coast and up the Klamath River. Many of the traditional stories of the Yurok involve dentalia. At least one such story follows the journey of two characters along this network -- down the Pacific coast and up the Klamath River -- and how they dispense of their shells. Their dentalia are in demand in some [hamlets] (or the hamlets are friendly, and allow them to trade), and not in other ones (or they are hostile). Various payments do or do not occur as our characters take follow the main flow of dentalia up the Klamath River. (Kroeber p397)

Two other marine shells were often used as fungible money among the indigenous peoples of western North America, even well inland, but not among coastal peoples such as the Yurok:

Hupa shaman [Source].

Other shells used as currency in the Western States included olivella and pieces of [the abalone shell] haliotis. The latter was in various denominations according to its size... The value of pieces of the same size varied according to the degree of their brilliance. There was a time when one single shell bought a horse in New Mexico. (Einzig p173)

Haliotis shells “were traded all down the West Coast from Alaska to Mexico” (Quiggin p299) But among the Yurok, the haliotis shell was common enough in the local environment that it was only used whole, as a pendant with minor treasure value. Olivella was also locally abundant and used liberally as an ornament, but not as substantial money or treasure. With both fungible money and non-fungible treasure, we again see the signature economics of collectibles at work: the unique interplay between supply and demand, in particular the demand for scarce supply, which distinguishes a collectible from a normal commodity.

The main kinds of Yurok obligations or deals, and the wealth transfers that satisfied them.

Obligation	Type of wealth
Shaman fees	Any kind of collectible treasure or the occasional useful good of great value (e.g. canoe), almost always including some dentalium but usually for no more than half the value. Most common treasures used in these larger wealth transfers were woodpecker scalps and large stone blades.
Injury compensation	Similar variety and frequency of items as for shaman fees
Bridewealth Recipient priority (p401): 1. father of bride 2. brothers of bride 3. uncles of bride	Similar variety and frequency of items as for shaman fees (Quiggin p296) “There was no fixed price, for that depended on the rank and wealth of the individual, and social status depended on the amount paid.” (Kroeber, 1925, pp. 21-2). Sometimes there were dowry counter-payments, e.g. if the bride’s father was particularly wealthy.
Divorce (p402-3) any time at a woman’s choice, as long as her kin repays man must show just cause to convince her kin to repay	Repayment depended on fertility: She died early => partial repayment Ongoing infertility => partial repayment Each child she bore => smaller repayment upon divorce, death, or subsequent infertility.
Exchange	Usually dentalia could be used to purchase a wide variety of treasures, useful goods, fishing rights, hunting rights, incorporeal rights (e.g. rights to say prayers and cast spells), etc. at either customary or negotiated exchange rates

Dentalia, unlike treasure, was fungible and divisible. In consequence the values of individual pieces of treasure, expressed as the Yurok did in terms of their customary or most recent exchange rate into dentalia, could in principle have been counted, summed, and subtracted to compute a net settlement in satisfaction of two opposing obligations. In practice, the indigenous Californians lacked calculating devices for accomplishing this – they had neither any sort of abacus nor methods of algorithmic writing used in Eurasia. Because of such difficulties in computing and thus comparing the values of money and treasure, bilateral large payments (such as bridewealth and dowry in a marriage, or bilateral damages incurred in a war) that included such treasures, as they almost always did, were not net settled, but instead each side paid in full. If two men married each others’ sisters, each paid the full bridewealth to the other (Quiggin p296).

Property with concrete utility was also sometimes used as part of large wealth transfers, albeit far less commonly than collectibles:

· Fishing rights

· Hunting rights

· Canoes (cross-river ferries, up-and-down-river polling-and-paddling, ocean-going paddling)

· Slaves

About five percent of the population were slaves. They “entered into this condition solely through debt, never through violence” – adult male prisoners of war were killed, with women and children returned upon settlement or adopted. The debt was almost always incurred in a dispute settlement – if the adjudged party could not pay the amount in question, whether through dentalia or other treasures or property, they became the slave of the adjudged victim.

Fishing sites were (and to a great extent still are) considered privately owned and transferable. Fishing rights could be loaned for a portion of the harvest. Owners of the best sites were envied “aristocrats”. (Lufkin). “Prolific eddies” were defined as discrete fishing spots by custom, which generally forbade the establishment of new locations, since these would usually degrade the fishing in current locations. A fishing spot could be individually owned, but since it usually generated more food than a family could eat, the spot was more often jointly owned in fractional shares by several men, who then used the spot in rotation. The shares were inheritable and sellable as individual property. (Kroeber p405)

A Yurok man fishes for salmon with a plunge net at pame-kya’-ra-m, a “usual and accustomed” fishing site on the Klamath River, California, before 1898. [Source]

If a piece of land was less than a mile or so from rivers or coast (the main sources of the Yuroks’ food) and good hunting, it was likely to be privately owned, meaning one needed the permission of the owner to hunt on it; otherwise it was common and permissionless. Deer and elk were the principle prey – smaller game were scarce or otherwise not worth the trouble. Special rights pertained to taking sea lions on the coast. The only punishable kind of trespassing was poaching, and poachers could be shot without incurring a blood money liability. (Kroeber p406).

A case of positive claim-rights to sea-lion flippers described by Hoebel illustrates a cycle of broken-down negotiations and revenge, culminating in a property settlement that satisfied principles and kin sufficiently to terminate the vendetta. A certain M had a generally acknowledged hereditary claim to have handed over to him the flippers of all sea-lions taken on a certain 4-mile section of beach. (Apparently sea lion flippers can be made into boots that grip slippery surfaces, fishing net floats, or glue, and at least farther up the Pacific Coast flipper meat was widely considered to be great delicacy: [Source]). A certain L allegedly killed sea-lions on the beach but kept their flippers in violation of M’s claim. A series of attack, claim, counter-attack, etc., including murder of L by M, eventually led to a settlement with L’s next-of-kin receiving the sea lion flipper claim rights that started the dispute. (Hoebel p54-55)

Yurok canoe on the Trinity River, c. 1923. [Source]

Conclusion

The ability to transfer wealth was crucial during many events critical to the Darwinian fitness of evolving humans, especially death (inheritance), dispute settlement, and marriage. With the Yurok and their neighboring tribes, this wealth typically took the form of collectibles that lacked concrete use – either non-fungible treasure, which came in a variety of forms, or fungible money in the form of dentalia shells and strings of same. The use of money and treasure in some transactions (e.g. for use mitigating violence) made it available and encouraged its use in others (e.g. trade).

Collectibles involved a unique interplay of supply and demand whereby demand was based in large part on a predictable constraint in supply. A common way cultures met this constraint was by using collectibles that originated in a very distant region and percolated into the local region via a relatively constant stream of transfers (which could be long-distance trade, but could also be a series of transfers themselves as injury compensation or bridewealth). Collectibles flowed from relatively plentiful at the origin to relatively scarce in the region they are used as collectibles. For fungible and divisible collectibles such as dentalia shells, they worked best as money where a geographical balance was struck between sufficient scarcity for value density and sufficient abundance to allow for its divisibility and fungibility. Such a collectible could be put to best use as money in a “Goldilocks region” in between where it was overly scarce and where it was overly abundant.

References

“Yurok Culture: History”

Lufkin, Alan, editor. California's Salmon and Steelhead: The Struggle to Restore an Imperiled Resource, chapter 2. Berkeley: University of California Press, c1991. [Link]

E. Adamson Hoebel, The Law of Primitive Man, Atheneum / Harvard University Press 1954

Kroeber, A.L., Handbook of the Indians of California, Chapter 2, as reprinted in R.F. Heizer and M.A. Whipple eds., The California Indians: A Sourcebook, University of California Press 1971

Kroeber, A. L., Handbook of the Indians of California , Bureau Amer. Ethn. Bull., 1925, as cited in Quiggins op. cit.

Goddard,P.E., Life and Culture of the Hupa, The University Press, 1903. [Link]

A. Hingston Quiggin, A Survey of Primitive Money, Methuen & Co. Ltd. 1949

Paul Einzig, Primtive Money, 2^nd ed., Pergamon Press 1966.

Money, blockchains, and social scalability

2017-02-09T09:22:00.000-08:00

Introduction

Blockchains are all the rage. The oldest and biggest blockchain of them all is Bitcoin, which over its eight-year history so far starshipped in value from 10,000 bitcoins per pizza (before there were exchanges that priced bitcoin in traditional currencies) to over $1,000 per bitcoin. As of this writing Bitcoin has a market capitalization of over $16 billion. Running non-stop for eight years, with almost no financial loss on the chain itself, it is now in important ways the most reliable and secure financial network in the world.

The secret to Bitcoin’s success is certainly not its computational efficiency or its scalability in the consumption of resources. Specialized Bitcoin hardware is designed by highly paid experts to perform only one particular function – to repetitively solve a very specific and intentionally very expensive kind of computational puzzle. That puzzle is called a proof-of-work, because the sole output of the computation is just a proof that the computer did a costly computation. Bitcoin’s puzzle-solving hardware probably consumes in total over 500 megawatts of electricity. And that is not the only feature of Bitcoin that strikes an engineer or businessman who is focused on minimizing resource costs as highly quixotic. Rather than reduce its protocol messages to be as few as possible, each Bitcoin-running computer sprays the Internet with a redundantly large number of “inventory vector” packets to make very sure that all messages get accurately through to as many other Bitcoin computers as possible. As a result, the Bitcoin blockchain cannot process as many transactions per second as a traditional payment network such as PayPal or Visa. Bitcoin offends the sensibilities of resource-conscious and performance-measure-maximizing engineers and businessmen alike.

Instead, the secret to Bitcoin’s success is that its prolific resource consumption and poor computational scalability is buying something even more valuable: social scalability. Social scalability is the ability of an institution –- a relationship or shared endeavor, in which multiple people repeatedly participate, and featuring customs, rules, or other features which constrain or motivate participants’ behaviors -- to overcome shortcomings in human minds and in the motivating or constraining aspects of said institution that limit who or how many can successfully participate. Social scalability is about the ways and extents to which participants can think about and respond to institutions and fellow participants as the variety and numbers of participants in those institutions or relationships grow. It's about human limitations, not about technological limitations or physical resource constraints. There are separate engineering disciplines, such as computer science, for assessing the physical limitations of a technology itself, including the resource capacities needed for a technology to handle a greater number of users or a greater rate of use. Those engineering scalability disciplines are not, except by way of contrast with social scalability, the subject of this essay.

Even though social scalability is about the cognitive limitations and behavior tendencies of minds, not about the physical resource limitations of machines, it makes eminent sense, and indeed is often crucial, to think and talk about the social scalability of a technology that facilitates an institution. The social scalability of an institutional technology depends on how that technology constrains or motivates participation in that institution, including protection of participants and the institution itself from harmful participation or attack. One way to estimate the social scalability of an institutional technology is by the number of people who can beneficially participate in the institution. Another way to estimate social scalability is by the extra benefits and harms an institution bestows or imposes on participants, before, for cognitive or behavioral reasons, the expected costs and other harms of participating in an institution grow faster than its benefits. The cultural and jurisdictional diversity of people who can beneficially participate in an institution is also often important, especially in the global Internet context. The more an institution depends on local laws, customs, or language, the less socially scalable it is.

Without institutional and technological innovations of the past, participation in shared human endeavors would usually be limited to at most about 150 people – the famous “Dunbar number”. In the Internet era, new innovations continue to scale our social capabilities. In this article I will discuss how blockchains, and in particular public blockchains that implement cryptocurrencies, increase social scalability, even at a dreadful reduction in computational efficiency and scalability.

Cognitive capacity – here in the form of the relative size of a species’ neocortex – set limits on how large primate groups can be. Maintaining animal or intimate human groups requires extensive emotional communications and investments in relationships, such as grooming in primates and gossiping, humor, story-telling, and other conversations, songs, and play in traditional human groups. Overcoming human cognitive limits to who or how many people can participate in an institution – the famous “Dunbar number” of around 150 people -- requires institutional and technological innovation. (Source)

Innovations in social scalability involve institutional and technological improvements that move function from mind to paper or mind to machine, lowering cognitive costs while increasing the value of information flowing between minds, reducing vulnerability, and/or searching for and discovering new and mutually beneficial participants. Alfred North Whitehead said, "It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them." Friedrich Hayek added: “We make constant use of formulas, symbols, and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we do not possess. We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up.”

A wide variety of innovations reduce our vulnerability to fellow participants, intermediaries, and outsiders, and thereby lower our need to spend our scarce cognitive capacities worrying about how an increasingly large number of increasingly diverse people might behave. Another class of improvements motivates the accurate collection and transmission of valuable information between an increasing number and variety of participants. Yet other advances enable a wider number or variety of mutually beneficial participants can discover each other. All these kinds of innovations have over the course of human prehistory and history improved social scalability, sometimes dramatically so, making our modern civilization with its vast global population feasible. Modern information technology (IT), especially by making use of the historically recent discoveries of computer science, can often discover many more mutually beneficial matches, can improve motivations for information quality, and can reduce the need for trust within certain kinds of institutional transactions, with respect to an increasingly large number and variety of people, thereby further increasing social scalability in some very important ways.

Information flows between minds – what I have called intersubjective protocols – include spoken and written words, custom (tradition), the contents of law (its rules, customs, and case precedents), a variety of other symbols (e.g. “star” ratings common in online reputation systems), and market prices, among many others.

Trust minimization is reducing the vulnerability of participants to each other’s and to outsiders’ and intermediaries’ potential for harmful behavior. Most institutions which have undergone a lengthy cultural evolution, such as law (which lowers vulnerability to violence, theft, and fraud), as well as technologies of security, reduce, on balance, and in more ways than the reverse, our vulnerabilities to, and thus our needs to trust, our fellow humans, compared with our vulnerabilities before these institutions and technologies evolved. In most cases an often trusted and sufficiently trustworthy institution (such as a market) depends on its participants trusting, usually implicitly, another sufficiently trustworthy institution (such as contract law). These trusted institutions in turn traditionally implement a variety of accounting, legal, security, or other controls that make them usually and sufficiently, at least for facilitating the functionality of their client institutions, trustworthy, by minimizing vulnerability to their own participants (such as accountants, lawyers, regulators, and investigators). An innovation can only partially take away some kinds of vulnerability, i.e. reduce the need for or risk of trust in other people. There is no such thing as a fully trustless institution or technology.

The nonexistence of complete trustlessness is true even of our strongest security technology, encryption. Although some cryptographic protocols do guarantee certain specific data relationships with astronomically high probability against opponents with astronomically high computing power, they do not provide complete guarantees when accounting for all possible behaviors of all participants. For example, encryption can strongly protect an e-mail from direct eavesdropping by third parties, but the sender still trusts the recipient to not forward or otherwise divulge the contents of that email, directly or indirectly to any undesired third parties. As another example, in our strongest consensus protocols harmful behavior by certain fractions of participants or intermediaries well short of 100% (as measured by their computing power, stake-holding, or individuation and counting) can compromise the integrity of transactions or information flows between participants and thereby on balance harm the participants. The historically recent breakthroughs of computer science can reduce vulnerabilities, often dramatically so, but they are far from eliminating all kinds of vulnerabilities to the harmful behavior of any potential attacker.

Matchmaking is facilitating the mutual discovery of mutually beneficial participants. Matchmaking is probably the kind of social scalability at which the Internet has most excelled. Social networks like Usenet News, Facebook, and Twitter facilitate the mutual discovery of like-minded or otherwise mutually entertaining or mutually informing people (and even future spouses!). After they have allowed people more likely to be of mutual benefit to discover each other, social networks then facilitate relationships at various levels of personal investment, from casual to frequent to obsessive. Christopher Allen among others has done some interesting and detailed analyses about group size and time spent mutually interacting in online games and associated social networks.

eBay, Uber, AirBnB, and online financial exchanges have brought social scalability via often great improvements in commercial matchmaking: searching for, finding, bringing together, and facilitating the negotiation of mutually beneficial commercial or retail deals. These or related services also facilitate performances such as payment and shipping, as well as verification that other obligations undertaken by strangers in these deals have been performed and communication about the quality of such performances (as with “star rating” systems, Yelp reviews, and the like).

Whereas the main social scalability benefit of the Internet has been matchmaking, the predominant direct social scalability benefit of blockchains is trust minimization. A blockchain can reduce vulnerability by locking in the integrity of some important performances (such as the creation and payment of money) and some important information flows, and in the future may reduce the vulnerability of the integrity of some important matchmaking functions. Trust in the secret and arbitrarily mutable activities of a private computation can be replaced by verifiable confidence in the behavior of a generally immutable public computation. This essay will focus on such vulnerability reduction and its benefit in facilitating a standard performance beneficial to a wide variety of potential counterparties, namely trust-minimized money.

Money and Markets

Money and markets directly benefit the participants in each particular trade by the market matching a buyer with a mutually beneficial seller and by a widely acceptable and standardized counter-performance (money). I use markets here in the sense Adam Smith used the term: not as a specific place or service where buyers and sellers are brought together (although it might sometimes involve these), but rather the broad set of typically pairwise exchanges whereby the supply chain that makes a product is coordinated.

Money and markets also incentivize creation of more accurate price signals that reduce negotiation costs and errors for participants in other similar exchanges. The potent combination of money and market thereby allowed a far higher number and variety of participants to coordinate their economic activities than previous exchange institutions, which more resembled bilateral monopolies than competitive markets.

Markets and money involve matchmaking (bringing together buyer and seller), trust reduction (trusting in the self-interest rather than in the altruism of acquaintances and strangers), scalable performance (via money, a widely acceptable and reusable medium for counter-performance), and quality information flow (market prices).

The greatest early thinker about money and markets was Adam Smith. At the dawn of the industrial revolution in Britain, Smith observed in The Wealth of Nations how making even the most humble of products depended, directly and indirectly, on the work of large numbers of a wide variety of people:

Observe the accommodation of the most common artificer or day-laborer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. The woolen coat, for example, which covers the day laborer, as coarse and rough as it may appear, is the produce of the joint labor of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! How much commerce and navigation in particular, how many shipbuilders, sailors, sail makers, rope makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labor, too, is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labor is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick maker, the brick layer, the workmen who attend the furnace, the millwright, the forger, the smith, must all of them join their different arts in order to produce them. Were we to examine, in the same manner, all the different parts of his dress and household furniture, the coarse linen shirt which he wears nest his skin, the shoes which cover his feet, the bed which he lies on, and all the different parts which compose it, the kitchen grate at which be prepares his victuals, the coals which he makes use of for that purpose, dug from the bowels of the earth, and brought to him perhaps by a long sea and a long land carriage, all the other utensils of his kitchen, all the furniture of his table, the knives and forks, the earthen or pewter plates upon which he serves up and divides his victuals, the different hands employed in preparing his bread and his beer, the glass window which lets in the heat and the light, and keeps out the wind and the rain, with all the knowledge and art requisite for preparing that beautiful and happy invention, without which these northern parts of the world could scarce have afforded a very comfortable habitation, together with the tools of all the different workmen employed in producing those different conveniences; if we examine, I say, all these things, and consider what a variety of labor is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided, even according to what we may falsely imagine the easy and simple manner in which he is commonly accommodated.

And this was before the many successive waves of industrial revolution and globalization between 1776 and now that refined, elaborated, and extended the division of labor many times more. Rather than trusting in the unlikely altruism of so many strangers, markets and money create many pairings of mutual benefit and thus motivate this large network of mutually oblivious people to act in our interests:

In civilized society man stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons…[In contrast to other animals, man has an almost constant occasion for the help of his brethren, and it is vain for him to expect it from their benevolence only. [Exchange is the] manner in which we obtain from another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard for their own interest.

Smith goes on to describe how division of labor, and thus labor productivity, depends on the extent of the network of pairwise exchanges: “As it is the power of exchanging that gives occasion to the division of labor, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market”. As the exchange network around a country and around the globe grows, involving a greater number and variety of producers, so grows the division of labor and thereby labor productivity.

Money facilitates social scalability by increasing the opportunities for this exchange. By lowering coincidence problems (coincidence-of-wants in exchange and coincidence-of-want-and-event in unilateral transfers), via a widely acceptable and reusable form of wealth storage and transfer, money greatly lowered transaction costs, making possible more exchanges of a greater variety of goods and services involving exchanges and other wealth transfer relationships with a much larger number and much wider variety of people.

A wide variety of media, from oral language itself, clay, paper, telegraph, radio, and computer networks, have served to communicate offers, acceptances, and the resulting deals and prices, as well as performance monitoring and other business communications. One of the most knowledgeable observations of the price network produced by markets and money can be found in Friedrich Hayek’s essay, “The Use of Knowledge in Society”:

In a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people…in any society in which many people collaborate, this planning, whoever does it, will in some measure have to be based on knowledge which, in the first instance, is not given to the planner but to somebody else, which somehow will have to be conveyed to the planner. The various ways in which the knowledge on which people base their plans is communicated to them is the crucial problem for any theory explaining the economic process, and the problem of what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy—or of designing an efficient economic system…The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process…The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; i.e., they move in the right direction….The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it. Through it not only a division of labor but also a coordinated utilization of resources based on an equally divided knowledge has become possible…a solution is produced by the interactions of people each of whom possesses only partial knowledge.

The Social Scalability of Network Security

Where long ago we used clay, and more recently paper, today programs and protocols running on our computers and data networks implement most of our commercial dealings. While this has greatly improved matchmaking and information flow, it has come at the cost of an increase in vulnerability to harmful behavior.

As networks grow, more people with fewer mutually understood habits of and constraints on behavior are added. Security via root-trusting access control, designed for small and chummy offices like Bell Labs where co-workers were well known and income and expenditures well controlled by paper procedures rather than performed on these office computers, breaks down as an efficient and effective security mechanism as organizations become larger, as organizational boundaries are crossed, and as more valuable and concentrated resources such as money are put on or activated via the computers. The more strangers one receives emails from, the more likely one is likely to get a phishing attack or a malware-laced attachment. Traditional computer security is not very socially scalable. As I describe in The Dawn of Trustworthy Computing:

When we currently use a smart phone or a laptop on a cell network or the Internet, the other end of these interactions typically run on other solo computers, such as web servers. Practically all of these machines have architectures that were designed to be controlled by a single person or a hierarchy of people who know and trust each other. From the point of view of a remote web or app user, these architectures are based on full trust in an unknown "root" administrator, who can control everything that happens on the server: they can read, alter, delete, or block any data on that computer at will. Even data sent encrypted over a network is eventually unencrypted and ends up on a computer controlled in this total way. With current web services we are fully trusting, in other words we are fully vulnerable to, the computer, or more specifically the people who have access to that computer, both insiders and hackers, to faithfully execute our orders, secure our payments, and so on. If somebody on the other end wants to ignore or falsify what you've instructed the web server to do, no strong security is stopping them, only fallible and expensive human institutions, which often stop at national borders.

Many server computers are not valuable enough for insiders or outsiders to attack. But an increasing number of others contain valuable concentrations of resources, motivating attack. Centralized root-trusting security scales poorly. As the resources controlled by computers become more valuable and more concentrated, traditional root-trusting security becomes more like the “call the cop” security we are used to in the physical world. Fortunately, with blockchains we can do much better for many of our most important computations.

