Douglass North – Humanity 3.0

Informal institutions grown on decentralized state machines

As we discussed in the prior post, institutions are constraints on human behavior established within human groups as operating rules about what is allowed and disallowed within the group. Shared beliefs about these rules and their interpretation are a precursor to making institutions work in society.

For this post, we shall use the term Decentralized State Machine as opposed to the term blockchain, in the same spirit as it has been used over the past several years by Cosmos founder Ethan Buckman, to define networks of computerized validators consisting of both CPU and memory that run a software client and apply consensus rules to keep a decentralized and shared log of transactions, votes, and social events carried out by members of the network (i.e. signed by their private keys).

Ethan Buckman talking about sovereign communities built on Decentralized State Machines.

Now, let’s take all that we’ve learned about Institutions from the prior post, and apply this lens of analysis to how we might possibly carry humanity forward with a new social, political, and economic order fashioned predominantly from informal institutions maintained by Decentralized State Machine networks.

While I have been big believer in the American system, and the framework that it has provided over the past 245 years to unleash human prosperity, I am writing this blog because I believe we now have the tools to do substantially better as a human species!

The key insight is that it has now become possible to establish a whole new family or class of informal institutions grown on top of Decentralized State Machines to deliver social, political, and economic order within local communities and at scale. Early examples of such informal institutions are now emerging and becoming tangible within many blockchain and cryptocurrency projects, and serve as proof of concept.

Want to learn more about this crazy ‘fever dream’ that I can foresee in my mind’s eye?

Here we go!

First, we make two simple observations:

Decentralized State Machines are record-keeping systems w/ capacity to maintain perfect socially-agreed accounts of social, political, and economic events. Saying this in another way, all of the nodes in a network that support a Decentralized State Machine maintain an exact-copy of the record of history of transactions, votes, and social events between members of that network, and since all of this record-keeping is public and subject to consensus rules, there is zero-discrepancy about the true history of events for any member of the community who is participating. Thus, a Decentralized State Machine is a perfect system for maintaining shared beliefs and a single record of truth about history for any community engaging in joint economic activity, decision-making, political-fact keeping, and social-fact keeping. In other words, even the the most forgetful, self-interested, or confused member of a community cannot dispute the record of facts in a socially-credible fashion if those facts have been recorded via a Decentralized State Machine network.
Decentralized State Machines make it possible to enact new kinds of informal institutions within huge communities of both humans and machines at massive societal scale at very low cost. For all of you blockchain builders: A new decentralized protocol programmed in a smart contract and accessible via a dApp is really a new kind of informal institution, as per the definition of the term ‘informal institution’ provided in the prior post. These new kinds of informal institutions can have myriad purposes and interaction points for human and machine users, and each interaction must follow the rules of the protocol and be signed by the users private key (we will discuss this more in the next post). In this sense, the protocol enforces the desired behavior and creates order or routine behavior within the community of users of the protocol. If a person or machine doesn’t follow the rules of a particular protocol, they simply cannot participate. They are effectively ostracized or banished from the group that is repeating the actions of the protocol and gaining its benefits.

For example, if a person doesn’t like the fact that Bitcoin transactions are irreversible and they don’t want to use the protocol, no one is making them join it. But if Bitcoin becomes dominant in society, and a small hold-out of people refuse to use it, or if they refuse to follow the protocol exactly as designed, then those individuals become unable to access the benefits of the protocol, and they are effectively banished and may not gain in the wealth creating associated with a society booting-up a new form of money. (in this regard, Peter Schiff sits outside of the Bitcoin protocol, and he will remain in this banished condition, until he gets with the ‘shared beliefs’ and starts to accept and follow the protocol rules).

Now, connecting observation 1 and 2 together, since all of the events within a community that builds its social, economic, or political activities on top of a network of Decentralized State Machines are perfectly recorded via a system of maintaining shared beliefs, without any possibility for social disagreement about the facts, and since blockchain protocols can be used to program voluntarily-accepted constraints on both human and machine behavior in terms of what that community of humans and machines can do relative to the protocol, thus a Decentralized State Machine is the ultimate substrate layer for creating new kinds of informal institutions, to underpin new kinds of social, political, and economic arrangements in humanity. (read: it becomes possible to create a whole new basis of order in society, polity, and economy relying on informal institutions and not so much on formal institutions, nor on the premise of violence on which formal institutions are enforced. This is because informal institutions DO NOT REQUIRE formal punishments, ie. there is no need for a police-state with fines, jailings, and electrocutions!)