Blockchains and Cryptocurrencies

Scalable markets and prices require scalable money. Scalable money requires scalable security, so that a greater number and variety of people can use the currency without losing its integrity against forgery, inflation, and theft.

An individual or group communicating under the name “Satoshi Nakamoto” brought Bitcoin to the Internet in 2009. Satoshi’s breakthrough with money was to provide social scalability via trust minimization: reducing vulnerability to counterparties and third parties alike. By substituting computationally expensive but automated security for computationally cheap but institutionally expensive traditional security, Satoshi gained a nice increase in social scalability. A set of partially trusted intermediaries replaces a single and fully trusted intermediary.

Financial controls on computational steroids: a blockchain as an army of robots, each checking up on each other’s work.

When we can secure the most important functionality of a financial network by computer science rather than by the traditional accountants, regulators, investigators, police, and lawyers, we go from a system that is manual, local, and of inconsistent security to one that is automated, global, and much more secure. Cryptocurrencies, when implemented properly on public blockchains, can substitute an army of computers for a large number of traditional banking bureaucrats. “These block chain computers will allow us to put the most crucial parts of our online protocols on a far more reliable and secure footing, and make possible fiduciary interactions that we previously dared not do on a global network.” (Source)

The characteristics most distinctively valuable in blockchain technology in general, and Bitcoin in particular — for example

independence from existing institutions for its basic operations

ability to operate seamlessly across borders

come from the high levels of security and reliability a blockchain can maintain without human intervention. Without that high security it’s just a gratuitously wasteful distributed database technology still tied to the local bureaucracies it would have to depend upon for its integrity.

Since the mid-20^th century computing has increased in efficiency by many orders of magnitude, but humans are using the same brains. This has created plenty of possibility for overcoming human limitations, and institutions based solely on human minds, with computational capabilities, including in security, doing what they do best, with human minds doing what they still do best. As a result, humans have no more raw mental ability to scale up our institutions than we ever have. But there is plenty of potential for improving social scalability by replacing some human functions with computational ones. (An important note – this argument depends on the slope, not the absolute position, of the human ability line. The absolute position shown above is arbitrary and depends on what human “computation” we are measuring).

A new centralized financial entity, a trusted third party without a “human blockchain” of the kind employed by traditional finance, is at high risk of becoming the next Mt. Gox; it is not going to become a trustworthy financial intermediary without that bureaucracy.

Computers and networks are cheap. Scaling computational resources requires cheap additional resources. Scaling human traditional institutions in a reliable and secure manner requires increasing amounts accountants, lawyers, regulators, and police, along with the increase in bureaucracy, risk, and stress that such institutions entail. Lawyers are costly. Regulation is to the moon. Computer science secures money far better than accountants, police, and lawyers.

In computer science there are fundamental security versus performance tradeoffs. Bitcoin's automated integrity comes at high costs in its performance and resource usage. Nobody has discovered any way to greatly increase the computational scalability of the Bitcoin blockchain, for example its transaction throughput, and demonstrated that this improvement does not compromise Bitcoin’s security.

It is probable that no such big but integrity-preserving performance improvement is possible for the Bitcoin blockchain; this may be one of these unavoidable tradeoffs. Compared to existing financial IT, Satoshi made radical tradeoffs in favor of security and against performance. The seemingly wasteful process of mining is the most obvious of these tradeoffs, but Bitcoin also makes others. Among them is that it requires high redundancy in its messaging. Mathematically provable integrity would require full broadcast between all nodes. Bitcoin can’t achieve that but to even get anywhere close to a good approximation of it requires a very high level of redundancy. So a 1 MB block consumes far more resources than a 1 MB web page, because it has to be transmitted, processed, and stored with high redundancy for Bitcoin to achieve its automated integrity.

These necessary tradeoffs, sacrificing performance in order to achieve the security necessary for independent, seamlessly global, and automated integrity, mean that the Bitcoin blockchain itself cannot possibly come anywhere near Visa transaction-per-second numbers and maintain the automated integrity that creates its distinctive advantages versus these traditional financial systems. Instead, a less trust-minimized peripheral payment network (possibly Lightning ) will be needed to bear a larger number of lower-value bitcoin-denominated transactions than Bitcoin blockchain is capable of, using the Bitcoin blockchain to periodically settle with one high-value transaction batches of peripheral network transactions.

Bitcoin supports a lower rate transactions than Visa or PayPal, but due to its stronger automated security these can be much more important transactions. Anybody with a decent Internet connection and a smart phone who can pay $0.20-$2 transaction fees – substantially lower than current remitance fees -- can access Bitcoin any where on the globe. Lower value transactions with lower fees will need to be implemented on peripheral bitcoin networks.

When it comes to small-b bitcoin, the currency, there is nothing impossible about paying retail with bitcoin the way you’d pay with a fiat currency — bitcoin-denominated credit and debt cards, for example, with all the chargeback and transactions-per-second capabilities of a credit or debit card. And there are also clever ways to do peripheral bitcoin retail payments in which small value payments happen off-chain and are only periodically bulk-settled on the Capital-B Bitcoin blockchain. That blockchain is going to evolve into a high-value settlement layer as bitcoin use grows, and we will see peripheral networks being used for small-b bitcoin retail transactions.

When I designed bit gold I already knew consensus did not scale to large transaction throughputs securely, so I designed it with a two-tier architecture: (1) bit gold itself, the settlement layer, and (2) Chaumian digital cash, a peripheral payment network which would provide retail payments with high transactions-per-second performance and privacy (through Chaumian blinding), but would like Visa be a trusted third party and thus require a “human blockchain” of accountants, etc. to operate with integrity. The peripheral payment network can involve only small value transactions, thereby requiring much less of a human army to avoid the fate of Mt. Gox.

Ralph Merkle: pioneer of public-key cryptography and inventor of hierarchical hash-tree structures (Merkle trees).

Money requires social scalability in its design, via security. For example it should be very hard for any participant or intermediary to forge money (to dilute the supply curve leading to undue or unexpected inflation). Gold can have value anywhere in the world and is immune from hyperinflation because its value doesn’t depend on a central authority. Bitcoin excels at both these factors and runs online, enabling somebody in Albania to use Bitcoin to pay somebody in Zimbabwe with minimal trust in or and no payment of quasi-monopoly profits to intermediaries, and with minimum vulnerability to third parties.

There are all sorts of definitions of “blockchain” out there, almost all of them just implicitly broad hand-waving amid the mountains of marketing hype. I suggest a clear definition that can be communicated to lay people. It is a blockchain if it has blocks and it has chains. The “chains” should be Merkle trees or other cryptographic structures with a similar integrity functionality of post-unforgeable integrity. Also the transactions and any other data whose integrity is protected by a blockchain should be replicated in a way objectively tolerant to worst-case malicious problems and actors to as high a degree as possible (typically the system can behave as previously specified up to a fraction of 1/3 to 1/2 of the servers maliciously trying to subvert it to behave differently).

Bitcoin’s socially scalable security, based on computer science rather than on police and lawyers, allows, for example, customers in Africa to pay suppliers in China seamlessly across borders. A private blockchain cannot accomplish this feat nearly as easily, since it would require an identification scheme, certificate authority, and PKI shared between these various jurisdictions. (Source)

Because of this fraction, and because of the (hopefully very rare) need to update software in a manner that renders prior blocks invalid – an even riskier situation called a hard fork -- blockchains also need a human governance layer that is vulnerable to fork politics. The most successful blockchain, Bitcoin, has maintained its immutable integrity via decentralized decision-making among experts in the technology combined with a strong dogma of immutability, under which only the most important and rare bug fixes and design improvements, that cannot be made any other way, justify a hard fork. Under this philosophy of governance accounting or legal decisions (such as altering an account balance or undoing a transaction) never justify a hard fork, but should be accomplished by traditional governance outside of (or on top of) the system (e.g. via a court injunction forcing a Bitcoin user to send a new transaction that effectively undoes the old one, or confiscating the particular keys and thus the particular holdings of a particular user).

To say that data is post-unforgeable or immutable means that it can’t be undetectably alteredafter being committed to the blockchain. Contrary to some hype this doesn’t guarantee anything about a datum’s provenance, or its truth or falsity, before it was committed to the blockchain. That requires additional protocols, often including expensive traditional controls. Blockchains don’t guarantee truth; they just preserve truth and lies from later alteration, allowing one to later securely analyze them, and thus be more confident in uncovering the lies. Typical computers are computational etch-a-sketch, while blockchains are computational amber. Important data should be committed to blockchain amber as early as possible, ideally directly from and cryptographically signed by the device in which it was generated, to maximize the blockchain’s benefit in securing its integrity.

A Merkle tree of four transactions (tx0 through tx3). Combined with a proper replication and chains of transaction blocks protected by proof-of-work, Merkle trees can make data such as transactions post-unforgeable by consensus. In Bitcoin, a Merkle root hash securely summarizes and is used to verify the unaltered state of all the transactions in a block.

My own 1998 “secure property title” architecture had Merkle trees and replication of data tolerant against an objective fraction of arbitrarily faulty software or malicious actors, but not blocks. It demonstrated my theory that you could protect the integrity of globally shared data and transactions, and use that ability to design a cryptocurrency (bit gold). It did not have the more efficient and computationally scalable blocks-and-ledger system that Bitcoin does. Also like today’s private blockchains, secure property titles assumed and required securely distinguishable and countable nodes.

Given the objective 51% hashrate attack limit to some important security goals of public blockchains like Bitcoin and Ethereum, we actually do care about the distinguishable identity of the most powerful miners to answer the question “can somebody convince and coordinate the 51%?

Blockchain security is objectively limited and blockchain governance is heavily influenced by the potential for a 51% attack. An attack of course does not have to be called an “attack” by the attackers; instead they might call it “enlightened governance” or “democracy in action”. Indeed some kinds of software updates needed to fix bugs or otherwise improve the protocol require a soft fork. Some other kinds of software updates require hard forks, which in Bitcoin pose an even greater security and continuity risks than soft forks. Blockchains, although reducing trust far more than any other network protocols, are still far from trustless. Miners are partially trusted fiduciaries, and those who are not expert developers or computer scientists who have invested a great deal of time in learning the design principles and codebase of a blockchain must place a great deal of faith in the expert developer community, much as non-specialists who want to understand the results of a specialized science do of the corresponding scientists. During a hard fork exchanges can also be very influential by deciding which fork to support with their order books and trade symbol continuity.

Public blockchains thus mostly but not entirely dodge the identity-is-hard bullet and take care of its remaining problem of identifying the most powerful miners at a higher “wet”/“social” level, where it is probably more appropriate, rather than trying to securely map such an inherently wet (brain-based) concept onto the protocol, as PKI (public key infrastructure) rather awkwardly tries to do.

So I think some of the “private blockchains” qualify as bona fide blockchains; others should go under the broader rubric of “distributed ledger” or “shared database” or similar. They are all very different from and not nearly as socially scalable as public and permissionless blockchains like Bitcoin and Ethereum.

All of the following are very similar in requiring an securely identified (distinguishable and countable) group of servers rather than the arbitrary anonymous membership of miners in public blockchains. In other words, they require some other, usually far less socially scalable, solution to the Sybil (sockpuppet) attack problem:

Private blockchains

The “federated” model of sidechains (Alas, nobody has figured out how to do sidechains with any lesser degree of required trust, despite previous hopes or claims). Sidechains can also be private chains, and it’s a nice fit because their architectures and external dependencies (e.g. on a PKI) are similar.

Multisig-based schemes, even when done with blockchain-based smart contracts

Threshold-based “oracle” architectures for moving off-blockchain data onto blockchains

The dominant, but usually not very socially scalable, way to identify a group of servers is with a PKI based on trusted certificate authorities (CAs). To avoid the problem that merely trusted third parties are security holes, reliable CAs themselves must be expensive, labor-intensive bureaucracies that often do extensive background checks themselves or rely on others (e.g. Dun and Bradstreet for businesses) to do so. (I once led a team that designed and built such a CA). CAs also act as a gatekeeper, rendering these permissioned systems. CAs can become singular points of political control and failure. "Public blockchains are automated, secure, and global, but identity is labor-intensive, insecure, and local.”

PKI-enabled private blockchains are a nice for banks and some other large enterprises because they already have mature in-house PKIs that cover the employees, partners, and private servers needed to approve important transactions. Bank PKIs are relatively reliable. We also have semi-reliable CAs for web servers, but not generally speaking for web clients, even though people have been working on the problem of client certificates since the invention of the web: for example advertisers would love to have a more secure alternative to phone numbers and cookies for tracking customer identities. Yet it hasn’t happened.

PKI can work well for some important things and people but it is not nearly so nice or so easy for lesser entities. Its social scalability is limited by the traditional wet identity bureaucracy on which it depends.

Some significant thefts in the broader bitcoin ecosystem. Whereas the Bitcoin blockchain itself is probably the most secure financial network in existence (and indeed must remain far more secure than traditional payment networks in order to maintain its low governance costs and seamless cross-border capability), its peripheral services based on older centralized web servers are very insecure. (Source: author)

We need more socially scalable ways to securely count nodes, or to put it another way to with as much robustness against corruption as possible, assess contributions to securing the integrity of a blockchain. That is what proof-of-work and broadcast-replication are about: greatly sacrificing computational scalability in order to improve social scalability. That is Satoshi’s brilliant tradeoff. It is brilliant because humans are far more expensive than computers and that gap widens further each year. And it is brilliant because it allows one to seamlessly and securely work across human trust boundaries (e.g. national borders), in contrast to “call-the-cop” architectures like PayPal and Visa that continually depend on expensive, error-prone, and sometimes corruptible bureaucracies to function with a reasonable amount of integrity.

Conclusion

The rise of the Internet as seen the rise of a variety of online institutions, among them social networks, “long-tail” retail (e.g. Amazon), and a variety of services that allow small and dispersed buyers and sellers to find and do business with each other (eBay, Uber, AirBnB, etc.) These are just the initial attempts to take advantage of our new abilities. Due to the massive improvements in information technology over recent decades, the number and variety of people who can successfully participate in an online institution is far less often restricted by the objective limits of computers and networks than it is by limitations of mind and institution that have usually have not yet been sufficiently redesigned or further evolved to take advantage of those technological improvements.

These initial Internet efforts have been very centralized. Blockchain technology, which implements data integrity via computer science rather than via “call the cops”, has so far made possible trust-minimized money -- cryptocurrencies – and will let us make progress in other financial areas as well as other areas where transactions can be based primarily on data available online.

This is not to say that adapting our institutions to our new capabilities will be easy, or indeed in particular cases anything short of difficult and improbable. Utopian schemes are very popular in the blockchain community, but they are not viable options. Reverse-engineering our highly evolved traditional institutions, and even reviving in new form some old ones, will usually work better than designing from scratch, than grand planning and game theory. One important strategy for doing so was demonstrated by Satoshi – sacrifice computational efficiency and scalability -- consume more cheap computational resources -- in order to reduce and better leverage the great expense in human resources needed to maintain the relationships between strangers involved modern institutions such as markets, large firms, and governments.

Weigh and deliver: compensation and the evolution of law and money

2016-12-18T14:54:00.001-08:00

Long before the invention of coins, the earliest written legal codes take for granted the existence of commodity money that served both as a medium for paying fines and compensation and as a unit of account and standard of value assessing such penalties. The rules throughout the Sumerian “Code” of Ur-Nammu [1], c. 2100–2050 BC. (about 1400 years before the invention of coinage), show us that standard weights of silver were being used as a unit of account and the actual medium of payment: the code specifically requires defendants adjudged guilty to “weigh and deliver” the specified weight of silver. Over half of the extant rules specify fine or damage payments in silver. The single rule specifying a silver payment that allows an alternative medium to be used calls it out as such: it specifies “he shall bring [a slave woman], if he has no slave woman, he shall instead weigh and deliver 10 shekels of silver; if he has no silver, he shall give him whatever of value he has.” (Law 24).

“In Mesopotamia, the adoption of a silver standard that equated measures of barley with a set amount of silver is illustrated by a rare example of a spiral coil of silver, lengths of which were snipped off to pay debts.” Given a standard cross-section, equal lengths of wire gave equal weights of metal. Coils could be audited by snipping them at random points inspecting the cut section. [Link]

A medium for paying fines and damages implies that the recipient (for example the king for a fine, or the victim for compensation) could use that medium in further useful payments – likely for inheritance, tax, religious tithe, tribute, and exchange, among other transactions. (These transactions, and how money emerges from them, will be discussed in future posts). Indeed, the frequency with which a an intermediate good is used as a medium for paying legal penalties may serve as a useful proxy for how much value that good adds (i.e. how much in transaction costs its saves) to other transactions (including but not limited to legal penalties) involved in the circulation of that good.

Penalty	Frequency
Weigh and deliver weight of silver	19
Death	4
Defining state of slavery	2
Return of same or similar (measure and deliver volume of grain for injury involving grain)	2
Variable damages	2
Misc.	2
Unknown or no compensation	6

Frequency of penalties in the “Code” of Ur-Namma [1]

An Indo-European example: the Old Hittite laws

Penalty	Frequency
Weight of silver	71
Number of slaves	10
Enslavement	4
Death	11
Volume of barley	6
Return objects in same or similar form as item(s) found or stolen	40
Storable food (sheep, bread, and beer)	3
Sheep	7
Land	4
Estate division (land, slaves, livestock)	5
Variable damages	10
Misc.	7
Unknown or no compensation	18

Frequency of penalties in the Old Hittite Laws (c. 1650-1500 BC: still over 800 years before the invention of coinage) [2]

The ubiquity and deep age of compensation culture [3]

Institutions of blood money and compensation via standard forms of wealth for other injuries have been observed and recorded by missionaries, traders, and ethnologists in every branch of humans, including all major divisions of humans that left Africa as well as many who stayed. It is possible that this ubiquitous geographical scope reflects a shared cultural influence that is more recent than our shared ancestry in Africa (c. 70,000 BC) but prior to Columbus and Magellan. More likely, it reflects a common cultural and genetic heritage dating back to at least 70,000 BC before the exit of the ancestors of today’s Austronesian and Eurasian peoples from Africa. This is also suggested by the deep age and continuity of the shell bead tradition detailed here. Shell beads were the predominant form of compensation money in cultures that migrated out of the African and Eurasian core before the dawn of livestock agriculture and metallurgy, to such diverse places as Melanesia and the Americas. These patterns will be laid out in detail, from descriptions derived from traveler, missionary, and ethnographic literature, in future post(s).

‘Shell-money "Bakhia", Solomon Islands, used as "blood money"’ [Link]

Customary prices

Prior to the rise of efficient competitive markets, prices for goods were often specified by custom or law rather than negotiated. This served to conserve transaction costs in a high transaction cost culture where exchange relationships resembled bilateral monopolies more closely than they resembled spot markets. Bargaining costs were high, and indeed bargaining failure often resulted in violence and destruction rather than merely in no deal. This made focal points of negotiation, such as customary prices and customary compensation amounts for specific injuries, a quite valuable and ubiquitous part of most Neolithic and earlier cultures. When specified by law, these rules setting prices were often intermingled with laws specifying legal penalties and used the same set of units: in the Mesopotamian and Anatolian law codes prior to coinage, most commonly weights of silver and volumes of barley.

Price unit	Frequency
Weight of silver	68
Volume of barley	6
Number of sheep	7
Labor or military service appurtenant to land	11
Other	1

Frequency of legally specified prices and rents in the Old Hittite Laws [2]

One can also think blood-money-type fixed damages (compensation) and fines as customary prices for injuries. As with customary prices for goods, customary prices for injuries conserved on the transaction costs of bilateral monopoly negotiations, in this case negotiations to settle legal disputes. Today this is solved, to the extent it is, by each side predicting what damages or punishments they expect a court to assess, and negotiating accordingly.

Copper spirals and gold discs, 4th millenium BC, Austria. Spiral armbands were among the earliest items worked from native copper, in what are now Serbia and Hungary, c. 5000-4500 BC. [Link]

Estimating deterrence and fairness: eye-for-eye vs. measured punishments

As kings and chiefs gained power, fines paid to them for criminal acts replaced compensation to victims. In some cases a separate set of laws (for example tort laws) arose alongside the criminal law, or was evolved from the previous compensation culture, maintaining some compensation for victims. Subsequently law usually evolved away from monetary compensation and towards punishments for deterrence. A chief concern of criminal law became estimation of deterrence value. The king had incentives to perform punishments both as a public good and a public show. To allow themselves and their public to assess the deterrence value of punishments, there were two major strategies:

· “Eye for an eye”-type laws, which focus on comparing the punishment to the crime’s injury (often similar to the injury to maximize perceived fairness, but sometimes also more severe than the injury for extra deterrence value). In some of the non-silver compensation rules in the Mesopotamian and Hittite law codes described above, barley, slaves, or other goods are substituted for silver because in order to correspond to an injury involving barley, slaves, etc.: like for like.

· Measured punishments, which, like monetary compensation for injury, allow the severity of different crimes to be compared and ranked, for example

o Whipping (number of lashes)

o Prison sentences (length of time), our dominant modern form of criminal punishment

As suggested above (and for reasons to be explicated in future posts), compensation according to a standard amount of a standard wealth good (pre-coinage money), the outcome of coercive negotiations between clans, was very likely the dominant form of measured punishment during the vast majority of the time and in the vast majority of cultures from the dawn of our species to today.


In Northern Europe, blood money and other compensation for injury was known as “wergeld”. If the guilty party didn't have the money on hand, they needed a money-lender.

Markets and the rise of variable damages

There was very little change between the Old Hittite Laws of (c. 1600 BC) and the New Hittite Laws (c. 1200 BC). But between then and the Roman Twelve Tables (c. 400BC) there was a radical shift away from fixed fees and towards variable damages, assessed by judge or jury. This evolution was coincident with the rise of coinage, probably due to the shift of trade in a wide variety of goods away from bilateral and hierarchical relationships and towards competitive marketplaces. Market deals were facilitated by being able to transfer metal in branded form (coins) instead of the cutting and weighing of coils or hack-silver or the laborious counting of shells (or error-prone approximations by length) which had dominated exchange up to that time. The lowering of negotiation costs by marketplaces, coins, and other developments substantially decreased the use of customary prices in favor of prices negotiated in a market.

To be continued!

Artifacts of wealth: patterns in the evolution of collectibles and money

2016-07-31T00:04:00.004-07:00

Introduction

This is the first of at least two posts on the evolution of collectibles and money. The goal is to explore the evolutionary and economic functions of the “ornamental” or “ceremonial” objects that are so common in the archaeological record. In this article, we will look broadly and visually at the patterns of evolution of artifacts, in terms of their material and visual characteristics, of the most common kinds of collectibles -- those objects that look to our modern eyes like jewelry.

‘Tomb Nr 7 from Yao Shan showing Jade implements and their position on or near the body. This display in the Museum gives a good overview of the multiple Jade pieces and shapes following the deceased Liangzhu Noble into to afterworld.' (Neolithic China, 3000 BC to 2000 BCE)

This blog post will lay out a profound puzzle: the ubiquity and importance of artifacts, often called “ornamental”, “decorative”, “ceremonial”, or “ritual”, the evolutionary function of which the anthropological and archaeological literature has never successfully explained. We will study the common instances, and the kinds of artifacts of most general importance across human cultures and timespans, and the connections between them, rather than thrilling to the rare and freakish artistry beloved of collectors, museums, and ethnographers.

Sungir (in the Russian plain, c. 200 km east of Moscow): burial with mammoth ivory bracelets and thousands of mammoth ivory beads, 25000-17000 BC. This is long before the Neolithic (early agriculture era; the people represented in these burials were mammoth hunters. http://archaeology.about.com/od/sterms/g/sungir.htm. Randall White estimates that an individual bead took one to two hours of work, and as a result that the grave goods in such a burial represented nearly 10,000 hours of labor. [7] “Each of the three intact individuals was lavishly decorated with thousands of painstakingly prepared ivory beads arranged in dozens of strands... The man was adorned with 2,936 beads…” http://www.donsmaps.com/sungaea.html

To describe my solution to these puzzles, in future posts I will elucidate updated versions of the theories laid out on the evolutionary functions of these objects[1]. These theories are not about how people in these cultures perceived or thought about their axes and shells and their uses, much less about the interpretations and explanations given in the accounts of travelers and missionaries, and in the ethnographic literature. These varied widely, both in how the natives themselves interpreted their thoughts and actions and how the various observers who recorded these thoughts and actions further interpreted them. Understanding the thoughts and feelings of people in such an alien culture is usually extremely difficult at best. Trying to get in the heads of people from long-extinct cultures is a futile exercise. Our account will rather be about the evolutionary function of these objects and their uses, which was typically unconscious, but which we can infer from archaeological facts, objective aspects of ethnographic observations, and general evolutionary and economic principles appropriately adapted. We talk in short in terms of ultimate rather than proximate explanations [14]: what were the consequences in terms of Darwinian fitness for the non-concrete uses of collectibles?

Artifacts as Wealth

There were a wide variety of objects that at one time or another could have served as to a greater or lesser extent as stores and displays of wealth, and to a greater or lesser extent media for the satisfaction of obligations and units of account. (I will describe what I mean by “media of obligation satisfaction” in future posts; for now it is sufficient to say that it is a generalization of the economic idea of “medium of exchange” to include a wide variety of non-exchange transactions that transfer wealth).

The manufacture and use of shell beads is more than 100,000 years old, and possibly dates to the earliest millennia of homo sapiens. The use of “ritual” blades and points may be even older, predating our species. The general pattern of artifacts in general and collectibles in particular in terms of their abilities to store, display, or transfer wealth can be diagrammed as follows:

At the extreme upper left-hand corner is modern money – used purely as a medium of exchange and obligation satisfaction, and with high velocity, typically several transactions per month. The predominant such media in a culture also usually becomes its of account. At the opposite (southeast) extreme are pure stores of value – seldom if ever alienated, they usually change ownership only at death. At the northeast extreme are pure collectibles – a low-velocity (a few to a few dozen transfers per human lifetime) medium of obligation satisfaction and exchange, but also a store and display of wealth. At the southwest extremely are immediate consumables, such as food obtained from foraging in cultures that do not preserve or store their food.

“Media for the satisfaction of obligations” is a generalization of the idea from modern monetary theory that money serves as a media of exchange. The kinds of obligations that might be satisfied over the course of human evolution are far broader and deeper than just exchange, which was probably far from the most important kind of wealth transfer during the Paleolithic. “Unit of account” is any measure or count that people in a society used as a general (across multiples goods and services) proxy measure of value.

As for display of wealth, according to the theory of this series this was the main function of ornamentation, and is derivative from the function of these objects as stores of wealth. In a future post we will discuss more about what is meant by this terminology.

The correlations between media for the satisfaction of obligations and units of account, and between stores and displays of wealth, largely holds true for Paleolithic and Neolithic times when functions were condensed that are now quite distinct . In more recent times there has been a strong divergence between stores of wealth and displays of wealth (e.g. stocks and bonds vs. jewelry).

Most of the durable artifacts that archaeologists dig up from the Paleolithic through Bronze Ages, including the early civilizations of Mesopotamia, lived a mixed life – they were concretely useful objects and low-velocity media of fitness-benefiting transactions and stores and displays of wealth, to varying degrees, but seldom if ever used as just any one of these. They condensed multiple functions that we now consider separate and often unrelated, as discussed further below.

It is important to keep in mind two very large selection biases at work in archaeology. The first is that apart from some exceptional environments (e.g. peat bogs) that preserve organic material, only durable objects survive to be dug up by the archaeologist. This means that an artifact is more likely to be a collectible than the typical artifact in the culture (which quite preponderantly would have been organic materials for concrete use that have not survived). The second selection bias is that nearly all collectors and museums, and most archaeologists, are heavily biased towards collecting objects that more resemble unique artworks than they are interested in collecting or studying repetitive and boring objects. Overcoming this bias can result in substantial breakthroughs in understanding a culture. For example Denise Schmidt-Besserant discovered the origins of writing in Mesopotamia by focusing on repetitive and unartful clay tokens that had been ignored by collectors and ther archaeologists.

In addition to the two general selection effects above, another selection effect particularly impacts metals. That is that metals, especially precious metals but even baser metals such as copper and bronze, were recycled very efficiently. Metallic artifacts we find in archaeological digs are likely to be particularly unrepresentative of the metallic artifacts most commonly used in a society. For money in particular, unless they were unique artworks of particular attraction to collectors, an earlier form of metallic money has with very high probability been recycled into a later form of metallic money, or into some other metal object, the result being that the earlier forms are highly underrepresented in the archaeological record.

From the Gutenberg 42-line Bible [source].

Some Basic Patterns of Collectibles

Three of the most important patterns of collectibles that have been discovered in this research are condensation, authority resemblance, and unforgeable costliness. In the former two cases these patterns are broadly applicable to artifacts in general. Taking these in turn:

1. Condensation -- generally speaking, the farther back we go in time, the lesser the degree of specialization (division of labor) and thus differentiation of technology exists. Furthermore, the weight and bulk of artifacts per family was much lower in Neolithic society, with its much higher transport costs, than today. In Paleolithic forager societies, which were typically mobile, belongings had to be carried on the person, resulting in a still radically lower weight or volume of goods controlled by a person or clan. This results as we go back in time in condensation: a given object tends to serve a greater variety of functions: it condenses the functions we consider or take for granted today as separate and often unrelated functions.

Obtaining fitness benefits by the widest variety of available means within a society with a radically smaller division of labor and differentiation of technology. Thus institutions usually condensed the functions of religion with business, business with politics and war, law with lore, tort law with criminal law, ceremony with accounting, and gang warfare with a substantial body of customary rules. Objects could condense the functions of jewelry with coinage, and concrete utility with media of obligation satisfaction and store of value.

From our point of view functions in earlier periods are increasingly condensed, and in Neolithic times were very highly condensed, and in Paleolithic times were radically condensed: a typical object tended to serve many more purposes in the early Paleolithic than in the late Paleolithic, less still in the Neolithic, and less still after the dawn of state-like agricultural societies. Contrariwise the general trend of economic development over millennia, and between stages of the Paleolithic and Neolithic, is differentiation. Missionaries, travellers, and ethnographic observers, as well as their readers, often committed the fallacy of exclusion – concluding that because an object was used for one thing, that it was not used for another thing in what we consider to be a separate sphere of activity.

Detail from the Giant Bible of Mainz, handwritten in the traditional way around the same time as Gutenberg produced the first printed Bible. [source]

2. Authority resemblance – Initial forms of innovative artifacts, of a kind the value of which was based at least in part on their authority, often borrowed authority from what they were replacing by physical resemblance. Mimicry of or semblance to pre-existing authoritative forms in a new medium was and is a very common feature of innovations: examples range from Gutenberg’s printing press mimicking scribal script to the private overnight parcel service Federal Express alluding by name and color scheme to the United States Postal Service. The ritualistic airstrips, offices, military drills, etc. of cargo cults were an extreme example of authority resemblance, and it predominates in the design of national flags and many other symbols (such as commercial brands) that invoke reputation or authority. Where not tabooed or banned as counterfeiting or trademark violation, authority resemblance was and is a common feature of innovative collectibles, their form invoking a traditional authoratative form while pioneering a new media.

The histories of art and architecture in religion, politics, finance, and business are replete with examples of authority resemblance. The designs of many of the very earliest coins, which differ greatly from the standard and presumably optimal form they soon converged on and have retained ever since, highlights what existing objects they were inspired by and suggests a similarity in intended role and function between the novel object and the old object whose form it has taken on. We will see in this and future posts that the earliest coins borrowed their form from shells, beads, and the metal blades of tools.

Detail of necklace from a burial at Sungir, Russia, 28,000 BP. Interlocking and interchangeable beads. Each mammoth ivory bead may have required one to two hours of labor to manufacture. [9]

3. Unforgeable costliness – a wide variety of objects, which we call collectibles, have as a necessary component and a secure costliness – either in search costs of collection, in manufacturing costs, or both – that serves to constraint its supply curve. This is true for collectibles as media of obligation satisfaction as well as collectibles as stores and displays of wealth.

Efficient symbolic communication – Mesolithic cave painting -- abundant surface and easily made pigments. Much information. [Source]

Many of the artifacts called here collectibles, especially Paleolithic and Neolithic beads, have been assumed by archaeologists to be primarily “ornamental” and serve a “symbolic” function, i.e. are said to have been “information technology”[6]. If an artifact were purely symbolic (e.g. a clay tablet impressed with accounting records) we would expect symbol efficiency to be high given the available materials (e.g. clay) and technologies (e.g. symbols for words). But with collectibles, people went out of their way to choose costly goods and undertake costly methods of manufacture – collectibles such as beads typically had an extremely poor symbol efficiency compared to the available alternatives. They must have had functions that were much more than symbolic, leading to competing requirements that we must elucidate.

Efficient symbolic communication – already existing and otherwise useful flint painted with symbols (c. 5000 BC) [Source]

As we will see below, beads of shell, bone, and similar objects were made, strung, and worn for tens of millennia in the vast majority of Upper Paleolithic and Neolithic cultures. Gratuitous use of costly beads over tens of millennia would have been weeded out by Darwinian genetic selection. Beads, used as actually observed either in Epipaleolithic or Neolithic burials or as observed in the few recently observed such cultures, are not, in contrast to spoken human language and every other information-rich symbolic system, used in any way remotely approaching the efficient coding scheme that would have emerged from natural selection if pure symbolism were their main evolutionary function. Beads that are arranged in a pleasing regular pattern, as they typically are, carry very little information – they are extremely inefficient in terms of information per unit of weight or volume and especially per cost of collection and manufacture. Since forager bands were typically mobile they had even more compelling evolutionary pressure to improve the symbol efficiency of their media, by evolving choices and designs for the most efficient available such media, if such recorded communication was an evolutionary important (and evolutionarily accessible) problem. Instead, vocal communications were far more useful for mobile forager bands and underwent the radical and unique evolution of human spoken language, while remains of recorded symbolic communications are sparse and rare.

Efficient communication – painted pebbles (Norwegian Mesolithic, c. 11,000 BP)

Not only were beads of multiple varieties almost always strung together in regular patterns that did not take advantage of the coding capabilities of the multiple varieties, but the most common bead pattern was repeating the same kind of bead over and over again, which carries no information whatsoever in the arrangement of the beads. The digital nature of shell beads makes this a tempting theory in our society so saturated by computer screens and codes, but it is wrong.

Cost-effective communication – pictures, pictograms and counting symbols in abundant clay (Transylvania, 5500-5300 BC)

What would have efficient symbolic coding of bead patterns look like if contrary to the observed facts it had evolved? If there are, for example, 16 different roles (what we would call “offices”) in a clan (elder, shaman, etc.), and there is evolutionary benefit (e.g. in minimizing disputes) to representing title to those positions in permanent form, one does not need a long string of beads. A clan only needs 16 different objects, each representing a different office. If the clan has only 2 different kinds of objects available, they still only 4 of them (2^4 = 16 bits of information). There are a wide variety of coding schemes in between that would be this efficient or nearly so. But no such efficient scheme, or any scheme anywhere nearly as efficient as such a scheme, using beads has ever been observed in widespread use in a Paleolithic or Neolithic culture: neither in contemporarily observed instances of such cultures nor in the archaeological record.

Wasteful as symbolic communication – regular pattern (little information) and made of costly beads, as well as taking much additional labor to assemble from the beads. Wampum, Museum of Ontario Archaeology. [Source]

If Paleolithic and Neolithic beads had been as extremely cheap as mass-manufactured beads are today, and transportation and storage costs had been those of today, the extremely poor symbolic efficiency of how beads were used might be taken to not have mattered so much. But beads were very costly to make and in a mobile forager society were costly to bring with. An example of how beads were far too costly for purely symbolic communications is provided by the cost analysis done on beads found in the Sungir Burials of the 29,000-15,000 BP epoch. Randall White estimates that an individual bead took one to two hours of work, and as a result that the grave goods in such a burial represented nearly 10,000 hours of labor. [7]

QR codes are a great way for computers to read a label printed by another computer and affixed to a movable object, but a terrible technique for human-to-human communications, especially if as with shell beads each “pixel” had cost an hour or more of human labor to make.

So while beads could have been and sometimes were used for symbolic purposes, this could not have been their primary evolutionary function – symbolic aspects of their use would have been very secondary. A similar analysis applies to most other kinds of collectibles, such as “ceremonial” blades and points (most commonly axes). Unforgeable costliness – the secure supply curve of these objects relative to the much more common objects in the environment that were not used as collectibles – strongly suggests that these collectibles had some function very important to Darwinian fitness related to wealth. What that function was has been explored in [1] which I hope to elaborate on in future post(s).

Regular pattern of costly beads. Wampum, British Museum. [Source]

In some broad sense of the term any display of wealth is “symbolic”, especially when its design invokes the reputation or authority of prior displays of wealth. Thus the commonality of authority resemblance in the design of paper money, coins, and jewelry, repeated tropes such as gold foil and expensive ultramarine blue pigments in medieval and Renaissance European art, etc. But it is the ability of the medium to serve as a secure store and display of wealth that is doing the heavy lifting here, not its ability to efficiently convey information.

When costliness becomes insecure, and authority resemblance comes to predominate over genuine scarcity, we can get counterfeiting crises that disrupt the culture relying on the old form of collectible. The first craftsmen to pound copper and gold flat and apply it to surfaces could make far more surface look lavish than was possible with solid copper or gold. Such a counterfeiting crisis would have produced a kind of inflation broader than monetary inflation: a change in expectations about wealth securely displayed as well as wealth securely stored in an object. To the extent imitation cowrie shells (see below) could be made out of materials much cheaper than the genuine cowrie (e.g. stone) it could produce such inflation. Trade beads were colonial examples: mass-produced beads that were supernormal models of shell beads shiny from wear, usurping their authority, while being cheaply mass produced, undermining the previously unforgeable costliness of beads.

Attributes of Collectibles

What attributes are we looking for in media of obligation satisfaction, units of account, and in stores and displays of wealth? "Shelling Out: The Origins of Money" argued, and future posts will argue, that

[C]ollectibles provided a fundamental improvement to the workings of reciprocal altruism, allowing humans to cooperate in ways unavailable to other species. For them, reciprocal altruism is severely limited by unreliable memory. Some other species have large brains, build their own homes, or make and use tools. No other species has produced such an improvement to the workings of reciprocal altruism.

[Economist Karl] Menger called this first money an "intermediate commodity" -- what this paper calls collectibles. An artifact useful for other things, such as cutting, could also be used as a collectible. However, once institutions involving wealth transfer became valuable, collectibles would be manufactured just for their collectible properties. What are these properties? For a particular commodity to be chosen as a valuable collectible, it would have had, relative to products less valuable as collectibles, at least the following desirable qualities:

(1) More secure from accidental loss and theft. For most of history this meant it could be carried on the person and easy to hide.

(2) Harder to forge its value. An important subset of these are products that are unforgeably costly, and therefore considered valuable…

(3) This value was more accurately approximated by simple observations or measurements. These observations would have had more reliable integrity yet have been less expensive.

Humans across the world are strongly motivated to collect items that better satisfy these properties. Some of this motivation probably includes genetically evolved instincts. Such objects are collected for the sheer pleasure of collecting them (not for any particularly good explicit and proximate reasons), and such pleasure is nearly universal across human cultures. One of the immediate proximate motivations is decoration. According to Dr. Mary C. Stiner, an archaeologist at the University of Arizona, "Ornamentation is universal among all modern human foragers." [W02] For an evolutionary psychologist, such a behavior that has a good ultimate explanation, in terms of natural selection, but has no proximate rationale other than pleasure, is a prime candidate to be a genetically evolved pleasure that motivates the behavior. Such is, if the reasoning in this essay is correct, the human instinct to collect rare items, art, and especially jewelry.

“Miniature Bi disc”, jade, from the late Neolithic to Bronze Ages, c. 3000-2000 BCE, diameter 1.25" to 2” [Source]

The kind of mobile art made by Paleolithic humans, (small figurines and the like) also matches these characteristics well. Indeed, Paleolithic peoples made very few objects that were not either utilitarian, or shared characteristics (1)-(3). There are many puzzling instances of useless or at least unused flints with homo sapiens…Cunliffe [C94] discusses a European Mesolithic era find of hundreds of flints, carefully crafted, but which micrograph analysis reveals were never used for cutting.

Flints were quite likely the first collectibles, preceding special-purpose collectibles like jewelry. Indeed, the first flint collectibles would have been made for their cutting utility. Their added value as a medium of wealth transfer was a fortuitous side effect that enabled the institutions described in this article to blossom. These institutions, in turn, would have motivated the manufacture of special-purpose collectibles, at first flints that need have no actual use as cutting tools, then the wide variety of other kinds of collectibles that were developed by homo sapiens.

It is no coincidence that the attributes of collectibles are shared with precious metals, coins, and the reserve commodities that have backed most non-fiat currencies. Money proper implemented these properties a purer form than the collectibles used during almost all of human prehistory.

Grave goods from Longshan or Liangzhu cultures (China, 3000 to 2000 BCE) [Source]

Due to endemic violence, high transaction costs, and the extremely low division of labor compared to later economies, there was nothing resembling modern efficient spot markets in Paleolithic or most Neolithic societies. As a result, classical accounts of the origins of money like those of Smith, Menger, et. al. cannot be used as a theory or guide to the actual historical origins of money without extremely heavy modification.

Rare and lovingly worked shell collectibles being displayed for transfer at a bride price ceremony in Papua New Guinea (20^th century) [Source]

The Snail Standard

Collectibles, even pure collectibles, have an extremely ancient heritage that must have put them under prolonged evolutionary selection: cultural (memetic[2]) selection most obviously, but as we shall see, possibly also genetic selection for a hankering to collect certain kinds of objects for display and accumulation, not just for food. An evolutionarily gratuitous practice of such substantial cost would have soon died out, but collectibles with the traits listed above have been a nearly ubiquitous and important part of human cultures for many tens of millennia and in all parts of the planet to which humans have spread.

The Upper Paleolithic period, as the tail end of the most recent Ice Age, featured climates mostly cooler than today and sea levels that were many tens of meters lower than they are today. The vast majority of seaside communities of that epoch now lie submerged under fathoms of ocean and are usually prohibitively costly for archaeologists to try to find.

Consistent form: Nassarius gibbosulus shells beads in varied stages of use-wear, from Üçağızli Cave I in Turkey. Shell beads generally get shinier with wear. [6]

One exception to this submersion is the set of Üçağızli caves along the thin stretch of Turkish coast that sits in front of Syria. The approach to the coast there is quite steep. As a result, even though the caves are still above sea level today, and were thus 60-80 meters above sea level in the Upper Paleolithic, they lie a short (but steep) walk of probably around 1 kilometer from that era’s shoreline.

The inhabitants of these caves lived in a climate that was more like that of today’s Baltic Sea region than of today’s Mediterranean. They feasted both on land animals such as deer and on marine resources, a mix that trended from land resources to a mix of land and marine resources over the period recorded in the archaeological layers. These people walked the shore not just in search of food, but also in search of a very specific set of uncommon yet authoritative objects – shells of the sea snail Nassarius gibbosulus. Once collected they were selected for size and intactness, and laboriously perforated. They were then strung onto cords, presumably as necklaces, bracelets, or belts, or sewn onto clothes, as beads would appear in later Paleolithic burials. Extensive cord-wear exists on most of the beads.

Consistent size distributions of Üçağızli Cave I beads by culture period from 41,000 BP (start of Initial Upper Paleolithic) to 29,000 BP (end of Epipaleolithic) [6]

Upper Paleolithic shell bead manufacturers were very selective of which size and shape of shells they chose to turn into beads: the resulting beads had “great consistency…of size and shape” compared to the natural biotic distribution of the shells. Most variation in shell species, shape, and size was eliminated during manufacture. They were as similar in size, shape, and weight as it was possible for a collectable set of natural objects in that environment to be. According to Stiner et. al.:

Something about the basket-shaped forms in particular – their resemblance to something else or just their geometry – held the interests of people over very long stretches of time. It is difficult to argue that continuity in species and forms across such vast stretches of time and space reflects cultural affinity or continuity, particularly in the case of beautiful natural objects. While preferred shell forms stayed much the same, other aspects of culture varied a great deal.[6]

Severe conservatism of shells selected for use as beads at Üçağızli from c. 41,000 BP (layer I) to 29,000 BP (layer EPI) – time goes from bottom to top. Relative frequencies of Columbella, Nassarius, Dentalium, Gibbula, and other taxa used as shell beads. There was during this long period a very strong preference for the “basket-shaped” shells of the most typical size of Columbella and Nassarius over the many other and more common shapes and sizes of shells across the Mediterranean. [6]

Besides a consistent form, the beads were also manufactured in a supply that was very stable across the more than ten millennia recorded in the Üçağızli caves. The diet changed – at the beginning of this timespan consisting almost entirely of land resources, at the end in a mix of land and marine resources -- but the shell bead supply remained remarkably steady.

Consider that objects constituting an efficient medium for the satisfaction of obligations among forager peoples would satisfy two main criteria:

1. They must be common and consistent enough to find or make a sufficient number of fungible instances to allow divisibility, and

2. They must be rare enough or costly enough to make to constitute substantial wealth with low bulk and weight, and must fit snugly enough together when strung and worn, that they do not overburden the mobile forgers who carry them around when changing campsites (as they often did).

These hard-to-find shells of Nassarius and Columbella were the objects in the Mediterranean forager environments that best satisfied these criteria. Incorporating as they did unforgeable costliness, they would have also made splendid stores and displays of wealth. In any of these roles, they were a pure collectible. The snail shell standard was far from arbitrary.

Consistent supply: abundance of beads (“ornaments”) vs. vertebrates (typically edible land animals) and edible shellfish (“shellfish”) found in the successive Üçağızli layers 41,000-29,000 BP.[6]

The use of N. gibbosulus shells as beads goes back much further in time than the 41,000 BP starting point of this study of Üçağızli. The earliest evidence of this shell standard is dated from between 100,000 and 135,000 BP at Skuhl in Israel, and similarly old beads were found in Algeria. The institution prevailed for many tens of thousands of years across most of the length of the Mediterranean[11]. It was not until the Epipaleolithic that there was even the slightest trace of Schumpeterian “creative destruction” in this institution.