The key insight here, as we move from Humanity 2.0 to Humanity 3.0 institutional arrangements, is that we are shifting the basis of “order” from formal institutions that were maintained by the nation-state with enforcement via violence and draconian limitations on personal freedoms, to informal institutions maintained by voluntary protocol societies with enforcement via loss of access.

A corollary insight: When we are in the realm of informal protocols, deviation from the protocol whether intentional or accidental, basically becomes synonymous with lack of access, or being fenced out, or in the language of institutional theory, ostracization or banishment from the protocol. In other words, if you don’t follow the protocol, you lose privilege of its benefits!

Please pause and think about this for a few moments: This link between Decentralized State Machines and Informal Institutions has wildly exciting potential for the organization of all of humanity! There may be a pathway that has opened up to our species, made available by harnessing this new Decentralized State Machine technology to create informal institutions, that allows us to replace the political and economic arrangements of the nation-state (which rely on formal institutions and enforcement by violence) with a new system that relies on informal institutions as a primary basis for societal order!

Here is the big idea: If we can build new kinds of informal institutions to replace — and re-factor and re-do even better –the formal institutions responsible over the last century for the delivery of public records, money markets, property rights, governance systems, professional credentialing bodies, scales of justice, other kinds of public goods, and so on and so forth, then we can build a new kind of Humanity 3.0 not premised on violence, and create a much better future for our species.

Another insight from economic historian Douglass North: history is path dependent. So, where you end up in any institution-building project is very much dependent on the philosophical underpinnings and where you start! So, if your entire system is premised on violence as a core starting-out assumption, probably that isn’t going to take you to very good places as a human species! I believe America now has a greater number of people locked up in cages out of any species in all of human civilization. I believe we can fix this now, with a system pinned on new starting assumptions.

Perhaps we can use Decentralized State Machines as a foundation for a parallel system built entirely on informal institutions, and slowly transition as a species away from the violence-underpinned system, and slowly create a new set of informal institutions to deliver governance systems, financial markets, and so on to support humanity running at scale, without needing for it to be ordered by the heavy cudgel of violence.

We know from institutional theory that informal institutions can be just as powerful and as useful for ordering human behavior as are formal institutions. In many respects, they are more persistent and enduring, as we have learned from the example of informal institutions in Russia outliving the implementation of both the communist and capitalist formal institutions.

The problem with them, is that it was difficult to enforce them at massive scale, due to the informal nature of enforcement. However, this has been solved now, with informal institutions enforced by networks of Decentralized State Machines.

In many respects, the birth of the nation-state was only possible with the advent of parchment paper, and the writing of rules, codes, and punishments with a quill pen down on the parchment paper, e.g. Hammurabi’s code, British common law, French Napoleonic law. The shared set of beliefs about crimes and requisite punishments recorded on ink on the parchment paper could be copied hundreds of times, could be replicated in libraries, and could became the basis of enforcing a consistent formal order. Thus, you can say that the quill pen and parchment paper were the technological precursors to formal rule of law systems as a basis of human order. Prior to the quill pen and parchment paper, the ordering of humanity was done through family clans and village councils mostly using informal institutions, i.e. if the village turned against you you were banished and needed to hunt and gather on your own as an excile.

Now, with the emergence of Decentralized State Machines as a new technology for implementing informal institutions, we could see a renaissance in ‘societal order building activities’ based entirely upon the informal institutional model, but in a much more sophisticated way.

The great thing about a network of Decentralize State Machines is that it is like a “clipboard army” of neutral, third-party observers to do “fact checking, certifying, auditing, and rule verifiying” for every event that is logged into a protocol. If it is a business protocol, then business rules can be enforced within a network (eg. see work being pursued at Chronicled). If it is a democracy protocol, then voting rules can be enforced within a network (eg. see everything happening within Polkadot, Cosmos, Decred, and Tezos).

For example, if the network encompasses a million people, and they all vote once during an important election, then the invisible clipboard army that is built-into that network is performing the function of a million third-party certifications that the votes were recorded correctly according to the rules. For example, rules might include that:

every single eligible vote must be for one of the three candidates,
the vote must be recorded during the proper window of time, and
an account on the network must not vote more than one time.