“Money Cowry; Length 2.6 cm; Palou Tello, Batu Islands, Indonesia.” [Source]

Cowries

Cowry shells are among the most widely distributed objects found in Eurasian Neolithic archaeology[8]. Peng and Zhu [2] use the archaeological record to trace an early Bronze Age “Cowrie Road” roughly following the arc of the later Silk Road across the mid-Eurasian steppes from the Red Sea (where the species used probably lived) to what is now modern China. The lack of thick forests or fixed agriculture made the region relatively easy for merchants and other travellers to traverse.

Finds of cowries originating from the Red Sea (off the map to the left), during the middle and late Shang Dynasty, c. 1400-1040 BC. This general West-to-East movement would be repeated in much later times by a largely ship-borne movement of silver. [2]

These cowries have also been found in many Neolithic excavations within a few hundred kilometers of the Red Sea, including pre-dynastic Egypt and Jericho as far back as the second Neolithic stage (7000-6000BC). Cowries are also found in the steppe Djeitun culture (7000-6000 BC). Cowrie shells did not however reach everywhere, and were far from the only shells used in the Eurasian Neolithic. In southeastern China during the late Neolithic and early Bronze Age, cowries were not used, but instead four species of mollusk from China’s own coast[2]. In the Mediterranean Neolithic Spondylus shells were often used [3], but there was also a significant presence of cowrie in Mesopotamia and the eastern Mediterranean.

Authority resemblance: bronze cowries (Shang dynasty (商代) 1600-1046 BC) [Source]

"Ant-nose” coins (Eastern Zhou 770 to 221 BC) [Source]

Cowries are also recorded in historical times as being used as money, for example in parts of China. The cowrie shell symbol 貝 is used as a component to write several Chinese words [5] associated with the transfer of value, including

則 (rule, law, regulation) – a cowrie and a knife – possibly referring to the two main kinds of legal remedies (money and punishment), which I hope to explore in depth in future posts

買 (buy, purchase) – a net over a cowrie (cowrie in a pouch?)

Exchange rates between cowries and coins existed in at least India, Bengal, and Siam.

Obverse and reverse of a Ban Liang coin from the Western Han Dynasty (206 BC – 204 AD). Like beads, they were strung on strings. These “strings of cash” were the most common form of payment in China until colonial times. [Source]

Authority resemblance, the mimicry of pre-existing authoritative forms in a new medium, is as described above a very common feature of innovation. The earliest electrum coins invented near the Turkish coast appear, like the Chinese bronze cowries and “ ant-nose” coins (so named by a much later numismatist), to purposefully resemble pre-existing shell collectibles[13]. This suggests that the earliest coins were intended to be authoritative for uses similar to what cowries in China and electrum beads in Anatolia, respectively, were already being used for.

Electrum beads in the form of cowrie shells, from a burial in Middle Kingdom Egypt. Yet another likely case of authority resemblance. [Source]

Shininess and other aesthetically desired characteristics could have served as proxy measures of scarcity during the long periods of the shell standards in the Upper Paleolithic, and these continue to be attractive attributes of jewelry to this day.

Electrum and gold beads, Nubia, c. 1700-1550 BC

Conclusion

It was once argued that the eye could not have evolved, for what use is half an eye, much less a quarter of an eye and so forth? Richard Dawkins called this “argument from lack of imagination.” It is hard to imagine objects much less functional than those we are familiar with as being useful at all. But even one light-sensing cell can be useful in telling the difference between night and day, which in some environments can be strongly correlated with the availability of food or protection from predators. Starting from that most rudimentary (yet useful in itself) of functions, there are a wide variety of useful steps to the sophisticated eyes of animals today. [4] Similarly with the artifacts of archaeology, sometimes objects far less functional than the ones we take for granted could have been evolutionarily crucial to humans dating back at least to the Middle Paleolithic.

Electrum bead, Mesopotamia c. 1000 BC. [Source]

A wide variety of artifacts have served to store, display, and transfer wealth in a wide variety of ways, ranging from unique artworks and heirlooms as we now understand them, to money as we now understand it (typically official government currencies, the modern legal definition of money), to a wide variety of forms and uses in between, most of which we no longer know about or have a difficult time understanding. Where artifacts are present in burials, they are most commonly these artifacts of wealth – these collectibles -- rather than concretely useful tools. They are also common in the remainder of the archaeological record dating back many tens of millennia, strongly suggesting an important evolutionary function. During Upper Paleolithic times shell beads were manufactured in standard forms with a tradition so rigid that these forms existed largely unchanged for many thousands of years.

Electrum bead necklace, Lydia (in what is now Turkey), c. 550-450 BC

Stocks and bonds, futures and derivatives, the kind of money we are familiar with (coins, paper money, digital money, etc.), high art, and most other artifacts of wealth as we understand them did not exist in Paleolithic times, and even in Neolithic times, when some artifacts more closely approached these ideals, they were still far less developed and specialized than today. We are not talking about the highly evolved forms of collectibles, quite the opposite – we are talking about the most rudimentary of function, which nevertheless is quite a bit better than nothing (which is what other animals have when it comes to collectibles). I described what such function is here and will be elaborating these theories and demonstrating them further in future publications.

Early electrum coins of the “Ionian-A” or Ephesian type, in what is now Turkey, c. 625-575 BC. [Source]

Of the wide variety of artifacts that had no concrete use, but which archaeologists tend to dub “ornamental” or “ceremonial”, most types were idiosyncratic to particular cultures. But two types were widely spread in time and space: beads of shell or bone were ubiquitous in Paleolithic and Neolithic cultures, while “ornamental” blades and points were widely popular in the Neolithic and possibly much further back in time.

In both cases where coins were invented – along the coast of Turkey and in parts of China – many early coins resembled shell beads in probable cases of authority resemblance. Prior to the invention of coinage many metal beads had also been shaped in forms resembling shell beads. Before the widespread use of coinage, the artifacts we now see as jewelry likely also often condensed a function similar to early coinage.

Early electrum coins of the “Ionian-B” or Milesian type. in what is now Turkey, c. 625-575 BC [Source]

Beads of shell and bone dominate the artifacts that look to us like ornaments in the archaeological record from its invention in the early years of homo sapiens to late Neolithic times, and were still very influential when coins were invented. Contrary to a currently popular archaeological theory, the main use of these shell beads was not as “information technology” or the visual convenience of symbolic information via different combinations of shell beads. Other materials available in forager environments and other techniques foragers could use were much better suited to cost-efficient symbolic communications. Instead what coins and jewelry, at least as far back as the very conservative shell bead traditions of the Upper Paleolithic, have in common, in sharp contrast to cost-efficient symbolic systems, is unforgeable costliness, which securely constrained the supply curve of these goods. This economic security feature strongly suggests functions related to wealth and the fitness benefits of wealth. What these functions more specifically were, in terms of genetic evolution and certain models from economics applied to that evolutionary framework, will be the subject of subsequent post(s) in this series.

Acknowledgements

My thanks to Colin Hardwick and Elaine Ou, among others, for their help with research and/or editing.

References

[1] Szabo, Nick (2002) “Shelling Out: The Origins of Money”, https://szabo.best.vwh.net/shell.html

[2] Ke Peng and Yanshi Zhu, “New Research on the Origin of Cowries in Ancient China”, in Sino-Platonic Papers #68 (May 1995) – on the “Cowrie Road” from the Red Sea across the Eurasian Steppes.

[3] Barry Cunliffe, The Oxford Illustrated History of Prehistoric Europe, p144

[4] Richard Dawkins, The Blind Watchmaker

[5] Elaine Ou, “China and 錢“, http://elaineou.com/2016/06/28/china-and-%E9%8C%A2/

[6] Mary C. Stiner, Steven L. Kuhn, Erksin Gülec, “Early Upper Paleolithic shell beads at Üçağızli Cave I (Turkey): Technology and the socioeconomic context of ornament life-histories,” Journal of Human Evolution 64 (2013) 380-398

[7] Randall White, “Technological and social dimensions of “Aurignacian age” body ornaments across Europe.” In Before Lascaux: The Complex Record of the Early Upper Paleolithic, H. Knecht, A. Pike-Tay, and R. White (eds.) pp. 277–299. Boca Raton: CRC Press (1993)

[8] http://www.tibetarchaeology.com/may-2014/

[9] Randall White, "From Materials To Meaning", Institute For Ice Age Studies

[10] John Wilford, "Debate is Fueled on When Humans Became Human", New York Times, February 26th, 2002 ↩

[11] Vanhaereny, M.; d'Errico, F.; Stringer, C.; James, S. L.; Todd, J. A.; Mienis, H. K. (2006). "Middle Paleolithic Shell Beads in Israel and Algeria". Science 312 (5781): 1785–1788.

[12] Richard Dawkins, The Selfish Gene

[13] Peng Xinwei, A Monetary History of China (Edward H. Kaplan, tr.) Edition 1.0 (1994)

[14] Thomas C. Scott-Phillips, Thomas E. Dickins, and Stuart A. West, “Evolutionary Theory and the Ultimate–Proximate Distinction in the Human Behavioral Sciences” [Online]

The trouble with books

2016-03-07T22:56:00.002-08:00

The Chinese invented printing, but their writing system required a large number of typefaces, which made for very high up-front capital costs to print even a single short book. Centuries after the slow dawn of Chinese printing Gutenberg in Germany, taking advantage of a concise phonetic alphabet, requiring only a small number of typefaces, invented a printing method that required much less up-front capital than Chinese printers. The Internet has even more radically lowered up-front capital costs to publish than did the Gutenberg revolution.

Chinese printed works were vast but rare. European books were smaller but still too long. Internet works are the actual length a reader needs, they are (or soon will be) available practically everywhere, and often readers can interact frequently with the author.

Most readers don't want to spend most of their time reading verbose works by single author, when a greater variety of more relevant and thoughtfully concise works are available from a much larger pool of thinkers. Prior to the Internet they had much less choice: books were just the way educated people learned and taught. (And many people still believe that reading and writing books is the sine quo non of being educated, just as many Europeans in 1500 still lauded the superiority of scribal methods and scholastic thought).

Magazines and newspapers involve smaller form factors, but they still draw from a very small pool of authors. These authors can only write in detail about a wider variety of subjects by pretending to know things that they don't: they take human institutions far more complicated than a single human can possibly comprehend and boil them down to a series of hypersimplified theories, what in less authoritative contexts we'd call ideologies or conspiracy theories.

Instead of being forced to read a vast number of words each from a small number and variety of authors, already widely read by many other people (making your reading of them often quite intellectually redundant), on the Internet you can read much less per-author text (and thus, potentially at least, far more thought out per word) from a much greater number and variety of authors.

The Internet also can be more interactive with more select groups than the old face-to-face + snail-mail + books regime— providing much more opportunity for Socratic dialog, glossing, and other intellectual processes that were too often neglected after Gutenberg. And while the Internet can produce far higher amounts of garbage, mixing up thoughtlessly popular haystacks with thoughtfully rare needles, search engines and links often make wading through these vasty spaces much easier. The Internet allows you to meet people who share your specialized interests and dialog with them, making possible specific interactions that rarely happened in the old regime. However, without actually reading the content, i.e. while initially searching for it, it is hard to distinguish thoughtless (even though textual) content from the thoughtful content -- a big reason why at least for the moment book-literacy retains its aura of intellectual superiority over Internet literacy: scholarly publishers with their monetary incentives often take the time to select the most thoughtful works for our consideration. Nevertheless, they lack the knowledge needed to select the most relevant works to match the wide variety of interests and knowledge of their readers, or to judge well among works outside their specialties.

Much as more efficient and speedier transportation networks enabled labor and natural resources to be brought together in a much greater variety of ways, so does the Internet by providing more direct and speedy connections between minds enable a far greater division of knowledge than was possible with in the face-to-face+snail-mail+books regime. However, in contrast to the economy of things, that division of knowledge is largely (so far, at least, and still mostly for the foreseeable future) unmonetized: the information economy is a vastly different beast than the economy of things.

That said, there is a good book(!) that covers much of this (along with of course a bunch of introductory material redundant for most readers, as well as the typical trivial or thoughtless text added to pad it out to books size): Smarter Than You Think by Clive Thompson.

tl;dr if you thought this blog post was too long, why would you ever pick up a book?

Two Malthusian scares

2016-02-16T01:16:00.000-08:00

Carter lectures the U.S.
on energy, 1978

In 1798. the Reverend Thomas Malthus wrote his influential essay on population, arguing that population grows exponentially while the supply of food, energy, and other commodities only grows linearly. As a result, the vast majority of humankind is doomed to be mired in poverty unless some even grimmer reapers than starvation (war, disease, etc.) are brought to bear, or births are moderated. In 1978 U.S. president Jimmy Carter, reflecting a popular intellectual Malthusian sentiment of the time, sat by his fireplace in a comfy sweater and instructed Americans to turn down the thermostat lest we run out of oil. (Here's a similar speech he gave a year earlier).

Malthus' description of a general pattern of human history (and indeed of the history of all living things, an observation that inspired Charles Darwin) was by and large accurate. But since the time of Malthus, writing during the early industrial revolution, developed and even most developing economies have managed to trot or even race ahead of Malthus: per capita income has increased tremendously far beyond the near-starvation limits set by Malthusian theory. Industrial productivity has pulled vastly increased amounts of commodities from the earth, using them to produce an unprecedented abundance of goods. Meanwhile population growth has radically declined until today many developing economies have below-replacement birthrates. Nevertheless, Malthus' observations and reasoning periodically stage an intellectual and popular comeback: industrial civilization can only cheat Malthus so long, thought leaders warn us; if we do not mend our unsustainable ways, and convert from gluttony to stringent conservation, Malthus' grim formula will soon return to wreak an awful revenge.

What chemical inputs does life depend on most? Hydrogen and oxygen from water is plentiful. Plants obtain copious carbon by breathing in carbon dioxide (and animals from eating the carbohydrates, fats, and proteins in the plants or other animals). Nitrogen-fixing bacteria (and legume plants that are symbiotic with them) obtain plenty of single-N nitrogen by splitting the plentiful but strongly bonded N2 in our atmosphere. Artificial means of nitrogen fixing depend primarily on natural gas or oil prices. Metals are plentiful in soil. The only significant remaining scarce ingredients for crops are potassium (K) and phosphorous (P) -- and of these on land phosphorous, which must be available in the form of phosphate, is the most needed and most lacking of all. No technology can substitute anything else for phosphate: it has to be phosphate in order to form DNA, the essential cell energy molecule ATP, and crucial parts of our bones and teeth. Phosphate is thus the most geopolitically important agricultural input and exhibit A in Malthusian warnings about limited resources and unsustainable practices. This also makes phosphorous a favorite target of stockpilers and speculators during a Malthusian scare.

The most important commodity for mining, manufacturing, and especially transportation, for almost all the 20th century and through the present time, is petroleum oil. Internal combustion and other engines powered by fuels refined from petroleum have since the early decades of the 20th century increasingly dominated he transport of goods and people on air, sea, and land. For much of the late 19th and 20th centuries heating was a major use of oil; in that use it is being eclipsed by its cousin carbon fuel, natural gas. Oil is also the world's most important feedstock for the production of plastics, synthetic fibers, and a wide variety of other chemicals. While oil makes up a much larger price value of trade than phosphates, oil in the long run is potentially far more vulnerable to substitution innovation. And as we shall see, it also has been at least somewhat more amenable to technological improvements in supply.

Between the mid-1800s, by which time the industrial revolution had transformed much of Europe, and the end of the Bretton Woods era, sentiments about the unsustainability of industrial civilization were usually on the intellectual fringe. But since the late 1960s, cries of doom and sophisticated warnings that we must redesign our economy, our technology, and civilization itself to "sustainable" lifestyles have become mainstream. Malthusian allegations that we face diminishing, or soon-to-be diminishing, supplies of raw materials such as oil, natural gas, metal ores and fertilizers, have become "common knowledge."

This component of green ideology has been fueled by two Malthusian scares: two substantial periods, the first between about 1968-1980, the second c. 2004-14, during which nominal commodity prices (i.e. the prices you see posted) increased dramatically, and "real" (adjusted for some measure of inflation, such as the consumer price index) commodity prices increased substantially. These price rises led to prophecies of a coming great diminution in our abilities to feed, cloth, and transport ourselves, much less to enjoy all the other abundant goods we have become accustomed to in the developed world as a result of the industrial revolutions that have occurred during and since the time of Malthus. We faced a miserable future unless we changed our ways. Unless we stopped having babies and stringently conserved and recycle our resources (the general green movement), or invest in solar power and electric cars (the Silicon Valley green movement), our future was deemed to be doom. This remains a predominant ideology in Western culture today.

A big part of those scares and of the green movement has been environmental limits -- that we are damaging our environments, our planet, the one and only planet we can ever hope to naturally inhabit in the foreseeable future, far too much -- adding too much sulfur dioxide, ozone, or carbon dioxide to the atmosphere, too many fertilizers to our waterways, etc. This essay does not address those concerns, which provide a far stronger argument for the sustainability movement than the topic of this essay -- the supply of commodities, especially of raw minerals from the earth such as oil, metal ores, and fertilizers, and the theories that have become popular since the late 1960s that historical rates of industrial growth cannot be sustained in the face of expected future diminution of those supplies. Indeed, if you are already scared by our ability to pollute our planet, after you finish reading this essay you should be even more scared. Our planet places no material limits on our ability to consume and pollute it. If we are to have such limits we must put them in place, politically, ourselves. (As for me, I'm scared both by the prospects for greater pollution and by the fact that political solutions and hoped-for advances in technology, not natural limits, will be the only ways to address the threats of pollution. The greatest source of domestic disputes is fighting over the thermostat; I expect this trend will carry over to international climate disputes of the future...)

For many of us in the developed world, a future of higher prices for energy and other commodities does not seem like such big a deal as it once did: we already have more physical goods than we know what to do with, and cutting back to achieve more peace of mind now seems to take and be worth more effort than accumulation. While the better-off fractions of the developed world have by and large reached a level of satisfaction in their consumption of the abundance of goods made possible by the industrial revolutions, the poorer fractions and the developing world have not.

Nevertheless, during the Malthusian scares commodities did seem to grow much more expensive and scarcer -- and not just a few commodities but commodities in general. Indeed, the prices of a broad range of industrial commodities went substantially higher, often much faster than the general inflation rate -- a sure sign, according to traditional industrial economics, that industrial supply was being outstripped by consumer demand -- that we were getting approaching, often rapidly, Malthusian limits rather than moving further away from them as has been the general trend since Malthus. During most of the years of the first and second scares raw material and food prices skyrocketed, practically across the board. Why was this happening, if not the predictions of Malthusians starting to come true? Let's take a look at the scares, and the economic histories surrounding them, to find out.

Prelude to the First Malthusian Scare

From ancient civilization to the late 1960s, civilization's money was generally defined by, and either consisted of or was convertible to, standard weights of precious metals. Even thousands of years before the invention of coinage, most fines in the earliest recorded code of laws were defined and paid in weights of silver. While the role of precious metals in monetary affairs declined throughout the 20th century, with many episodes of fiat currencies untied to precious metals inflating and hyperinflating, under the post-World War II Bretton Woods system United States and its allies up to 1968 had a gold window whereby authorized high rollers (among them most other governments) could still cash in their dollars for gold at a promised official rate. Under Bretton Woods most other free world currencies were pegged to the dollar. So you could cash in your local currency for dollars, and (if you were an authorized high roller) your dollars for gold, all at committed official prices.

But Bretton Woods, depending on a single country to ultimately back the entire free world's money, was not financially sustainable. It established the U.S. dollar as the free-world standard after World War II, when the the U.S. made half the world's industrial goods and held over half of its financial reserves. But the economies damaged by World War II quickly recovered, and agricultural and industrial revolutions spread to the developing world where economic growth greatly quickened. While the U.S. economy in its own terms was thriving, the relative U.S. role in the world economy declined as those of the rest of the world quickly rose from the ashes. By the mid-1960s the U.S. held only 16% of the world's financial reserves, and even less than that of its gold reserves. Even though it promised to exchange dollars for gold on demand, the U.S. Federal Reserve issued more notes, and its banks more broadly issued more dollar credit, than could possibly be securely backed by its diminishing gold reserves.

Meanwhile, most academic and government economists scoffed at the gold standard as a "barbarous relic" and held that world monetary conditions would be improved if the U.S. stopped pretending that the dollar was pegged to gold. By 1968 the U.S. was no longer willing to honor its commitment to deliver an ounce of gold for $35. The U.S., which since the time of Franklin Roosevelt had banned the domestic private gold trade, now tried with futility to halt overseas private trade by refusing to deal in gold with governments that allowed private gold trade. (In reality, this was less a serious attempt to stifle overseas private gold trade than an attempt to close down the gold window in a face-saving way). The U.S. government forced the London Gold Pool, the gold window mechanism operating between the major free world central banks, to declare a "bank holiday", i.e. shut down its operations. But of course this didn't stop non-Americans from trading in gold; quite the opposite: it signaled that the U.S. dollar, and all the currencies pegged to the U.S. dollar, had radically changed in form, and might no longer be as reliable as a store of value. The free-market price of gold soon rose well above $35 official rate. The U.S. was by 1971 forced to officially float the dollar (it had already been floating de facto for up to three years), officially making the U.S. dollar a purely fiat currency. The pegged currencies followed suit, and Bretton Woods was dead.

All this monetary obscurity matters for our Malthusian scares not just because all the aforesaid commodity prices from then until now are quoted in major fiat currencies, most usually in dollars, and these signals prices send about industrial supply and demand can only be as reliable as the currencies those prices are denominated in. Such a consideration could, with good statistics based on good records, be reasonably dealt with by computing the "real", inflation-adjusted prices of commodities. But commodity prices proceeded to skyrocket even in general-inflation-adjusted terms The dawn of the pure fiat, floating currency regime caused far deeper forces to come into play.

For in reality, post-gold-standard prices for industrial commodities are not driven purely, or often even mostly, by industrial demand being met by appropriate changes in material supply. Instead, both supply and demand curves have been warped by a new role for the major industrial commodities -- they are no longer purely commodities; the are in part also money. In particular, they have since the late 1960s been increasingly used as a liquid store of value, easily tradeable for media of exchange (e.g. dollars), as an alternative to and hedge for the new regime of floating rate currencies.

Noise in the signal: radical increase in volatility of two of the most
important geopolitical minerals, crude oil and phosphate, between the
Bretton Woods (1947-70) and floating rate (1970-present) eras.

What does it mean to say a commodity is part money? For this we need to turn to economist Carl Menger's theory of the origins of money. Menger's theory is less an accurate account of how money did historically originate among humans (which happened long before the dawn of the efficient commodity markets postulated by Menger), as a good theory and reasonably accurate set of predictions about how a free barter market economy does behave whenever it does arise. According to Menger, in a world of market-based barter, a very high cost (which economists would now call a transaction cost) comes from having to keep track of on the order of N^2 prices for the N goods, and the lack of coincidence of mutual wants between the holders of any two particular such commodities.

For this reason market participants start spontaneously treating some goods as intermediate commodities. Intermediate commodities are held, not to consume them, but to store value until the next opportunity for exchange comes along. The intermediate commodity's price increases substantially from what it was when it was just demanded for its consumption: it obtains a price premium for its use as a store of value immune from the changing values of currency or currency-denominated assets the holder of the intermediate commodity would have otherwise held. This price premium waxes and wanes with the weighted changes in inflation expectations of the world's main traded currencies.

Many commodities might be used this way: and every commodity that is used in this way becomes, in part, money. It is no longer just an good whose supply is driven by purely by the costs of production (since producers may choose to withhold production rather than sell for a currency whose inflation expectations have just increased, or may choose to increase production beyond the needs of immediate demand when inflation expectations have decreased), or whose demand is driven purely by desires or needs for its consumption (since some of the demand -- the vast majority of the demand in the case of gold and silver -- is now for its use as a store of value). It is an intermediate commodity, partial money.

When the primary use of the commodity money is as a medium of exchange, for example the cigarettes used as money in some wartime prisons, strong network effects usually exist to cause the market to converge on one or a few standards -- historically, usually gold and silver. These undergo a "bubble that does not pop". But the other intermediate commodities, the commodities don't make it all the way to being dominant and nearly pure money, are bubbles that can and do pop.

When the primary use of commodity money is, however, a store of value, a store of value that can be readily exchanged when needed for the actual medium of exchange, there is almost no network effect. Any commodity that can be stored and so traded can be used as store of value that will render the owner immune from the perceived or actual risks of holding a floating currency. This storage could occur in the form of a paper or digital future, or as the actual commodity in the warehouse, or even as a readily extractable mineral such as oil still in the ground.

Since the end of Bretton Woods, the major industrial commodities, and especially the major geopolitical commodities such as oil and phosphates, have become Mengerian. They are no longer purely industrial commodities. They are also stores of value, places to put wealth in between obtaining money and spending it, that provide an alternative for those who wish to diversify away from, for various reasons, holding currency or assets such as bonds and derivatives that are defined by or correlated to the health of currencies. In the face of increasing inflation expectations, stockpiling of commodities also decreases the risk that further economic growth that nations may be expecting or planning for in their economies could only come at the costs of even purchasing the needed inputs at even higher prices in the future (e.g. China in the 2000s). Stockpiling of commodities is also a general strategy whenever international trust erode and leaders start thinking of potential risks that trade will be slowed or embargoed.

There are other securities that can store and even grow value -- stocks, bonds, real estate. In many ways all these are better stores of value than commodities. However for a major financial and political power, they have drawbacks. First, they are trust-based -- you are trusting somebody (often a foreigner) to pay the coupons or dividends. In the case of real estate, it depends on the vagaries of local economic activity and politics. Commodities, especially commodities a government can physically control, are far more trust-minimized. The U.S. can sanction Russia by freezing the assets of its national held in paper or digital form in the U.S., but it cannot take the oil from Russia's wells or stop it from drilling, pumping, and selling it to e.g. Europe. Finally, commodities in most of their forms, especially as futures, are readily exchanged for pure money such as dollars. Since the theme of this paper is Malthusian resources, we shall focus on the waxing and waning of the intermediateness of commodities, and in particular the geolitical commodities oil and phosphate rock.

Thus industrial commodities, and especially minerals important to geopolitics like crude oil and phosphate, serve at least three major purposes in the post Bretton Woods world beyond just industrial or agricultural consumption:

(a) a hedge against increases in expected inflation in floating rate currencies, or greater uncertainties about same,

(b) for governments, protection against coercive economic sanctions by foreign governments, and

(c) for militarily strong countries, a form of wealth relatively immune from foreign attack in time of war

We will see all these factors at play during the first and second Malthusian scares.

The First Malthusian Scare

Oil "chasing the tail of gold"
during the 1970s. (Source)

As described above, the Bretton Woods era ended between 1968 and 1971, leading to the purely floating rate regime that has prevailed from 1971 to today. Free trade in gold, which had been banned under Franklin Roosevelt, was returned to the U.S.

Shortly thereafter, in 1973-4, an event that many economists have deemed an "exogenous shock", and even a main cause of the dramatic oil price rises of the 1970s, occurred on the world stage: the Arab oil embargo of Britain and the U.S. in response to their intervention on behalf of Israel in the 1973 Yom Kippur War. Around the same time OPEC more than doubled the dollar prices it charged for its oil. It is common but highly inaccurate to call OPEC a "monopoly cartel" at that time -- it accounted for only about 3% of U.S. oil consumption in 1967 and still only 6.7% at the end of 1973. It had increased its pricing power from negligible to slight; it could hardly have more than doubled the price of oil on its own had not other oil-producing companies and countries been of similar mind.

One dog didn't bark: oil prices around the times of the
Suez crisis (1956-7), in which Europe lost control of over
half its oil supply, and the Arab Crisis (73-74), involving a
temporary embargo that was easy to get around
by trading through cutout countries.

By sharp contrast, the Suez Crisis of 1956-7, which produced a much more dramatic and longer-lasting impact on the world's oil supply chains -- Europe suddenly lost military control over more than half of the oil it consumed to a recently independent and hostile Egypt, never to gain it back -- was followed by a far smaller and more ephemeral percentage increase in oil prices.

Due to the increased inflation expectations, oil producers conserved on pumping, despite rising prices and oil consumers stockpiled despite the rising prices of funding those purchases. The reverse would happen throughout the decreases in inflation expectations and resulting long decline in commodity prices during most of the 1980s and 1990s. Oil producers kept pumping beyond the needs of the industrial market to hasten the drawdown of their depreciating reservoirs.

What the voter saw: U.S. consumer
price index 1973-81.

But during the first Malthusian scare, U.S. and European entities began stockpiling oil and other strategic commodities. For example U.S. oil imports from the Middle East, which had been only about 3% of consumption in 1967 when relations were friendly, had increased to 6.7% by 1973 even though relations had become hostile. and nominal prices of that oil had risen. Meanwhile U.S. oil producers were pumping less oil, choosing to keep relatively more of it in the ground rather than sell it for cheapening dollars.

The Second Malthusian Scare

As in the 1970s, the commodity rise during the second Malthusian scare of roughly 2004-14 was often sharp and concurrently effected the vast majority of commodities. After substantial advances in both real estate and commodity prices the previous several years, during 2007 central banks cut rates and raise money supplies to fight collapsing real estate prices. These efforts fueled sharp increases in inflation expectations. Nominal and CPI-adjusted prices of fossil fuels, precious metals, industrial metals, lumber, fibers, fertilizers, grains, oilseeds, dairy, and livestock all skyrocketed during 2007, hitting record highs in nominal prices. The market’s endless search for stores of value independent of the vagaries of fiat currencies had switched from real estate on which easy loans were defaulting to commodities that could be held more securely. This time the most (in)famous stockpiler was China, planning for the rapid economic growth it expected in the decades ahead.

Also as in the 1970s, the individual components of this broad-range trend were attributed to a stupendous variety of idiosyncratic causes -- the co-occurrence of which all driving prices in the same direction at the same time was astronomically improbable. The only reasonable attribution would be to related common causes – which, given that there had been no sudden worldwide industrial boom, had to have been monetary causes.

Warnings about peak oil, peak phosphorous, etc. issued from all the major media outlets and science journals. In Silicon Valley, a boom in "green technology" startups and investments ensued -- resulting later in mostly bankrupt companies.

As I wrote at the time:

It is a gross violation of Occam's Razor to attribute the recent very broad-based run-up in dollar commodity prices primarily to the plethora of disparate causes to which they have been attributed: "peak oil", the war in Iraq, ethanol subsidies displacing food, and so on. Rises in industrial demand, increases in the costs of transporting commodities due to high oil prices, and so on explain only a small fraction of the rise in other commodity prices, and do not explain at all why precious metal prices have increased alongside those of other commodities. Occam's Razor points us, as it did to wise investors and economists in the 1970s, to the one kind of commodity all these other commodities have in common: the currencies they are priced in...

...demand for the oft-dreaded but ill-understood "hoarding" and "speculation", that is storing extra commodities (often off-the-books, or at least not in the officially measured warehouses) and the purchase of extra commodity futures and other commodity derivatives to hedge transactions based on government currencies, will remain strong as long as the Federal Reserve continues to inflate the dollar supply, and as long as many developing countries continue to link their currencies to this dollar. Commodity prices in dollars will level off, and then move back down close to historical trends based largely on just industrial consumption, if or when the Fed stops increasing the supply of dollars faster than the demand for dollars.

As it transpired, neither the Malthusian worries nor, as of this writing, the inflation expectations proved justified. The run-up in oil helped fund the fracking revolution, a technology which defied peak oil theory:

Theory: peak oil diagram after Hubbert. Alleged to
apply at all scales not just to individual wells.

Reality: not as simple as theory

Oil thus demonstrated itself as a poorer monetary substitute than gold: being a much more novel commodity than gold, its production is subject to substantially more likelihood of technological invention and geological discovery.

Fracking in one diagram

This possibility, which had not been sufficiently priced into oil before fracking, makes oil supply less reliably scarce than that of gold, rendering it less useful as a store of value, reducing the monetary premium of the oil price over oil as it would be priced if it were just an industrial commodity. Secondly, of course, is the direct effect of fracking on the supply curve in lowering oil prices. The effects of the fracking revolution are amplified because more than just the Econ-101 supply curve shift is reducing oil prices due to fracking: oil's monetary premium is being eroded at the same time. Oil had been a monetary bubble which is now bursting.

If you are Saudi Arabia or Iraq sitting on large reservoirs of easily extracted oi, your alternative to treating oil as a store of value, if you still don't trust the Western powers, is to pump even more and trade the proceeds for gold (and also pay off some foolishly acquired debts) -- which is what we now see happening. Thus, paradoxically (to those who analyze oil as no more than an industrial commodity) oil producing countries pump more oil despite much lower oil prices. They are selling oil from their "oil warehouse" below the sands of the Middle East in exchange for gold, which due to the fracking revolution has reasserted its superiority as a trust-minimized currency over oil. If "money is the bubble that doesn't pop", partial money, i.e. Mengerian intermediate commodities, create bubbles that sometimes do pop, as the desirability of various commodities for their monetary properties, especially their value as a store of value relatively immune from political interdiction, waxes and wanes.

As much good news as bad: the two Malthusian scares
sandwich an era when inflation-commodity prices fell by about the same
amount that they rose during the two scares combined. (And they have
fallen further since 2010). The explanation of "tight money" vs. "easy
money" is pertinent but oversimplified, as one would expect an
attempt to explain a theory in chart labels to be...

Conclusion

During the Bretton Woods era the U.S. dollar, pegged to gold at $35 an ounce, served the entire free world as a common and reliable standard of value. The transition from Bretton Woods to floating rates left the world with no common and reliable standard of value by which to guarantee future real returns on contracts or investments. As a result the most commonly traded commodities, and especially geopolitical commodities such as oil and phosphates, became Mengerian intermediate commodities, with a price premium as a store of value that waxed and waned with the weighted expected inflation among the world's various floating currencies. As a result, the prices of these commodities are much more volatile since 1970 than they were during the Bretton Woods era. Epochs of increasing inflation expectations have led to rapid, broad-based commodity price rises, where the market gives out false signals of scarcity, leading to Malthusian anxieties and panics that we face a future of diminishing natural resources. This in turn has fueled a major and sustainable growth in green ideology since the 1960s.

It's no longer debatable that commodity supplies in general pose few limits to long-term industrial growth, nor, except in the special case of phosphates, any significant limits that cannot eventually be innovated past by substituting newer more abundant materials for scarcer older ones. To obtain all the commodities we have consumed in history has involved barely scratching he surface of one planet. Scratching out somewhat more each upcoming decade and century into the foreseeable future is, in terms of that supply, by and large sustainable. A far more debatable proposition is to how much environmental impacts will or should limit industrial growth -- for example, what is or should be our ability to continue pumping more carbon dioxide into the atmosphere? That is a debate this paper shall leave for another day.

Estimating and minimizing consumer worry

2015-10-08T13:40:00.000-07:00

The process of selling in general, and web commerce in particular, is often described or charted as a funnel. Prospective customers are poured in at one end, and a fewer number of paying customers come out at the other. The other prospects spill out through other holes or over the side of the funnel and don't bring you any revenue. The fraction of customers left, converted from prospects to customers, is called the conversion rate. As prospects proceed from initial interest to final sale, from initial entry page to clicking the final "I Agree" button, more and more of them become discouraged by various worries which beset the consumer. They drop out. The remaining prospects, those who have not dropped off, have been converted into customers or into an audience for your advertisers.

There are a variety of factors that cause drop-off, which vary from business to business. A common cause is forms. Simplifying forms often greatly increases conversion rates. For example, in one study cutting the number of lines on a form in half increase conversions by a third. As one web designer put it: "[i]s every field you're asking the visitor to submit absolutely necessary? Can you trim the fat and make the process simpler?"

Besides the sheer tediousness and time consumed in filling out forms, rational consumers also worry about the potentials for privacy violation and identity theft from the information most e-commerce sites currently require them to divulge: physical and e-mail addresses, phone numbers used for cross-site behavioral tracking, insecure credit card numbers, and more.

The tinfoil-wallet crowd is now mainstream

Instances of regret that one has filled out a form, only to have one's trust violated -- or pride among the sophisticated that they refused to fill out such a form -- are on the rise.

The worst worry culprit is usually the step you most want your customers to complete -- paying you. "[T]he credit card form likely has the highest abandonment rate of any other part of the sign-up process." [Source].

If you don't require payments, you are probably funding your service through advertisements. Those also cause worries. Ads typically distract and delay from the content users are after, provide a low quality of entertainment or information, and are too often offensive. And sophisticated users are worried about the tracking that tends to go with ads. Ad blocking grew nearly tenfold between 2009 and 2014.

Replacing ads and identity-based payments with payments that don't require identity, such as bitcoin, can greatly reduce these worries, lowering the barriers and hesitations that currently prevent consumers from paying for your service.

But there remains a big worry that no payment system can reduce. Consumers worry about whether they are getting their money's worth -- the mental transaction cost problem (see also this paper). If e-commerce were as worry-free as some of it could be, your customers would neither have to fill out forms, nor be bothered by ads, nor have to worry about repeated charges for content or services of variable value. They would be able to just insert a few digital coins into your online vending machine and then not have to worry about losing your service for another year. Eliminate forms and eliminate repeated payments -- both are key to worry-minimized e-commerce.

Many bitcoin startups are making the grave mistake of replacing one set of worries with another. The ability of cryptocurrency systems to facilitate small payments tempts many companies to nickel-and-dime their customers with pay-per-click micropayments and other such excruciating schemes. Don't follow the many lemmings who have already jumped off that cliff. Stick to long-term subscriptions for content (or other services of variable value) and pay-per-unit for fungible units of consistent value (as in phone minutes). That way customers aren't saddled with having to constantly re-evaluate the amount and worthiness of recurring charges. The costs to your customers of having to finance a years' worth of low-cost subscription to a reputable brand is almost always far less than the mental transaction costs of recurring charges for content or services of variable value. The ideal worry-free commerce is to "stick the coin into the machine" once, and then never have to pay again for an entire year. A vending machine for subscriptions. Reduce your customers' worries across the board: eliminate forms and eliminate recurring charges.

Ideal worry-minimization can only be closely approached in some purely online forms of commerce, such as video streaming, remote storage, privacy services, and the like. The more physical and offline contract performances are -- a common example being physical delivery -- the more location, various kinds of identity (legal, social network, etc.) may need to come into play, adding, often greatly and necessarily, to the worry overhead, the mental transaction costs, of your relationship with your consumers.

I have previously called this worry-minimized commerce by a narrower label, "form-minimized commerce." The complexity of the forms you make your users fill is indicative of the worries you are causing them, and thus the barriers you are putting up between your prospects and their decisions to purchase your services.

When you are a consumer, the tediousness of the forms you are filling out is not only a direct cost of your time, and your ability to enjoy that time, it is on top of that a decent proxy measure of the odds of your identity being stolen and of your privacy otherwise being violated. The fewer forms you fill out, the more the tediousness, worries, and risks in your life caused by interacting with the world's institutions will drop in proportion.

While such a proxy measure does not account in particular for the wide variety of information that can be disclosed, nor that some kinds of information (social security numbers) are more risky to divulge than others (throw-away email addresses), nor for the wide variety of risks in identity theft and privacy violation that are consequent, nevertheless consumers necessarily must bring to bear such sweeping rules-of-thumb in order to satisfactorily navigate the bizarre complexities of the digital world. And when your users are using, whether consciously or implicitly, such estimates, you the service provider and the product designer must use them too.

Add to the forms your customers must fill out the repeated charges you make your customers make, and we get a rough proxy measure of the worry that you are causing your consumers:

Index of worry = number of lines of forms + number of repeated charges for content or services of variable value

If you are funded through ads rather than consumer payments, you can substitute for the repeated charges the proportion of screen space covered by your ads, or any other reasonable estimate of the delay and distraction the ads on your pages cause.

The index of worry allows you to estimate and minimize the worries you are causing your users, and as a result to minimize the drop-off in your sales funnel and maximize the number of users coming back for more -- and willing to view your ads or pay for the privilege.

The Greek financial mess; and some ways Bitcoin might help

2015-07-03T19:53:00.001-07:00

Many years of government debt buildup in Greece has ultimately resulted, in the last few days, in a political and financial maelstrom. The political maelstrom includes demonstrations in the run up to a referendum on obscure debt-restructuring provisions to be held this Sunday (July 5th). This article focuses on financial problems and some potential practical steps that can be taken to mitigate them. The imposition of capital controls is a disaster for a modern trade-driven economy, a catastrophe which however digital technology, and in particular the digital currency bitcoin (which given the Greek environment usually must involve direct use of the Bitcoin blockchain), has the potential to mitigate. This article will explore some of the severe practical problems that capital controls are causing Greek individuals and businesses, and suggest some potential bitcoin solutions, many of which could also be applied to other countries with some similar financial problems and controls such as Argentina and Venezuela. These aren't solutions that can be applied in time to help with the current 6 days of capital controls, but could substantially help some Greeks and some aspects of the Greek economy if some version of these controls is continued for months or years.

At root the Greek financial problem is that the Greek government has spent more, compared to the GDP generated by its economy, than the vast majority of other governments. It has borrowed copious sums to do so, falling ever deeper into debt. Here is its payment schedule:

And you thought your student loan debt was bad

The only place the Greek government has left to go for money to fund its ongoing expenditures and pay these debts is Greek banks. Fearing capital controls and "haircuts" (government confiscation of certain fractions of bank deposits), many Greeks in recent months have, quite rationally, started withdrawing money out of their banks and sending it overseas. More trusting Greeks kept their savings in their banks, with the result that, with the imposition of capital controls last Monday, they have been locked out of their savings, and plans for "haircuts" of 30% or more have been reported (If somebody lopped off 30% of your head, you’d have more than a haircut).

When capital controls were first rumored and then announced on Sunday, vast lines formed at ATMs as Greeks rushed to rescue what little of their life savings that they could:

ATM line, Thessaloniki


ATM line, Larissa City

On Tuesday, the Greek government defaulted on its scheduled debt payment to the International Monetary Fund (IMF).

Under capital controls, ATM withdrawals from Greek bank accounts are now limited to 60 euros a day. Debit cards can still be used for payments within the country, but the money simply gets transferred from one frozen bank account to another. As a result many businesses no longer accept debit cards, and many more are demanding a substantial premium price (in at least one business, double) for debit cards (transferred bank balances) versus hard cash. There is a growing shortage of such cash; as a result some stores are paying their suppliers in private "scrip", which can be used by the supplier's workers to purchase goods from the issuing store. (more on this below).

Use of credit and debit cards to pay out of the country is banned and effectively blocked, resulting in a near-complete freeze-out of Greeks from Internet commerce. This restriction, along with the controls resulting in Greeks being excluded from the pan-European money settlement system, means that Greek businesses can't pay for imports. Many shipments into the country have been halted as a result. (The government plan is to create a whitelist of politically approved cases in which such payments for imports will be unblocked).

A crucial feature of store-issued scrip is that it literally circulates through a complete closed cycle: store --> supplier --> workers --> store. Such specific cycles are a pattern that is commonly found when currencies are primitive or newly emerging, and every Bitcoin marketer and evangelist should be familiar with them.

The kula ring, two specific cycles (counter-circulating cycles of shell money) allowing exchange of seasonal goods in the precolonial South Pacific

It doesn’t help much to sell bitcoin to isolated individuals: as a mere store of value its volatility is much greater than most existing currencies; as an investment it only makes sense as a tiny high-risk fraction of one's portfolio. Bitcoin does have some political-affinity and status value in developed countries; by contrast in many developing countries and in countries under financial crisis such as Greece, there are urgent needs bitcoin potentially can address. In terms of these needs Bitcoin is mainly useful as a way to send money across borders for investment in more stable assets overseas, and to substitute for cash or other substitute currencies in a money-starved environment.

To have value as a medium of exchange, bitcoin must be taken up by a community of people who already frequently trade with each other, and who have a strong need to use it in these trades. It is especially important to market to the links in the cycle that have the strongest negotiating leverage with the others (in the case of Greek the Greek store scrip cycle, the store and its larger suppliers). The link in the cycle with the greatest incentives to switch to bitcoin here are likely the store's suppliers, because they don’t fully trust the store, nor the underlying currency, euro or post-euro, that is the “O” in an IOU, but are participating in the scrip because, sans bitcoin, they have no other choice.

In bitcoin specific cycles create other cost savings. Almost everywhere they economize on the increasingly high KYC/AML (know your customer/anti-money-laundering) costs of going through a fiat-bitcoin exchange. What's more, in a capital controls environment like Greece specific cycles avoid the capital controls that would be imposed on a Greek-based fiat-bitcoin exchange, and avoid the need nearly all Greek customers using out-of-country exchanges would have to futilely try to tap into their frozen bank accounts in order to purchase bitcoin. Bitcoin will not, contrary to some feverish news reporting, help Greeks get money out of their frozen bank accounts.

But bitcoin does have great potential to help in less obvious ways: for one thing, as a superior (not vulnerable to trust in an issuing store, and in any currency underlying an IOU) substitute for the emerging store scrips. For another, it could help greatly with the severe cross-border commerce issues that are emerging. Exporters, including freelancers working over the Internet, can bring bitcoin into the country, thereby avoiding earning wages that get deposited to frozen bank accounts (per Greek lore, be wary of a cave with many tracks coming in but few coming out). Importers can pay for goods with bitcoin while other electronic payment channels (European money settlements, Paypal, and credit & debit cards when paying foreign businesses, etc.) remain frozen. Again specific cycles must be set up: isolated marketing to just exporters or importers will be far less effective than organizing existing supply chains that involve both.

There are likely many other, mostly highly non-obvious, niches in which bitcoin, and other cryptocurrencies, and smart contract platforms could play a quite valuable role in capital-controlled and other financially handicapped countries.