Although simple, the costs of enforcing these three rules over a million people is non-trivial in a world of paper and pens, or, even in a world of desktops and central databases. Prior to decentralized consensus systems, the transaction costs of doing one million third-party verifications to certify adherence to the voting protocol was extremely cost-prohibitive. Now, it is virtually costless with dApps running on Decentralized State Machines and reliable enforcement of dApp accessible via network protocols.

In the Humanity 2.0 era, most of the important institutions that you and I and every other citizen of the nation-state encountered were formal institutions, passed by the Congress, and these formal institutions were the backbone of the entire American system. Indeed, when there was failure to comply with a formal institution, to make the American system work, it was necessary to institute jail or fines as punishment, backed by the monopoly on violence carried by the State. Of course, there were informal institutions scattered throughout the system, but somehow they were of secondary importance to the formal institutions in terms of the functioning of the system.

In the humanity 3.0 era, there will be much greater centrality placed on informal institutions, as network protocols can be used as a new substrate layer to boot-up money, run democratic processes to choose representation, deliver public goods, gain credentials, and access the scales of justice. Thus, informal institutions will emerge as the backbone of the new voluntary Libertarian system, and formal institutions will become a lot less central.

As this new order emerges, banishment from the networks — and loss of access to opportunities for creating wealth, gaining credentials, and developing reputation — will become the worst form of punishment that could be imagined within this new order.

Given that decentralized blockchain networks will increasingly become a source of important public goods and services that human beings depend upon for liberty, freedom, and happy livelihoods, human beings will generally become considerably more careful about not to be banished from these important networks, and in a sense banishment will become worse then doing jail time as we approach the 22nd century and this new social order built upon informal institutions fully unfolds.

Many economic historians have justified the violence present in the nation-state model, as something that is inevitable if you are going to create order in society, and thus they have accepted this premise of violence using an ‘ends justifies the means’ argument. However, one can only argue that the ends justifies the means if there is no better means available to achieving those same ends. As soon as the technology frontier evolves such that the formal institutional means built on violence can indeed be replaced with something better, then isn’t it a moral obligation as a human species to re-build better on the new foundations? If we can do successfully, the sustainability of humanity on planet earth and the citadels that we can climb to as a human species can be vastly improved, imho.

Humanity 1.0, 2.0 and 3.0

As a futurist, pragmatist, humanist, and blockchain enthusiast, over the past several years I’ve increasingly come to see blockchain as the missing link on which to build a whole new family of informal institutions that can allow humanity to leapfrog or transcend beyond prior states of human progress, which I shall label Humanity 1.0 and Humanity 2.0. These labels employ key concepts developed by economic historian Douglass North, which he taught me as his doctoral student many years ago.

Humanity 1.0 – what Doug referred to as the “natural order” – this is the economic system typical of hunter-gatherer, agrarian, and early-civilized societies, with the dominant institutions being family clan, mafia, and kinship structures. Enforcement of agreements in the economy is done via personal trust, loyalty, and threat of shadow of the future. If someone cheats or defrauds you, you can resort to ‘naming and shaming’ them and the community of people around you can ostracize the bad individual, but short of beating the person up and/or kicking them out of your social circles, there was little else you could do. In-group and out-group have been key concepts to understand the natural order, and in China and Turkey (places where Humanity 1.0 is still practiced), for example, in-group relationships are always approached with the utmost loyalty, respect, and integrity (many cups of tea are drunk together before a business transaction) whereas out-group relationships are in many cases characterized by behaviors of deception, intent to defraud, and extreme distrust. Over the past hundred years in China and Turkey, a business man could defraud the current group of investors, skip town, and start over with a new personal name and a new business name in a different town 200 miles away with little repercussion.
Humanity 2.0 – what Doug referred to as “impersonal exchange economies” – in these systems enforcement of agreements is by third-party institutions. The dominant institutions being contracts, rule of law, courts, and police. The first impersonal exchange economies are thought to have originated in Italy, with the trade guilds playing the role of the third-party institutions that would sanction craftsmen who did not perform according to their contracts. Once there exists functioning third-party enforcement of contractual agreements, then it is possible to transact and do business people with people you have never met in the economy, because you don’t need to trust the people, your trust is placed in the contracts and the third-party enforcing institutions (i.e. the courts and police). It is this system as we have in America that makes it possible for me personally to have a credit card with a company where I don’t know any of the executives personally, and with a monthly statement showing transactions with 100+ entities whom I’ve never met, done a reference check on, or done business with previously. In a Humanity 1.0 system this would be impossible. But in the Humanity 2.0 system, trust is placed in the rule of law and third-party enforcement of agreements. Within impersonal exchange economies the so-called transaction sector of the economy grows enormously as people engage in high numbers of smaller transactions with all kinds of intermediaries and service providers, while the transaction costs per individual transaction tend to fall with sophisticated contracting, payment, and insurance technologies. Not surprisingly, there is a phenomenon in the American business culture where personal relationships mean very little (no cups of tea are drunk before a transaction), what is enshrined in the contract carries the day, and the lawyers rule the roost, as the contract is all that matters!