Bitcoin is not easy to learn, either conceptually or in setting up businesses and individuals with the software (and preferably also the secure hardware) to accept it. This is especially the case in a capital controls climate where the traditional bitcoin exchanges and retail payment companies, with their consumer-friendly front ends, as they normally operate in developed countries, likely can't effectively operate. To take advantage of bitcoin many Greeks will have to use the Bitcoin blockchain directly. So it's too late for bitcoin to help much with the current 6 days of bank closure, but once the learning curves have been surmounted, the participants in specific cycles educated, bitcoin has great potential to address likely many ongoing problems with capital control, in Greece as long as they continue in various forms, and in many other parts of the world where such financial restrictions designed for a pre-digital era have been imposed.

[Update: various minor edits: the first version was rather rough, sorry :-)]

Small-game fallacies

2015-05-25T21:36:00.003-07:00

A small-game fallacy occurs when game theorists, economists, or others trying to apply game-theoretic or microeconomic techniques to real-world problems, posit a simple, and thus cognizable, interaction, under a very limited and precise set of rules, whereas real-world analogous situations take place within longer-term and vastly more complicated games with many more players: "the games of life". Interactions between small games and large games infect most works of game theory, and much of microeconomics, often rendering such analyses useless or worse than useless as a guide for how the "players" will behave in real circumstances. These fallacies tend to be particularly egregious when "economic imperialists" try to apply the techniques of economics to domains beyond the traditional efficient-markets domain of economics, attempting to bring economic theory to bear to describe law, politics, security protocols, or a wide variety of other institutions that behave very differently from efficient markets. However as we shall see, small-game fallacies can sometimes arise even in the analysis of some very market-like institutions, such as "prediction markets."

Most studies in experimental economics suffer from small-game/large-game effects. Unless these experiments are very securely anonymized, in a way the players actually trust, and in a way the players have learned to adapt to, overriding their moral instincts -- an extremely rare circumstance, despite many efforts to achieve this -- large-game effects quickly creep in, rendering the results often very misleading, sometimes practically the opposite of the actual behavior of people in analogous real-life situations. A common example: it may be narrowly rational and in accord with theory to "cheat", "betray", or otherwise play a narrowly selfish game, but if the players may be interacting with each other after the experimenters' game is over, the perceived or actual reputational effects in the larger "games of life", ongoing between the players in subsequent weeks or years, may easily exceed the meager rewards doled out by the experimenters to act selfishly in the small game. Even if the players can somehow be convinced that they will remain complete strangers to each other indefinitely into the future, our moral instincts generally evolved to play larger "games of life", not one-off games, nor anonymous games, nor games with pseudonyms of strictly limited duration, with the result that behaving according to theory must be learned: our default behavior is very different. (This explains, why, for example, economics students typically play in a more narrowly self-interested way, i.e. more according to the simple theories of economics, than other kinds of students).

Small-game/large-game effects are not limited to reputational incentives to play nicer: moral instincts and motivations learned in larger games also include tribal unity against perceived opponents, revenge, implied or actual threats of future coercion, and other effects causing much behavior to be worse than selfish, and these too can spill over between the larger and smaller games (when, for example, teams from rival schools or nations are pitted against each other in economic experiments). Moral instincts, though quite real, should not be construed as necessarily or even usually being actually morally superior to various kinds of learned morals, whether learned in economics class or in the schools of religion or philosophy.

Small-game/large-game problems can also occur in auditing, when audits look at a particular system and fail to take into account interactions that can occur outside their system of financial controls, rendering the net interactions very different from what simply auditing the particular system would suggest. A common fraud is for trades to be made outside the scope of the audit, "off the books", rendering the books themselves very misleading as to the overall net state of affairs.

Similarly, small-game/large-game problems often arise when software or security architects focus on an economics methodology, focusing on the interactions occurring within the defined architecture and failing to properly take into account (often because it is prohibitively difficult to do so) the wide variety of possible acts occurring outside the system and the resulting changes, often radical, to incentives within the system. For example, the incentive compatibility of certain interactions within an architecture can quickly disappear or reverse when opposite trades can be made outside the system (such as hedging or even more-than-offsetting a position that by itself would otherwise create a very different incentive within the system), or when larger political or otherwise coercive motivations and threats occur outside the analyzed incentive system, changing the incentives of players acting within the system in unpredictable ways. Security protocols always consist of at least two layers: a "dry layer" that can be analyzed by the objective mathematics of computer science, and a "wet layer" that consists of the often unpredictable net large-game motivations of the protocols' users. These should not be confused, nor should the false precision of mathematical economic theories be confused with the objective accuracy of computer science theories, which are based on the mathematics of computer architecture and algorithms and hold regardless of users' incentives and motivations.

A related error is the pure-information fallacy: treating an economic institution purely as an information system, accounting only for market-proximate incentives to contribute information via trading decisions, while neglecting how that market necessarily also changes players' incentives to act outside of that market. For example, a currently popular view of proposition bets, the "prediction markets" view, often treats prop bets or idea futures as purely information-distribution mechanisms, with the only incentives supposed as the benign incentive to profit by adding useful information to the market. This fails to take into account the incentives such markets create to act differently outside the market. A "prediction market" is always also one that changes incentives outside that market: a prediction market automatically creates parallel incentives to bring about the predicted event. For example a prediction market on a certain person's death is also an assassination market. Which is why a pre-Gulf-War-II DARPA-sponsored experimental "prediction market" included a prop bet on Saddam Hussein's death, but excluded such trading on any other, more politically correct world leaders. A sufficiently large market predicting an individual's death is also, necessarily, an assassination market, and similarly other "prediction" markets are also act markets, changing incentives to act outside that market to bring about the predicted events.

The dawn of trustworthy computing

2014-12-11T10:16:00.001-08:00

When we currently use a smart phone or a laptop on a cell network or the Internet, the other end of these interactions typically run on other solo computers, such as web servers. Practically all of these machines have architectures that were designed to be controlled by a single person or a hierarchy of people who know and trust each other. From the point of view of a remote web or app user, these architectures are based on full trust in an unknown "root" administrator, who can control everything that happens on the server: they can read, alter, delete, or block any data on that computer at will. Even data sent encrypted over a network is eventually unencrypted and ends up on a computer controlled in this total way. With current web services we are fully trusting, in other words we are fully vulnerable to, the computer, or more specifically the people who have access to that computer, both insiders and hackers, to faithfully execute our orders, secure our payments, and so on. If somebody on the other end wants to ignore or falsify what you've instructed the web server to do, no strong security is stopping them, only fallible and expensive human institutions which often stop at national borders.

The high vulnerability we have to web servers stands in sharp contrast to traditional commercial protocols, such as ticket-selling at a movie theater, that distribute a transaction so that no employee can steal money or resources undetected. There is no "root administrator" at a movie theater who can pocket your cash undetected. Because, unlike a web server, these traditional protocols, called financial controls, can securely handle cash, you didn't have to fill out a form to see a movie, shop for groceries, or conduct most other kinds of every-day commerce. You just plunked down some coin and took your stuff or your seat. Imperfect and slow as these processes often are (or were), these analog or paper-based institutions often provided security, financial control, and/or verifiability of fiduciary transactions in many ways far superior to what is possible on web servers, at much less hassle and privacy loss to customers. On the Internet, instead of securely and reliably handing over cash and getting our goods or services, or at least a ticket, we have to fill out forms and make ourselves vulnerable to identity theft in order to participate in e-commerce, and it often is very difficult to prohibitive to conduct many kinds of commerce, even purely online kinds, across borders and other trust boundaries. Today's computers are not very trustworthy, but they are so astronomically faster than humans at so many important tasks that we use them heavily anyway. We reap the tremendous benefits of computers and public networks at large costs of identity fraud and other increasingly disastrous attacks.

Recently developed and developing technology, often called "the block chain", is starting to change this. A block chain computer is a virtual computer, a computer in the cloud, shared across many traditional computers and protected by cryptography and consensus technology. A Turing-complete block chain with large state gives us this shared computer. Earlier efforts included state-machine replication (see list of papers linked below). QuixCoin is a recent and Ethereum is a current project that has implemented such a scheme. These block chain computers will allow us to put the most crucial parts of our online protocols on a far more reliable and secure footing, and make possible fiduciary interactions that we previously dared not do on a global network

Much as pocket calculators pioneered an early era of limited personal computing before the dawn of the general-purpose personal computer, Bitcoin has pioneered the field of trustworthy computing with a partial block chain computer. Bitcoin has implemented a currency in which someone in Zimbabwe can pay somebody in Albania without any dependence on local institutions, and can do a number of other interesting trust-minimized operations, including multiple signature authority. But the limits of Bitcoin's language and its tiny memory mean it can't be used for most other fiduciary applications, the most obvious example being risk pools that share collateral across a pool of financial instruments.

A block-chain computer, in sharp contrast to a web server, is shared across many such traditional computers controlled by dozens to thousands of people. By its very design each computer checks each other's work, and thus a block chain computer reliably and securely executes our instructions up to the security limits of block chain technology, which is known formally as anonymous and probabilistic Byzantine consensus (sometimes also called Nakamoto consensus). The most famous security limit is the much-discussed "51% attack". We won't discuss this limit the underlying technology further here, other than saying that the oft-used word "trustless" is exaggerated shorthand for the more accurate mouthful "trust-minimized", which I will use here. "Trust" used in this context means the need to trust remote strangers, and thus be vulnerable to them.

Trust-minimized code means you can trust the code without trusting the owners of any particular remote computer. A smart phone user in Albania can use the block chain to interact with a computer controlled by somebody in Zimbabwe, and they don't have to know or trust each other in any way, nor do they need to depend on the institutions of either's countries, for the underlying block chain computer to run its code securely and reliably. Regardless of where any of the computers or their owners are, the block chain computer they share will execute as reliably and securely as consensus technology allows, up to the aforementioned limits. This is an extremely high level of reliability, and a very high level of security, compared to web server technology.

Instead of the cashier and ticket-ripper of the movie theater, the block chain consists of thousands of computers that can process digital tickets, money, and many other fiduciary objects in digital form. Think of thousands of robots wearing green eye shades, all checking each other's accounting. Individually the robots (or their owners) are not very trustworthy, but collectively, coordinated by mathematics, they produce results of high reliability and security.

Often block chain proponents talk about the "decentralized" block chain versus the "centralized" web or centralized institutions. It's actually the protocol (Nakamoto consensus, which is highly distributed) combined with strong cryptography, rather than just decentralization per se, that is the source of the far higher reliability and and much lower vulnerability of block chains. The cryptography provides an unforgeable chain of evidence for all transactions and other data uploaded to the block chain. Many other decentralized or peer-to-peer (P2P) technologies do not provide anything close to the security and reliability provided by a block chain protected by full Byzantine or Nakamoto consensus and cryptographic hash chains, but deceptively style themselves as block chains or cryptocurrency.

A big drawback is that our online and distributed block chain computer is much slower and more costly than a web server: by one very rough estimate, about 10,000 times slower and more costly, or about the same as it cost to run a program on a normal computer in 1985. For this reason, we only run on the block chain that portion of an application that needs to be the most reliable and secure: what I call fiduciary code. Since the costs of human ("wet") problems caused by the unreliability and insecurity of web servers running fiduciary code are often far higher than the extra hardware needed to run block chain code, when web server reliability and security falls short, as it often does for fiduciary computations such as payments and financial contracts, it will often make more sense to run that code on the block chain than to run it less reliably and securely on a web server. Even better, the block chain makes possible new fiduciary-intensive applications, such as posting raw money itself to the Internet, securely and reliably accessible anywhere on the globe - apps that we would never dare do with a web server.

What kinds of fiduciary code can we run? We are still thinking up new applications and the categories will be in flux, but a very productive approach is to think of fiduciary applications by analogy to traditional legal code that governs traditional fiduciary institutions. Fiduciary code will often execute some of the functions traditionally thought of as the role of commercial law or security, but with software that securely and reliably spans the global regardless of traditional jurisdiction. Thus:

* Property titles (registered assets), where the on-chain registry is either the legally official registry for off-chain assets or controls on-chain ones, thus providing reliable and secure custody of them. One can think of a cryptocurrency such as Bitcoin as property titles (or at least custody enforced by the block chain consensus protocol) to bits recognized as being a fixed portion of a currency, or as controlling unforgeably costly bits, or both. Block chains could also control hardware which controls the function of and access to physical property.

* Smart contracts: here users (typically two of them) agree via user interface to execute block chain code, which may include transfer of money and other chain-titled assets at various times or under various conditions, transfer and verification of other kinds of information, and other combinations of wet or traditional (off-chain) and dry (on-chain) performance. A block chain can hold cryptocurrency as collateral (like an escrow) which incentivizes off-chain performance that can be verified on-chain, by the parties or by third parties. A full block chain computer can pool on-chain assets into a single chain-controlled risk pool spread among many similar financial contracts, reducing the amount of collateral that needs to be stored on-chain while minimizing the need for off-chain collateral calls. The block chain can also make the search, negotiation, and verification phases of contracting more reliable and secure. With on-chain smart contracts we will be able to buy and sell many online services and financial instruments by button and slider instead of by laboriously filling out forms that disclose our private information.

* On-chain treasuries, trusts, and similar, where money lives on the block chain and is controlled by multiple signature ("multisig") authority. Putting a treasury with signature authority on a block chain computer is low-hanging fruit, but is often tied to more speculative efforts under the label "distributed autonomous organization (DAO)", which may include voting shares and other mechanisms to control the treasury like a corporation or other kind of of organization.

I hope to discuss these block chain applications, especially smart contracts, in future posts. While there is much futurism in many block chain discussions, including many trying to solve problems that aren't actually solved by the block chain, I will generally stick to low-hanging fruit that could be usefully implemented on Quixcoin, Ethereum, or similar technology in the near future, often interfacing to still necessary parts of traditional protocols and institutions rather than trying to reinvent and replace them in whole.

References

Here is a list of basic computer science papers describing the technology of block chains (including cryptocurrencies).

Wet vs. dry code

Transportation, divergence, and the industrial revolution

2014-10-16T14:00:00.002-07:00

After about 1000 AD northwestern Europe started a gradual switch from using oxen to using horses for farm traction and transportation. This trend culminated in an eighteenth-century explosion in roads carrying horse-drawn carriages and wagons, as well as in canals, and works greatly extending the navigability of rivers, both carrying horse-drawn barges. This reflected a great rise in the use of cultivated fodder, a hallmark of the novel agricultural system that was evolving in northwestern Europe from the start of the second millennium: stationary pastoralism. During the same period, and especially in the seventeenth through nineteenth centuries, most of civilized East Asia, and in particular Chinese civilization along its coast, navigable rivers, and canals, faced increasing Malthusian pressures and evolved in the opposite direction: from oxen towards far more costly and limited human porters. Through the early middle ages China had been far ahead, in terms of division of labor and technology, of the roving bandits of northern Europe, but after the latter region's transition to stationary pastoralism that gap closed and Europe surged ahead, a growth divergence that culminated in the industrial revolution. In the eighteenth century Europe, and thus in the early industrial revolution, muscle power was the engine of land transportation, and hay was its gasoline.

Metcalfe's Law states that a value of a network is proportional to the square of the number of its nodes. In an area where good soils, mines, and forests are randomly distributed, the number of nodes valuable to an industrial economy is proportional to the area encompassed. The number of such nodes that can be economically accessed is an inverse square of the cost per mile of transportation. Combine this with Metcalfe's Law and we reach a dramatic but solid mathematical conclusion: the potential value of a land transportation network is the inverse fourth power of the cost of that transportation. A reduction in transportation costs in a trade network by a factor of two increases the potential value of that network by a factor of sixteen. While a power of exactly 4.0 will usually be too high, due to redundancies, this does show how the cost of transportation can have a radical nonlinear impact on the value of the trade networks it enables. This formalizes Adam Smith's observations: the division of labor (and thus value of an economy) increases with the extent of the market, and the extent of the market is heavily influenced by transportation costs (as he extensively discussed in his Wealth of Nations).

The early industrial revolution was highly dependent on bringing together bulk goods such as coal and iron ore. Land transportation of such materials more than a dozen miles in most parts of the world was prohibitively costly, and they were only rarely located a shorter distance from navigable water (the costs per mile of water transport were generally orders of magnitude cheaper than the costs per mile of of land transport). As a result, the early industrial revolution, and the potential for a region to be the first to industrialize, was very sensitive to small changes in land transportation costs.

Furthermore, land and sea-borne transportation were far more complements than substitutes. Cheaper land transportation was a "force multiplier" for water transportation. Decreasing the costs of getting to port from field or mine by a factor of two increased the number of fields and mines accessible by a factor of four, and increased the number of possible ways to divide labor, and thus the value, by an even greater factor via Metcalfe's law. This in turn incentived greater investment in sea-borne transport. It's thus not surprising that, even before the industrial revolution, the leaders in global trade and colonization were European countries that could access the Atlantic.

By the dawn of the industrial revolution in northwest Europe the effects of horse haulage had already been dramatic: drop by a factor of two in the costs, and increase in speed by about the same factor, of transporting goods by land, the corresponding increase in commercial crop area and in area that could be economically lumbered and coal and metals that could be mined. Multiply that factor of four by much more when we factor in (1) innovations in wheels, tires, shock absorption, and road building that followed on the heels, as is were, of the great increase in horse haulage, and (2) the great increase in mileage and inland penetration of navigable rivers and canals, especially in the 18th century, the barges again hauled by horses. And as Metcalfe's Law suggests, the number of combinations, and thus the value, increased by a far greater factor still. Not only did northwestern European ports have access to far more land, but there were far more ports far more "inland" along rivers and canals, thanks again chiefly to the draft horses and the nutrient-rich cultivated fodder that fed them.

To enable the industrial revolution, mines and nutrient-dense fodder had to be colocated within efficient bulk transport distance of each other — which in the case of horses hauling coal or wood by rural road, was typically less than twenty miles, and for oxen and human porters far less still — to produce the low-cost bulk transportation networks needed to make industrial revolution scale use of most commercial crops and mines. Efficient bulk transportation is needed _all the way_ between the iron mine, the coal mine, and the smelter. Because the cost per mile of water transport was so much smaller than the costs of land transport, this “last few miles to the mine” problem usually played a dominant role in transportation economics, somewhat analogous to the “last mile” problem in modern cable networks. That’s why stationary pastoralism with its efficient markets for nutrient-dense (because cultivated) fodder was such a huge win — it allowed horses to be housed at the mines, canals, roads, and factories where they worked, which no place in the world outside Europe could during that era do. Nutrient-dense fodder created a virtuous recursion, enabling itself to be harvested (via horse-drawn mows and rakes) and transported to mine, factory, and stable at increasingly lower costs.

Industrialization came in many phases. Very roughly speaking, the first phase, in the latter half of the eighteenth century, involved the culmination and optimization of the use of horses, by northwestern Europe, and especially England, greatly expanding its horse wagon and carriage roads and horse-drawn barge canal networks. Horses brought coke or charcoal and iron ore to the smelters. Horse-powered capstans performed some arduous farm tasks such as threshing. Along with primitive Newcomen steam engines they pumped coal mines. Horse gins also powered most of the early versions of innovative textile machinery (they switched to more power-efficient water mills when they later scaled up). That classic carnival ride, the merry-go-round, was inspired by these perpetually circling horses.

Again roughly speaking, the second phase of industrial growth, after about 1830, was more scientific and far easier to copy than northwestern Europe's unique biology: steam engines came to replace horse gins and water mills for running industrial machinery, and the steam-powered railroad radically lowered transportation costs between major mines, factories, and urban centers. When non-European countries industrialized, such as Japan after the 1870s, they did it in a "leap-frog" style: they skipped over the long-evolved improvement in draft animals and went straight to mature steam engines and, soon thereafter, electrical motors. Much as countries installing phone networks for the first time over the last few decades have leap-frogged over the land line era, going straight to cell phones. Starting early in the 20th century industrializing countries could replace all the remaining important functions of the horse with internal combustion engines. England, which made the longest and most thorough use of the horse, and thereby had the transportation economies allowing it to pioneer the industrial revolution, had a less pressing need to use the internal combustion engine and thus lagged enough in that technology so that second-generation industrializers like Japan, Germany, and the United States became leaders in internal combustion engine products.

Given the scientific nature of the second phase of the industrial revolution, which could be discovered by any culture full of literate craftsmen, this second phase was more technologically inevitable and didn't ultimately depend on northwestern Europe's unique biology. At the same time, during the long evolution that culminate in the industrial revolution, and during its first phase, land transportation the world over was muscle powered and the unique system of stationary pastoralism, by breeding draft horses that ran on cultivated, nutrient-dense fodder, substantially lowered transportation costs. This allowed the value of northwestern Europe's bulk transportation networks to radically increase and made it very nearly as inevitable that that region would be the pioneers of the industrial revolution.

Hat tips and references: Edward Wright and Raymond Crotty among many other authors have explored some of these issues.

Raymond Crotty

Raymond Crottyamong many other authors have explored some of the issues.

Tweeting

2014-07-02T20:26:00.001-07:00

https://twitter.com/NickSzabo4

European-Asian divergence predates the industrial revolution

2013-11-18T19:17:00.000-08:00

Stephen Broadberry describes new estimates of per capita GDP which say that the economic divergence between Western Europe and other civilized parts of the world predates the industrial revolution. (H/T Marginal Revolution). This is more consistent with my own theories (linked below) than the idea that the Great Divergence magically appears from nowhere around the year 1800. Nevertheless I feel compelled to point out shortcomings in these kinds of estimates, on any side of such debates.

There are the usual correctable, but sadly seldom corrected, problems with datasets comparing European economies over historical periods, for example using "Holland", and leaving out, presumably not only the rest of the modern Netherlands, but the entire area of the exceptional Low Country late medieval industry and wealth (Flanders, Brabant, Hainault, etc.), most of which migrated (along with most of the skilled craftsmen and merchants) to the Netherlands during the 16th century wars there. The southern Low Countries, until those wars, were the leading centers of European textile manufacture and probably also had the most labor-productive agriculture.

Worse are these and all other attempts to compared historical European "wealth" or "income" to those of non-European cultures before the era of cheap global precious metals flows (initiated by the exploration explosion) allows comparison of prices. How do you compare the “wealth” or “income” of rice-eating and cotton-wearing Chinese farmer to a milk-drinking, oat-eating, and wool-clad Scottish peasant? It it is neither very useful nor very reliable to try to reduce such cultural and even genetic differences to mere numerical estimates.

So it's no surprise to see such conjectural and subjective estimates subject to major revisions, and I'm sure we'll see many more such revisions, in both directions, in the future. That said, many of the economically important innovations in northwestern Europe long predate not only the industrial revolution, but also the Black Death (Broadberry's new date for the start of the Great Divergence), including the following biological bundle:

(1) heavy dairying

(2) Co-evolution of human lactase persistence and cow milk proteins

(2) delayed marriage

(3) hay

(4) greater use of draft animals

These innovations all long predate the Black Death, except that thereafter this biological divergence, especially in the use of draft animals, accelerated. After a brief interruption the lactase persistent core resumed its thousand-year conversion of draft power from humans and oxen to horses, including super-horses bred to benefit from good fodder crops -- the Shire Horse, Percheron, Belgian, etc., and of course the famous Clydesdale of the beer ads. Draft horses figured prominently in the great expansion of the English coal mines from the 14th to 18th centuries. They both pumped the mines and transported the coal to navigable water. Due to lack of horsepower for pumping and transport, the Chinese use of coal, though already well established by the 13th century visit of Marco Polo, where both mine and consumer were within short human-porter distance to navigable water, failed to grow beyond that limit until the coming of the railroad. Similarly draft horses, alongside the more famous water-mills, played a key role in the early (pre-steam) exponential growth of the English textile industry, the economically dominant feature of the early industrial revolution.

Greater use of draft animals led to higher labor productivity and larger markets for agricultural output, and thus to greater agricultural specialization. Higher labor productivity implies higher per capita income, even if it can’t be measured. For civilizations outside Western Europe by contrast, much less use was made of draft animals with the result that these effects were confined to within a dozen or less miles of navigable water.

Contrariwise, northern Europe has always been at a severe ecological disadvantage to warmer climates when it comes to growing rice, cotton, sugar, and most other economically important crops. However these seem not to have had an anti-Malthusian effect in increasing labor productivity -- the increased efficiency of rice in converting solar power to consumable calories, for example, simply led to a greater population rather than a sustained increase in per capita income.

Political relationships

2013-08-04T18:50:00.000-07:00

In most political theories and ideologies, there is a preposterous oversimplification about what kinds of political relationships are desirable, common, or even possible. Given the irreduceable complexity of society, any summary of real-world political relationships is by necessity going to be greatly oversimplified, but most such movements neglect even very broad and common kinds of political relationships. So herein, based on my extensive study of the legal relationships between political players that have existed in a very wide variety of polities, is a classification scheme:

Let's define a "polity" as any entity with some coercive powers. Polities can range in scale from the United Nations to the jail cell at the back of your local shopping mall. By studying polities over many years, and borrowing from previous work on law and political science, I have identified three basic kinds of legal relationships between polities. The basic legal structure, or constitution, of a polity can also be characterized by how much and in what ways it is composed of each kind of relationship. The three basic kinds of political relationships are:

(1) Delegation: This includes any kind of delegation from a principal to an agent. The principal authorizes the agent to act for him, e.g. by making a contract or treaty with a third party to which the principal will be bound. A principal can be a boss, a contractee, or voter; the corresponding agents being employee, contractor, or representative. We can characterize principal/agent relationships by representation distance, with each extreme common:

(A) at a very short representation distance is the master/servant (in modern parlance, employer/employee) relationship. The master gives orders to the servant who is delegated to carry them out and closely supervised. A military dictatorship, for example the Roman Empire, is or was dominated by commander-subordinate relationships. In such a system, to paraphrase the legal code compiled for the Emperor Justinian, the emperor's will is law.

(B) at the other extreme, an extremely long representation distance, is the relationship between millions of voters and the representatives they vote for in most modern governments. Voters do not give orders, but rather are treated as having delegated most their coercive powers to their representatives. Representatives in modern governments usually further delegate political and legal power to unelected bureaucracies themselves dominated by type A (boss/employee) relationships.

(2) Subsidiarity: for example the relationship in the United States between counties and states, or between the states and the federal government. Often these combine supremacy clauses (when in conflict the law of the encompassing jurisdiction trumps that of its subsidiaries) with typically enumerated powers (the subject matters of the encompassing power is typically limited relative to that of the subsidiary). We can characterize subsidiarity relationships by how much and what kinds of coercive power can be exercised by the encompassing jurisdiction.

In medieval England, the subject matter of the encompassing jurisdiction was very small, the Crown essentially having jurisdiction only regarding procedural laws for interactions between subsidiarity jurisdictions (which like the encompassing Crown were held as property by individuals or corporations), as well as some war-making powers. Substantive law was almost entirely in the hands of the encompassed jurisdictions, including the specialized merchant courts as peers enforced an international standard of business law, the lex mercatoria.

By contrast in the modern U.S., the substantive legal jurisdiction of the encompassing power has become vast in scope. Nevertheless one can still find many examples of fine-grained subsidiarity, down to "stand your ground" laws, citizen's arrest, and those shopping mall jail cells.

In property law (which once was also procedural law and essential to defining political relationships), the landlord/tenant relationship is a subsidiarity relationship. The landlord is generally not the master of the tenant, and cannot issue the tenant arbitrary commands, but rather their relationship is governed on both sides by the constraints imposed by the tenancy.

(3) Peer-to-peer: these include any agreements made between polities where neither is a subsidiary of the other, or a standard law arrived at in parallel, either through parallel development of precedent (as in the lex mercatoria and many other bodies of law) or codification of a standard law (e.g. the Uniform Commercial Code, which is not federal or national law, but a standard set of laws separately enacted by 50 separate jurisdictions, the states of the United States, as peers). Peer-to-peer relationships most commonly involve maintaining distinct sets of laws adapted to local conditions along with agreements or mutually evolved practices for resolving conflicts of laws. Conflict-of-laws law itself was primarily developed through parallel development of judicial precedent, through courts respecting each other in order to maintain their reputations for enforcing the rule of law. On a larger scale wars and treaties between nations are peer-to-peer relationships. In medieval Italy, a wide variety city-states that were often at war with each other nevertheless also developed through this process most of the body of modern conflict-of-laws law.

Since political theory developed in universities out of the study of Roman imperial law, it has been dominated by imputing to polities only one of the above kinds of relationships -- namely master/servant or commander/subordinate relationships, or at best delegation in general. This is especially apparent in the quixotic search for a "locus of sovereignty", a search that typically amounts to conspiracy theory in search of a hidden commander-of-all when in fact far more sophisticated combinations of the above kinds of relationships are at play.

For further reading:
Conflict-of-laws law
Substantive vs. procedural law
Jurisdiction as property (subsidiarity and peer-to-peer relationships via property law)
Representation distance
Liberty of house (common law origins of stand-your-ground laws)

A very underrated invention

2013-07-20T13:12:00.000-07:00

Perhaps the most underrated invention in history is the humble hourglass. Invented in Europe during the late 13th or early 14th century, the sand glass complemented a nearly simultaneous invention, the mechanical clock. The mechanical clock with its bell was a centralized way of broadcasting the hours day and night; the sand glass was a portable way of measuring shorter periods of time. These clocks were made using very different and independent techniques, but their complementarity function led to their emergence at the same time and place in history, late medieval Europe.

The sandglass was more portable than a water clock. Since its rate of flow is independent of the depth of the upper reservoir, it was also more accurate. And, important in northern Europe, it didn't freeze in winter.

An advancing technology in 13th century western Europe very different from mechanics was glass-blowing. The origin of the sandglass is quite obscure, but its accuracy relies on a precise ratio between the neck width and the grain diameter. It thus required extensive trial and error for glass-blowers to arrive at hour glasses for sand, ground marble, eggshell, and other sized grains, and techniques for mass producing these precisely sized works of glass, besides a ready of market of users, which Europe turned out to be.

There are no demonstrated cases of sandglasses before the 14th century. Manufacture and use of the sand-glass was widespread in western Europe by the middle of the 14th century. In 1339 Ambrosio Lorenzetti painted a fresco in Siena, one of the commercial cities of northern Italy, which shows a sandglass as an allegory for temperance (self-control). Mariners in the Mediterranean were likely using sandglasses to measure time and velocity by 1313. By 1394 French housewives were using recipes to make, along with food, glue, ink, and so on, marble grains for an hour-glass:

"Take the grease which comes from the sawdust of marble when those great tombs of black marble be sawn, then boil it well in wine like a piece of meat and skim it, and then set it out to dry in the sun; and boil, skim and dry nine times; and thus it will be good."
Such a recipe presumably creates grains of a size in a precise ratio to a standard hour-glass neck size, thus producing an accurate time.

The sandglass, not the mechanical clock, became between the 13th and 16th centuries the main European timekeeper in activities as diverse as public meetings, sermons, and academic lectures. It was also the main navigational and scientific clock during that period. [*]

From the point of view of later engineers, the mechanical clock was the more important invention -- they were on the cutting edge of technology from the time of their invention until the industrial revolution. However,

For contemporaries....the sandglass was equally or more important. Until the widespread use of small table-top mechanical clocks, the sandglass was the primary means of fair timekeeping. The sand glass was visible to all in a room, and it could only be dramatically and obviously “reset”, it couldn’t be fudged like a mechanical clock. [*]

As I detail here, the sand glass also played an essential role in the technique of dead reckoning for ocean navigation, also developed in late medieval Europe. A strict regimen of turning the glasses was kept non-stop throughout a voyage:

During the voyage of Ferdinand Magellan around the globe, his vessels kept 18 hourglasses per ship. It was the job of a ship's page to turn the hourglasses and thus provide the times for the ship's log. Noon was the reference time for navigation, which did not depend on the glass, as the sun would be at its zenith.[8] More than one hourglass was sometimes fixed in a frame, each with a different running time, for example 1 hour, 45 minutes, 30 minutes, and 15 minutes. [*]

Arab and Chinese navigators lacked this crucial piece, and thus by the time of the exploration explosion had not developed navigation techniques that could rival those of Western Europe.

Dead reckoning, maps, and errors

2012-10-28T18:23:00.001-07:00

In my last post I introduced dead reckoning as used during the exploration explosion. In this post I will describe the errors these explorers (Dias, Columbus, da Gama, etc.) typically encountered in dead reckoning (DR) when sailing on the oceans, and why dead reckoning could be usefully accurate despite the fact that trying to map those dead reckoning directions onto a normal map would be very inaccurate.

To get a taste of the issue, first consider the following abstract navigation problem -- hiking in foggy hills:

There are only two useful landmarks, 1F (the origin or "first fix") and 2F (the destination or "second fix").
It’s very foggy, so you have no way to use the hills as recognizable features. But the dead reckoning directions are of sufficient accuracy to get you within sight of landmark 2F. (For simplicity assume 100% accuracy).
You don’t know and can’t measure hill slope angles. Indeed there are only two things the hikers can measure: (a) magnetic compass direction, and (b) distance actually walked. Observe that this is not distance as the crow flies, nor is it distance projected onto the horizontal plane. If a hill happens to be a pyramid, and you happen to be walking straight up it (and thus walking up the hypotenuse of a triangle), the distance measured is the length of the hypotenuse, not the length of the horizontal leg of that triangle.
The first person who discovered 2F, starting from 1F, recorded dead reckoning directions to there and back as a sequence of tuples { direction, speed, time }.

We can draw a useful head-to-tail diagram of these directions on a piece of paper. But we can’t use these directions to figure out the distance as the crow flies between 1F and 2F, because we don’t know the slopes of the hills traversed. And for the purposes of our loose analogy to long-distance ocean navigation, our hikes are short and could be in all steep terrain or all flat, so that over the course of our hike the slopes don’t converge on a knowable average.

Since we have insufficient information to determine "crow flight" distances, we don’t have enough information to accurately draw our dead reckoning itinerary on maps as we know them (i.e. Ptolemaic maps). Yet such faithfully recorded directions are sufficient to get any hiker (who can also exactly measure bearings and distances) from 1F to 2F and back.

Most maps as we know them – Ptolemaic maps -- are projections from a sphere to a Euclidean plane based on lines of latitude and longitude where lines of longitude converge at the celestial poles. Latitude is determined by measuring the altitude of a celestial object, and latitude is also ultimately defined by what navigators call the celestial sphere (although by "Ptolemaic map" I will refer to any map that shows actual earth surface distances proportionately on the map, i.e. "to scale"). There are also non-Ptolemaic maps, for example subway maps, which show the topological relationships between entities but not proportional distances. This chart of the kind Zheng He may have used, or was drawn using information from those or similar voyages, was of such a topological nature (the west coast of India is along the top and the east coast of Africa is along the bottom):

A set of dead reckoning directions can be diagrammed. But although it contains more information than a subway map, it doesn’t contain enough information to plot on a Ptolemaic map. Thus like a subway map this dead reckoning "space" cannot be accurately projected, or "mapped" in mathematical terminology, onto a normal (Ptolemaic) map without further information.

A subway map is in no way "to scale": the distances on are not proportional to any measured values. By contrast a dead reckoning map can be drawn "to scale" in its own distinct Euclidan plane. But not only cannot this dead reckoning space without further information be accurately projected (i.e. projected with proportions intact or "to scale") onto a Ptolemaic map, but two different dead reckoning itineraries drawn on a Euclidean plane will also generally be in error relative to each other, as I will describe below. And now to the central point I want to get across in this article: these two kinds of errors -- from trying to Ptolemaically map a dead reckoning itinerary on the one hand and between two dead reckoning itineraries on the other hand -- are very different. They are quite distinct in kind and usually produce errors of very different magnitudes.

The unknown values ignored in a dead reckoning itinerary, analogous to the hill slopes in the scenario above, can be any spatially variable but temporally constant distances, directions, or vectors that are unknown to the navigators writing and following the directions. The three most important spatially variable but temporally constant sets of vectors generally unknown to or ignored by dead reckoners on ocean and sea voyages from the 13^th century through the era of the exploration explosion were were magnetic variation (shown below as green arrows), current (red arrows), and curvature of the earth (ignored in this post, but the same argument applies). Since these temporally constant but spatially variable factors (analogous to the slopes of our foggy hills) were unknown or ignored, they had no way to map such pure dead reckoning directions onto a Ptolemaic map. The information they rigorously measured and recorded for the purposes of dead reckoning was insufficient for that purpose. Yet that information was sufficient to enable navigators to retrace their steps (to get back on course if blown off course) or follow a previously recorded dead reckoning itinerary (or a nearby course, as I'll show below) with usefully small error.

Temporally constant but spatially variable vectors shown on a diagram. Only the dead reckoning (DR) vectors are shown added head-to-tail, since these are all the dead reckoning navigator in the exploration explosion era usually measured. The vectors shown here are magnetic variation (green) and current (red). Since these vectors were unknown, dead reckoning directions could not be accurately plotted on a Ptolemaic map. Curvature of the earth, not shown here, is also temporally constant and can thus also be ignored for the purposes of dead reckoning.

However some kinds of dead reckoning errors were due to unknowns variables that changed over time. These produced small but cumulative errors in dead reckoning even for the purposes of specifying repeatable directions. Errors in measuring bearing, speed, and time were of this nature. Externally, different winds required different tacking angles, creating "leeway", where the boat moves not straight forward but at an angle. If the directions don’t account for this, or account for it imperfectly, there will necessarily be a cumulative error. It was thus important to "fix" on landmarks or soundings. The more accuracy needed (such as when approaching shorelines, much more hazardous than open-ocean sailing), the more often fixes had to be taken. I hope to say more about fixes and temporally variable errors in future posts. This post is about dead reckoning between two fixes and errors that vary spatially but can be reasonably treated as constant in time.

A dead reckoning diagram made on a chart, with "fixes" or adjustments (dashed line)s to a landmark or sounding (yellow "X") diagrammed on the chart. The start and end of points of the voyage are also landmarks, so there is also a fix for the final landmark. Note that the chart still does not have to be Ptolemaic for this purpose -- the fixes need not be shown with proportionally correct distances to each other. Indeed the Zheng He era chart above is roughly in this form, with only one crude dead reckoning vector between each fix: it labels each arc with a crude time or distance estimate along with a (much more accurate) bearing estimate, but like a subway map it doesn't care about showing distances as proportional.

When sailing over continental shelves, European mariners (and sometimes Chinese mariners) of that era took "soundings" that measured depth and sampled the bottom soil, creating a unique signature of { depth, soil type} that functioned like landmarks but on open ocean. Soundings could be taken when sailing over the relatively shallow areas of continental shelves. As you can see, most parts of the oceans are too deep for this, but most shorelines are fronted by at least a few miles of soundable shelf, and sometimes hundreds of miles. Soundings were very useful for navigating in clouds, fog, and at night far enough away from the shore to avoid the hazards of very shallow water, yet close enough for the water to be shallow enough to sound. Pilots that used soundings thus had a set of "landmarks" for fixing their dead reckoning directions that allowed them to avoid hazardous navigation too close to land.

Notice that these kinds of fixes still do not give Ptolemaic coordinates -- they simply map or "fix" a particular point in our dead reckoning "space" to a particular point on the earth's surface of unknown Ptolemaic (celestial) coordinates, and indeed of unknown distances relative to other fixes.

(Side note -- explorers between Cao and Magellan usually could not get a celestial "fix" on a rolling deck of sufficient accuracy to be useful, i.e. more accurate than their dead reckoning -- and even in the case of Magellan this was only useful because there was nothing better, dead reckoning errors having accumulated to very high levels by the time they were in the mid-Pacific. So like them we will have to ignore this way, both more ancient and more modern, but generally unused during the exploration explosion, of correcting DR errors at sea).

It's all fine and good for dead reckoning to provide, as shown above, repeatable directions to a destination, despite being Ptolemaically unmappable, when the same itinerary is exactly repeated. But the best itinerary over the oceans depends on the wind. These winds vary, and the early explorers of new oceans searched for the best courses and seasons in order to catch the best winds. So the early explorers usually did not exactly repeat dead reckonings recorded on prior voyages. They usually took courses a few hundred miles away from the prior voyages' itinerary in order to catch more favorable winds. So the question arises: if the navigator adjusts his course by a few hundred miles, roughly what amount of resulting error should the navigator generally expect.

(BTW, it us important to note that dead reckoning directions, while they did not have to account for currents, magnetic variation, and the curvature of the earth, for the reasons given in this article, did have to account for variations in winds and the related leeway from tacking, since these reasons do not apply to vectors with substantial temporal variability. So we assume, as the navigators themselves probably did in some fashion, that the velocity vectors in our dead reckoning itineraries aren't strictly those measured, but are those measurements adjusted for variations in wind).

To reiterate the most important point: this is a different question than the question of what the error is when plotted on a normal map. Historians trying to recreate these voyages, in order to figure out where their landfalls were, or plot them on maps, or to estimate what navigational acccuracy of European navigators achieved in that era, usually haven't understood this crucial distinction. Indeed, because currents and magnetic variation don't in most places in the open ocean change in extreme or sudden ways, the resulting errors in dead reckoning navigation tended to be much smaller than the errors when plotting the dead reckoning directions on a Ptolemaic map. If you can scrutinize some more complicated diagrams I can demonstrate this by example here. First consider two dead reckoning itineraries, unadjusted for current and magnetic variation and thus plotted non-Ptolemaically:

Black = DR velocity in given time period

Red = average current velocity in given time period

Green = average magnetic variation in given time period

A, B = Two different DR itineraries as recorded (i.e. not adjusted for unknown magnetic variation and current). B has different first and third leg plus different currents on last two legs (only DR measurements added head-to-tail) – navigator would not actually plot these on a chart of geographic location, or at least would not consider such plotting accurate.

1F, 2F = first fix, next fix (same in each case, but their geographical location doesn’t need to be known)

For simplicity I am treating magnetic variation as uniform and spatially varying only the current, but the same argument I make here applies even more strongly to magnetic variation (and even more strongly to curvature of the earth, which can be treated as another set of vectors). The second fix (2F) has a question mark in front of it to indicate that the second itinerary (B) won't actually arrive at the same spot as A arrives at -- due to the different currents it encounters, it will arrive at a different spot. We assume, as was usually the case out of sight of shore, that our early explorer doesn't know the current. But the explorer did want to know, as historians want to know: roughly how large can such errors in typical oceans be expected to be? To demonstrate the mathematics of this, I've created a Ptolemaic map of the itineraries (dashed lines) by adding in the currents and magnetic variations head-to-tail. I've also superimposed the original non-Ptolemaic diagram (just the dead reckoning vectors added up) to show the much larger error that occurs when trying to project that onto a Ptolemaic map.

A‘, B’ = A and B adjusted to show difference in geographic location (all vectors added head-to-tail). The navigator in Columbus’ day could not usally compute these, since he typically did not know the current and magnetic variation values.

NA, NB = net effect of spatially variable but temporally constant current on geographic (i.e. Ptolemaic or celestial) location. Error if unadjusted itineraries Ptolemaically mapped. Separate red arrow diagram shows the same net effect of the two separate sets of currents.

Dashed blue line next to 2F = actual navigator’s error of two DR itineraries against each other when neither set of itineraries adjusts for current or magnetic variation. The next fix lies somewhere on this line, assuming no other errors.

(BTW if you can copy and paste arrows it's easy to make your own examples).

As you can see, the errors (solid blue lines labeled NA and NB) from trying to superimpose the non-Ptolemaic dead reckoning itineraries (solid lines) on the Ptolemaic map are much larger than the actual error (dashed blue line labeled 2F) that occurs from following itinerary A instead of B or vice versa (shown on dashed lines when adjusted for current. The magnetic variation is held constant, but the same argument applies to that, and to the curvature of the earth.

Note that the error in locating our second fix 2F is simply the same as the difference between the two separately added sets of current vectors:

It would be instructive to create a computer simulation of this which plugs in actual values (which we now know in excrutiating detail) for current, magnetic variation, and curvature of the earth.

Dead reckoning and the exploration explosion

2012-10-18T02:18:00.001-07:00

Navigation is the art or science of combining information and reducing error to keep oneself on, or return oneself to, a route that will get you where you want to go. Note what I did not say here. Navigation is not necessarily the art or science of locating where you are. While answering the latter question – i.e. locating oneself in a Euclidean space, or a space reasonably projectable onto a Euclidean space – can usefully solve the navigation problem, figuring out such a location often requires different, and often more, information than you need to answer the questions of how to stay on or return to your desired route. And indeed this is what dead reckoning does – it gets you where you want to go with different information than what you would need to draw or find yourself on a normal map. I hope to explain more about this important incompatibility between the pilots’ and cosmographers’ systems during most of the age of exploration in a future post, but for now I will give an overview of the historical development of dead reckoning.

Between Italy of the late 13^th century and the advent of GPS, dead reckoning formed the basis of most modern navigation. Dead reckoning was in particular the primary method of navigation used during the exploration explosion of the late 15^th and early 16^th centuries – the startlingly unprecedented voyages across unknown oceans of Dias, da Gama, Columbus, Magellan, and so on.

Dead reckoning is based on a sequence of vectors. Each vector consists of two essential pieces of information: direction and distance. Distance is typically calculated from time and speed, so each vector typically consists of the tuple {direction, time, speed}. With only speed and time, we have only a scalar distance value – it could be in any direction. With time but not speed, or speed but not time, we don’t have enough information to determine the distance covered.

From the start of a voyage to the last docking at the home port, dead reckoning was a strict regimen that never stopped: day and night, in calm and in storm, its measurement, recording, and diagramming protocols were rigorously followed.

Measuring or estimating the speed of a ship was a craft mystery the nature of which is still debated today, so I’ll skip over that and focus on the two more straightforward innovations in measurement, both of which occurred in or reached Italy and were first combined there in the 13^th century: in measuring direction and in measuring time.

For measuring time mariners used the sand glass, invented in Western Europe during that same century. I have discussed this invention here. A strict regimen of turning the glasses was kept non-stop throughout a voyage.

For measuring direction, the ships of the exploration explosion typically had at least two magnetic compasses, usually built into the ship to maintain a fixed orientation with the ship. Typically one compass was used by the helmsman, in charge of steering the ship, and the other by the pilot, in charge of ordering both the sail rigging and the general direction for the helmsman to keep.