The logic of Humanity 1.0 arrangements existed in agrarian societies prior to the rise of nation-states and has continued to exist in the 20th and 21st century in a majority of the world’s developing countries. For example, in many developing countries, even though democracies, courts, and rule of law seem to be present from the outside, once you peel the onion and understand what is actually happening in the country, you find out that the democracy is a sham, the courts are corrupt, and personal relationships w/ the strongman and his surrounding elite can tip the scales of justice (e.g. Pakistan, Russia, Venezuela). Thus, the whole country still runs as a Humanity 1.0 system.

For a society to evolve from the state of Humanity 1.0 to the state of Humanity 2.0, the hands of the President or Prime Minister as well as key cabinet minsters and senators must be bound by the institutions of the state, so that these individuals cannot interfere with administration of the institutions of democracy, rule of law, courts, and so forth. Sadly, many of the countries that have copied the British institutions of the nation-state, democracy, rule of law, and courts have manipulated, altered, and twisted how the social behaviors of these key institutions are replicated and practiced, rendering the Humanity 2.0 institutional templates as a facade masking Humanity 1.0 informal institutional behaviors.

For example, there are stories of the courts in Pakistan where Military Generals sit on the front bench in the court room when they desire a certain decision to be delivered by the Magistrate; this is a case of a Humanity 1.0 institutions overriding the Humanity 2.0 institutional facade. I mean, why even have the court building if basically it is a mob/mafia rule and the Military Generals are for all intents and purposes above the rule of law?

To share a personal anecdote, I can remember interacting w/ Doug North when he was in his mid-80s. I was visiting him at his summer house in Benzonia, Michigan during a time when I was writing a paper and he was working on his book “Understanding the Process of Economic Change“. I remember he was very excited like a young boy on Christmas eve as he was pursuing the question “what are the ‘doorstep conditions‘ allowing a country to evolve from the natural state (Humanity 1.0) into an impersonal exchange system (Humanity 2.0)?” Specifically, how does a country evolve its institutions to bind the hands of the political elite and the military against interfering with the rule of law? How has this evolution happened across human history in different countries over time, and how can we effect this to happen in a positive way in the future?

Around that time, Doug was making visits to Bangkok to meet with King Bhumibol, to discuss how it might be possible to evolve Thailand’s constitution and institutions to prevent backsliding of democratic progress if and when new self-interested leaders would come to power in the future. Sadly, Doug and old King Bhumibol were not successful in their precautionary efforts to strengthen the Thai constitution and democracy, as over the past decade we have all watched Thailand regress badly into dictatorship, censorship of free speech, loss of individual freedoms, killing of journalists, meddling with democracy, and weakening of rule of law.

I also distinctly remember Doug saying to me: “It is my greatest fear that a charismatic leader could come to power in America, and subvert the institutions of our great American democracy, and the country could regress back into the economic dark ages of the ‘natural state’ of medieval times (i.e the equilibrium conditions dictated by the institutions of Humanity 1.0). Based on my knowledge of economic history, there is nothing to preventing this pathway from unfolding even here in America.”

Doug passed away in 2015, a full year before the rise of Donald Trump, and several years before Donald Trump’s attempt to subvert the American constitution, democracy, and rule of law. How sage his predictions had been!

As far as I know, in all places where Humanity 2.0 has been achieved, the leadership was democratically elected, and democracy was the basis of transition of power of the political elite. The institution of democracy is necessary in order to transition power in a peaceful manner and to prevent a powerful leader rising up above the rule of law, lengthening his/her own stay in office, and becoming all powerful — i.e. becoming a king.