The magnetic compass was probably first invented in China, used first for feng shui and then for navigation by the early 12^th century. Somehow, without any recorded intermediaries, it appears in the writings of authors in the region of the English Channel in the late 12^th century where it was quite likely being used for navigation in that often cloudy region. Its first use in Italy was associated with the then-thriving port city of Amalfi. As both Amalfi and the English Channel were at the time controlled by the Normans, this suggests to me either a Norman innovation, or arrival via Norse trade connections to the Orient via Russia combined with now unknown Chinese trade routes. This is conjectural. Neither the Norse sagas nor writings about the Normans during earlier periods mention a magnetic compass, nor do Arab sources mention it until the late 13^th century in the Mediterranean. In any case, it is the Italians who made the magnetic compass part of a rigorous system of dead reckoning.

Green dots indicate, in the case of northern Europe, the location of authors who mention use of the magnetic compass for navigation in the late 12th and 13th centuries, and for Italy, the traditional Italian association of the invention of the compass with Amalfi in the 13th century. Red indicates areas controlled by the Normans.

A dead reckoning itinerary can be specified as a sequence of tuples { direction, speed, time }. It can be drawn as a diagram of vectors laid down head-to-tail. However, as mentioned above, this diagram by itself, for nontrivial sea and ocean voyages, contains insufficient information to map the arrows accurately onto a Ptolemaic map (i.e. maps as we commonly understand them, based on celestial latitudes and longitudes), yet sufficient at least in theory to guide a pilot following such directions to their destination.

For recording speed and direction for each sand glass time interval (e.g. half hour), pilots used some variation of the traverse board, in which these values were specified by the locations of pegs in the board.

Traverse board. Pins on the upper (circular) portion indicate compass heading and (via distance from the center) for each half hour. Pins on the lower (rectangular) portion indicate estimated speed during each hour. The board thus allows an a pilot on a wet deck unsuitable for a paper log to record an equivalent of a sequence of tuples { direction, speed, time } over four hours, after which time this information is transferred to the ship’s written log(normally kept indoors), the progress is plotted as a head-to-tail diagram on a chart (also kept indoors), and the traverse board is reset. Note that the direction is read directly off the magnetic compass: thus north (the fleur-de-lis) is magnetic north, not geographic (celestial) north.

In a future post I hope to discuss more about dead reckoning directions and explain how the errors that can accumulate in such directions over long distances were corrected. I will also explain why neither the directions nor even the corrections could be accurately drawn on a normal (Ptolemaic or celestial coordinate) map, and yet such dead reckoning directions are sufficient at least in theory for the pilot to guide his ship from the starting port to the intended destination port. In practice, pilots "fixed" errors in their dead reckoning using landmarks and sounding, which I will also describe. And I hope to describe how this resulted in two incompatible systems of “navigation” (broadly speaking) during exploration explosion -- the pilot’s dead reckoning methods versus the cosmographers’ maps and globes based on latitude and longitude.

I also hope to someday figure out just why the exploration explosion occurred when it did. The advent of rigorous dead reckoning -- combining the compass, the sand glass, and decent estimates of speed with rigorous log-keeping -- did not occur in Asia (where the Chinese, lacking the sand glass at least, made a less systematic use of the compass), nor with the Arabs (who seldom used either sand glass or compass), which along with naval superiority explains why the exploration explosion occurred from western Europe. The puzzle of why the explosion started specifically in the 1480s, and not sooner or later, however, remains a mystery to be solved.

Authority and ad hominem

2012-08-15T00:35:00.000-07:00

Argument from authority ("I'm the expert") goes hand-in-hand with the ad hominem ("you're not"). Each may be rebutted by the other, and the average quality as evidence of arguments from authority are about the same as the average quality as evidence of ad hominem. By necessity, these two kinds of evidence are the dominant forms of evidence that lead each of us as individuals to believe what we believe, since little important of what you believe comes from your own direct observation. Authority's investment costs are one good proxy measure for evaluating the value of such evidence. But contrast the law of the dominant paradigm. Perhaps the latter is superior for judging claims about the objective world, whereas investment costs are superior for judging the intersubjective.

Proxy measures, sunk costs, and Chesterton's fence

2012-08-07T23:58:00.000-07:00

G.K. Chesterton ponders a fence:

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, "I don't see the use of this; let us clear it away." To which the more intelligent type of reformer will do well to answer: "If you don't see the use of it, I certainly won't let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it."

This paradox rests on the most elementary common sense. The gate or fence did not grow there. It was not set up by somnambulists who built it in their sleep. It is highly improbable that it was put there by escaped lunatics who were for some reason loose in the street. Some person had some reason for thinking it would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable. It is extremely probable that we have overlooked some whole aspect of the question, if something set up by human beings like ourselves seems to be entirely meaningless and mysterious. There are reformers who get over this difficulty by assuming that all their fathers were fools; but if that be so, we can only say that folly appears to be a hereditary disease. But the truth is that nobody has any business to destroy a social institution until he has really seen it as an historical institution. If he knows how it arose, and what purposes it was supposed to serve, he may really be able to say that they were bad purposes, that they have since become bad purposes, or that they are purposes which are no longer served. But if he simply stares at the thing as a senseless monstrosity that has somehow sprung up in his path, it is he and not the traditionalist who is suffering from an illusion.

Contrast the sunk cost fallacy, according to one account:

When one makes a hopeless investment, one sometimes reasons: I can’t stop now, otherwise what I’ve invested so far will be lost. This is true, of course, but irrelevant to whether one should continue to invest in the project. Everything one has invested is lost regardless. If there is no hope for success in the future from the investment, then the fact that one has already lost a bundle should lead one to the conclusion that the rational thing to do is to withdraw from the project.

The sunk cost fallacy, according to another account:

Picture this: It's the evening of the Lady Gaga concert/Yankees game/yoga bootcamp. You bought the tickets months ago, saving up and looking forward to it. But tonight, it's blizzarding and you've had the worst week and are exhausted. Nothing would make you happier than a hot chocolate and pajamas, not even 16-inch pink hair/watching Jeter/nailing the dhanurasana.

But you should go, anyway, right? Because otherwise you'd be "wasting your money"?

Think again. Economically speaking, you shouldn't go.

Has Chesterton committed the sunk cost fallacy? Consider the concept of proxy measures:

The process of determining the value of a product from observations is necessarily incomplete and costly. For example, a shopper can see that an apple is shiny red. This has some correlation to its tastiness (the quality a typical shopper actually wants from an apple), but it's hardly perfect. The apple's appearance is not a complete indicator -- an apple sometimes has a rotten spot down inside even if the surface is perfectly shiny and red. We call an indirect measure of value -- for example the shininess, redness, or weight of the apple -- a proxy measure. In fact, all measures of value, besides prices in an ideal market, are proxy measures -- real value is subjective and largely tacit.

Cost can usually be measured far more objectively than value. As a result, the most common proxy measures are various kinds of costs. Examples include:

(a) paying for employment in terms of time worked, rather than by quantity produced (piece rates) or other possible measures. Time measures sacrifice, i.e. the cost of opportunities foregone by the employee

(b) most numbers recorded and reported by accountants for assets are costs rather than market prices expected to be recovered by the sale of assets.

(c) non-fiat money and collectibles obtain their value primarily from their scarcity, i.e. their cost of replacement.

Proxy measures are important because we usually can't measure value directly, much less forecast future value with high confidence. And often we know little of the evidence and preferences that went into an investment decision. You may have forgotten or (if the original decision maker was somebody else) never learned the reason. In which case, the original decision-maker may have had more knowledge than you do -- especially if that decision-maker was somebody else, but sometimes even if that decision-maker was you. In which case it can make a great deal of sense to use the sunk cost as a proxy measure of value.

In the first account of sunk cost, there seems to be no uncertainty: by definition we know that our investment is "hopeless." In such a case, valuing our sunk costs is clearly erroneous. But the second, real-world example, is far less clear: "you've had the worst week and are exhausted.." Does this mean you won't enjoy the concert, as you originally envisioned? Or does it mean that in your exhaustion you've forgotten why you wanted to go to the concert? If it's more likely to mean the latter, then my generalization of Chesterton's fence, using the idea of proxy measures, suggests that you should use your sunk costs as a proxy measure of value, and weigh that value against the costs of the blizzard and the benefits of hot chocolate and pajamas, to decide whether you still will be made happier by going to the concert.

If your evidence may be substantially incomplete you shouldn't just ignore sunk costs -- they contain valuable information about decisions you or others made in the past, perhaps after much greater thought or access to evidence than that of which you are currently capable. Even more generally, you should be loss averse -- you should tend to prefer avoiding losses over acquiring seemingly equivalent gains, and you should be divestiture averse (i.e. exhibit endowment effects) -- you should tend to prefer what you already have to what you might trade it for -- in both cases to the extent your ability to measure the value of the two items is incomplete. Since usually in the real world, and to an even greater degree in our ancestors' evolutionary environments, our ability to measure value is and was woefully incomplete, it should come as no surprise that people often value sunk costs, are loss averse, and exhibit endowment effects -- and indeed under such circumstances of incomplete value measurement it hardly constitutes "fallacy" or "bias" to do so.

In short, Chesterton's fence and proxy measures suggest that taking into account sunk costs, or more generally being averse to loss or divestiture, rather than always being a fallacy or irrational bias, may often lead to better decisions: indeed if it is done in just those cases where substantial evidence or shared preferences that motivated the original investment decision have been forgotten or have not been communicated, or otherwise where the quality of evidence that led to that decision may outweigh the quality of evidence that is motivating one to change one's mind.. We generally have far more information about our past than about our future. Decisions that have already been made, by ourselves and others, are an informative part of that past, especially when their original motivations have been forgotten.

References:

Chesterton's Fence

Sunk Cost Fallacy (1), (2)

Endowment Effects/Divestiture Aversion:

Loss Aversion:

Cost as a Proxy Measure of Value

Three philosophical essays

2012-07-25T23:33:00.001-07:00

From Algorithmic Information Theory:

Charles Bennett has discovered an objective measurement for sophistication. An example of sophistication is the structure of an airplane. We couldn't just throw parts together into a vat, shake them up, and hope thereby to assemble a flying airplane. A flying structure is vastly improbable; it is far outnumbered by the wide variety of non-flying structures. The same would be true if we tried to design a flying plane by throwing a bunch of part templates down on a table and making a blueprint out of the resulting overlays.

On the other hand, an object can be considered superficial when it is not very difficult to recreate another object to perform its function. For example, a garbage pit can be created by a wide variety of random sequences of truckfulls of garbage; it doesn't matter much in which order the trucks come.

More examples of sophistication are provided by the highly evolved structures of living things, such as wings, eyes, brains, and so on. These could not have been thrown together by chance; they must be the result of an adaptive algorithm such as Darwin's algorithm of variation and selection. If we lost the genetic code for vertebrate eyes in a mass extinction, it would take nature a vast number of animal lifetimes to re-evolve them. A sophisticated structure has a high replacement cost.

Bennett calls the computational replacement cost of an object its logical depth. Loosely speaking, depth is the necessary number of steps in the causal path linking an object with its plausible origin. Formally, it is the time required by the universal Turing machine to compute an object from its compressed original description.

From Objective versus Intersubjective Truth:

Post-Hayek and algorithmic information theory, we recognize that information-bearing codes can be computed (and in particular, ideas evolved from the interaction of people with each other over many lifetimes), which are

(a) not feasibly rederivable from first principles,

(b) not feasibly and accurately refutable (given the existence of the code to be refuted)

(c) not even feasibly and accurately justifiable (given the existence of the code to justify)

("Feasibility" is a measure of cost, especially the costs of computation and empircal experiment. "Not feasibly" means "cost not within the order of magnitude of being economically efficient": for example, not solvable within a single human lifetime. Usually the constraints are empirical rather than merely computational).

(a) and (b) are ubiqitous among highly evolved systems of interactions among richly encoded entities (whether that information is genetic or memetic). (c) is rarer, since many of these interpersonal games are likely no more diffult than NP-complete: solutions cannot be feasibly derived from scratch, but known solutions can be verified in feasible time. However, there are many problems, especially empirical problems requiring a "medical trial" over one or more full lifetimes, that don't even meet (c): it's infeasible to create a scientifically repeatable experiment. For the same reason a scientific experiment cannot refute _any_ tradition dealing with interpersonal problems (b), because it may not have run over enough lifetimes, and we don't know which computational or empirical class the interpersonal problem solved by the tradition falls into. One can scientifically refute traditional claims of a non-interpersonal nature, e.g. "God created the world in 4004 B.C.", but one cannot accurately refute metaphorical interpretations or imperative statements which apply to interpersonal relationships.

As Dawkins has observed, death is vastly more probable than life. Cultural parts randomly thrown together, or thrown together by some computationally shallow line of reasoning, most likely result in a big mess rather than well functioning relationships between people. The cultural beliefs which give rise to civilization are, like the genes which specify an organism, a highly improbable structure, surrounded in "meme space" primarily by structures which are far more dysfunctional. Most small deviations, and practically all "radical" deviations, result in the equivalent of death for the organism: a mass breakdown of civilization which can include genocide, mass poverty, starvation, plagues, and, perhaps most commonly and importantly, highly unsatisying, painful, or self-destructive individual life choices.

From Hermeneutics: An Introduction to the Interpretation of Tradition:

Hermeneutics derives from the Greek hermeneutika, "message analysis", or "things for interpreting": the interpretation of tradition, the messages we receive from the past... Natural law theorists are trying to do a Heideggerean deconstruction when they try to find the original meaning and intent of the documents deemed to express natural law, such as codifications of English common law, the U.S. Bill of Rights, etc. For example, the question "would the Founding Fathers have intended the 1st Amendment to cover cyberspace?" is a paradigmatic hermeneutical question...[Hans-Georg] Gadamer saw the value of his teacher [Martin] Heidegger's dynamic analysis, and put it in the service of studying living traditions, that is to say traditions with useful applications, such as the law . Gadamer discussed the classical as a broad normative concept denoting that which is the basis of a liberal eduction. He discussed his historical process of Behwahrung, cumulative preservation, that, through constantly improving itself, allows something true to come into being. In the terms of evolutionary hermeneutics, it is used and propagated because of its useful application, and its useful application constitutes its truth. Gadamer also discusses value in terms of the duration of a work's power to speak directly.

Pascal's scams (ii)

2012-07-23T02:26:00.002-07:00

Besides the robot apocalypse, there are many other, and often more important, examples of Pascal scams. The following may be or may have been such poorly evidenced but widely feared or hoped-for extreme consequences (these days the fears seem to predominate):

That we are currently headed for another financial industry disaster even worse than 2008 (overwrought expectations often take the form of "much like the surprise we most recently experienced, only even more extreme").

That global warming has caused or will cause disaster X (droughts, floods, hurricanes, tornadoes, ...)

A whole witch's brew of "much like what just happened" fears were the many terrorist disaster fears that sprouted like the plague in the years after 9/11: suitcase nukes, the "ticking-time bomb" excuse for legalizing torture, envelopes filled with mysterious white powders, and on and on.

On the positive daydream side, Eric Drexler's "molecular nanotechnology" predictions of the 1980s: self-replicating robots, assemblers that could make almost anything, etc. -- a whole new industrial revolution that would make everything cheap. (Instead, it was outsourcing and a high-tech version of t-shirt printing that made many things cheap, and "nanotechnology" became just a cool buzzword to use when talking about chemistry).

A big hope of some naive young engineers during the previous high oil price era of the late 1970s: solar power satellites made from lunar materials, with O'Neill space colonies to house the workers. Indeed, a whole slew of astronaut voyages and industries in space were supposed to follow after the spectacular (and spectacularly expensive) Apollo moon landings -- a "much like recently experienced, only more so" daydream.

The "Internet commerce will replace bricks-and-mortar and make all the money those companies were making" ideas that drove the Internet bubble in the late 1990s. Indeed, most or all of the bubbles and depressions in financial markets may be caused by optimistic and pessimistic Pascal fads respectively.

History is replete with many, many more such manias and scares, whether among small groups of otherwise smart people, or among the vast majority of a society. Sometimes poorly evidenced consequences do happen to occur, just in way(s) very different from expected -- for example Columbus, following the advice of well respected authorities like Strabo and Toscanelli and heading west for India -- ending up instead in America. And sometimes a lucky penny prophecy of a wonderful or terrible but very unlikely event comes true -- although hardly any of us ever seem to learn about these sage predictions until after the event. Then they only make us believe enough in prophecy that we fall for the next scam.

Pascal's scams

2012-07-14T00:16:00.000-07:00

Beware of what I call Pascal's scams: movements or belief systems that ask you to hope for or worry about very improbable outcomes that could have very large positive or negative consequences. (The name comes of course from the infinite-reward Wager proposed by Pascal: these days the large-but-finite versions are far more pernicious). Naive expected value reasoning implies that they are worth the effort: if the odds are 1 in 1,000 that I could win $1 billion, and I am risk and time neutral, then I should expend up to nearly $1 million dollars worth of effort to gain this boon. The problems with these beliefs tend to be at least threefold, all stemming from the general uncertainty, i.e. the poor information or lack of information, from which we abstracted the low probability estimate in the first place: because in the messy real world the low probability estimate is almost always due to low or poor evidence rather than being a lottery with well-defined odds:

(1) there is usually no feasible way to distinguish between the very improbable (say, 1 in 1,000) and the extremely improbable (e.g., one in a billion). Poor evidence leads to what James Franklin calls "low-weight probabilities", which lack robustness to new evidence. When the evidence is poor, and thus robustness of probabilities is lacking, then it is likely that "a small amount of further evidence would substantially change the probability. " This new evidence is as likely to decrease the probability by a factor of X as increase it by a factor of X, and the poorer the original evidence, the greater X is. (Indeed, given the nature of human imagination and bias, it is more likely to decrease it, for reasons described below).

(2) the uncertainties about the diversity and magnitudes of possible consequences, not just their probabilities, are also likely to be extremely high. Indeed, due to the overall poor information, it's easy to overlook negative consequences and recognize only positive ones, or vice-versa. The very acts you take to make it into utopia or avoid dystopia could easily send you to dystopia or make the dystopia worse.

(3) The "unknown unknown" nature of the most uncertainty leads to unfalsifiablity: proponents of the proposition can't propose a clear experiment that would greatly lower the probability or magnitude of consequences of their proposition: or at least, such an experiment would be far too expensive to actually be run, or cannot be conducted until after the time which the believers have already decided that the long-odds bet is rational. So not only is there poor information in a Pascal scam, but in the more pernicious beliefs there is little ability to improve the information.

The biggest problem with these schemes is that, the closer to infinitesimal probability, and thus usually to infinitesimal quality or quantity of evidence, one gets, the closer to infinity the possible extreme-consequence schemes one can dream up, Once some enterprising memetic innovator dreams up a Pascal's scam, the probabilities or consequences of these possible futures can be greatly exaggerated yet still seem plausible. "Yes, but what if?" the carrier of such a mind-virus incessantly demands. Furthermore, since more than a few disasters are indeed low probability events (e.g. 9/11), the plausibility and importance of dealing with such risks seems to grow in importance after they occur -- the occurrence of one improbable disaster leads to paranoia about a large number of others, and similarly for fortuitous windfalls and hopes. Humanity can dream up a near-infinity of Pascal's scams, or spend a near-infinity of time fruitlessly worrying about them or hoping for them. There are however far better ways to spend one's time -- for example in thinking about what has actually happened in the real world, rather than the vast number of things that might happen in the future but quite probably won't, or will likely cause consequences very differently than you expect.

So how should we approach low probability hypotheses with potential high value (negative or positive) outcomes? Franklin et. al. suggest that "[t]he strongly quantitative style of education in statistics, valuable as it is, can lead to a neglect of the more qualitative, logical, legal and causal perspectives needed to understand data intelligently. That is especially so in extreme risk analysis, where there is a lack of large data sets to ground solidly quantitative conclusions, and correspondingly a need to supplement the data with outside information and with argument on individual data points."

On the above quoted points I agree with Franklin, and add a more blunt suggestion: stop throwing around long odds and dreaming of big consequences as if you are onto something profound. If you can't gather the information needed to reduce the uncertainties, and if you can't suggest experiments to make the hope or worry falsifiable, stop nightmaring or daydreaming already. Also, shut up and stop trying to convince the rest of us to join you in wasting our time hoping or worrying about these fantasies. Try spending more time learning about what has actually happened in the real world. That study, too, has its uncertainties, but they are up to infinitely smaller.

More short takes

2012-07-01T22:47:00.001-07:00

Perhaps I should take up Twitter, but I already have this blog, and even my short takes tend to go a bit over 140 characters. So here goes:

* The most important professions in the modern world may be the most reviled: advertiser, salesperson, lawyer, and financial trader. What these professions have in common is extending useful social interactions far beyond the tribe-sized groups we were evolved to inhabit (most often characterized by the Dunbar number). This commonly involves activities that fly in the face of our tribal moral instincts.

* On a related note, much mistaken thinking about society could be eliminated by the most straightforward application of the pigeonhole principle: you can't fit more pigeons into your pigeon coop than you have holes to put them in. Even if you were telepathic, you could not learn all of what is going on in everybody's head because there is no room to fit all that information in yours. If I could completely scan 1,000 brains and had some machine to copy the contents of those into mine, I could only learn at most about a thousandth of the information stored in those brains, and then only at the cost of forgetting all else I had known. That's a theoretical optimum; any such real-world transfer process, such as reading and writing an e-mail or a book, or tutoring, or using or influencing a market price, will pick up only a small fraction of even the theoretically acquirable knowledge or preferences in the mind(s) at the other end of said process, or if you prefer of the information stored by those brain(s). Of course, one can argue that some kinds of knowledge -- like the kinds you and I know? -- are vastly more important than others, but such a claim is usually more snobbery than fact. Furthermore, a society with more such computational and mental diversity is more productive, because specialized algorithms, mental processes, and skills are generally far more productive than generalized ones. As Friedrich Hayek pointed out, our mutual inability to understand a very high fraction of what others know has profound implications for our economic and political institutions.

* A big problem in the last few years has been the poor recording of transfers of ownership of mortgages (i.e. of the debt not the house). The issue of recording transfers of contractual rights is very interesting. I have a proposal for this, secure property titles. This should work just as well for mortgage securities and other kinds of transferable contractual rights as it does for the real estate itself or other kinds of property. Anytime you transfer rights to a contract it should be registered in such a secure and reliable public database in order to avoid the risk of not being able to prove ownership in court.

* Not only should you disagree with others, but you should disagree with yourself. Totalitarian thought asks us to consider, much less accept, only one hypothesis at a time. By contrast quantum thought, as I call it -- although it already has a traditional name less recognizable to the modern ear, scholastic thought -- demands that we simultaneoulsy consider often mutually contradictory possibilities. Thinking about and presenting only one side's arguments gives one's thought and prose a false patina of consistency: a fallacy of thought and communications similar to false precision, but much more common and imporant. Like false precision, it can be a mental mistake or a misleading rhetorical habit. In quantum reality, by contrast, I can be both for and against a proposition because I am entertaining at least two significantly possible but inconsistent hypotheses, or because I favor some parts of a set of ideas and not others. If you are unable or unwilling to think in such a quantum or scholastic manner, it is much less likely that your thoughts are worthy of others' consideration.