Now, coming to Humanity 3.0, in my mind’s eye I can foresee a new ‘equilibrium state’ for human political-economy, made possible by a new set of informal institutions maintained by blockchain systems, the conditions for which I can now see evolving in front of my very eyes with public/private key pairs as the link for each individual to express his/her free will, dApps as the point of access, and protocols enforced by blockchain nodes maintaining social, political, and economy stability. Even though many people may not yet realize that the creation of new kinds of informal institutions is what is actually happening on top of blockchain, that is indeed where I see it all going, that is what I see as the potential highest and best use of the technology, and thus why I am setting out to write this blog to add shape and form to this nascent and emergent trajectory of human progress.

Here are a few key attributes of the new economic and political institutions that can and will emerge on top of blockchain:

they make it possible to have advanced forms of human governance and civilization without the premise of violence that was necessary to sustain Humanity 2.0,
they enable every member of the system to sign payments, votes, and other events via their private key with a clear record of the ‘transaction’ recorded on a blockchain enabling everyone in the system to trust the records & results,
they begin to do away with the need of horribly-inefficient middle men that are nation-states and governments to preside over public matters of elections; money markets; public-record keeping; private property rights; budget allocations to defense, education, and healthcare services; and enforcement of justice as all of which can be done better, cheaper, and more justly and transparently via decentralized protocols and direct democracy,
they surpass the limitations of nation-states in defining currency regimes and defining the role & function of the financial sector,
they extend the role of courts from merely arbitrating disputes over personal injury, property, and the like to actually (potentially) reversing transactions in the economy in order to guarantee the service of justice,

If Milton Friedman could see what I can envision now, in terms of leveraging the new technological frontier to achieve a blockchain-administered substitute for the apparatus of government, without any corruption, or inefficiency in the administrative apparatus needed to deliver all manner of public goods and services, I believe he would leap for joy in his grave immediately upon recognizing the incredible opportunity for human progress and advancement of our species. The systems that we can create under this new technology frontier could likely make Milton’s lifetime dream of a “small and limited government” look a lot closer to out-dated concepts of governmental bloat and inefficiency then to the new models of efficiency that I imagine should possible by exploiting this new technology frontier!

From a blue sky potential standpoint, this new level of efficiency that can be achieved in administering public/network level services on top of neutral blockchain systems can push the frontier of what makes sense to deliver to society as public goods, as there are no longer heavy transaction costs of administration requiring an extreme burden of taxation to support the model.

To explain the direction I am headed from the standpoint of eliminating middle men: the government is the biggest middle man of all, and if we can replace all of the functions of the government with a neutral, technology-layer that always does its job like a loyal and faithful clipboard army, at minimal transaction costs, then we really will have accomplished something for humanity’s future!

In the same way that the Humanity 2.0 institutions brought down the average transaction costs of a single average transaction in the economy, thereby allowing the transaction and financial sector of the economy as a whole to flourish and grow, the Humanity 3.0 institutions will bring down the average costs of providing community goods and public services, and will allow the public sector of the economy as a whole to flourish and grow!

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As a person who is highly self-critical and also somewhat lazy when it comes to publishing my own original intellectual ideas, I am starting this blog project both with cautious excitement about how important it could be as a lighthouse for the future of our human species, but also with a certain trepidation due to what I fear as my own ineptitude in communicating the flickering ideas that I see within my own mind’s eye, which come in fit’s and starts like shooting stars, and which are difficult to pin down into a linear sequence in written prose.

Oddly, it was the death of the first Bitcoin maximalist Mircea Popescu that triggered me to finally sit down and begin the effort to linearize my ideas. I had visited his blog Trilema occasionally over the years, and when I saw news of his passing earlier today and revisited his blog once again, I realized that if I didn’t get busy writing and sharing my own ideas my chance to do so could also be lost.

Over the past year I’ve been experiencing chest pain and a great deal of eye pain, and the number of hours in the day during which my mind is sharp is considerably fewer now then a few short years ago. As a humanist, the fear of losing my window of opportunity to make a positive contribution within humanity is perhaps my greatest fear, and I need to get busy here or else surely I will meet my end feeling regret that I didn’t exercise my opportunity to contribute when I had the chance. This fear may be my greatest motivator to get busy on this blogging project.

So, without further ado, let’s get on with it — I genuinely hope the ideas I share here can be useful for others to critique, piggyback upon, and building technology over the years that follow.