5 ms·

I appreciate the author's framing of "transaction costs." These costs are often hidden. It seems that as systems scale (in size) they tend to become inherentl

I appreciate the author's framing of "transaction costs." These costs are often hidden. It seems that as systems scale (in size) they tend to become inherently lower-trust. Consider a physician who makes house calls (not uncommon as recently as a few generations ago, and certainly not incompatible with modern medicine) and a large medical system such as Kaiser Permanente or NHS. The economic benefits of the larger-scale system are obvious, and are directly measured, but the economic detriment due to increased transaction costs (derived from decreased trust) are neither obvious nor readily measurable. Upsides of systems at scale can still outweigh downsides, and often do, but I suspect many industrial systems have a maximum scale above which efficiency gains lose out to, in this author's framing, transaction costs. This abuts certain natural "borders" for system growth, such as national (or in the case of EU, common market) boundaries.

gumby 6y ago
> It seems that as systems scale (in size) they tend to become inherently lower-trust. I think the commodity markets (grains, coal, oil, steel, etc) are a significant counterexample: they do use spot checks but by and large run pretty lean on mechanism and rely on trust. Another one is customs enforcement.
- AnHonestComment 6y ago
  Isn’t broken trust due to low quality Chinese steel and Chinese counterfeits eroding the international order? Those seem like a weird example to hold up as a success — that high trust spot checking system is failing in the face of trying to integrate with a low trust actor and is tearing down international trade with it.
- i_am_proteus 6y ago
  I'll agree, but also note that commodities are fungible.
  - gumby 6y ago
    Sorry, that was precisely my point. Commodities depend on their fungibility: that wheat is all durum and has an impurity level below X; the sulphur level of that crude oil is between Y and Z, and so on. Plus that the seller will deliver per the contract There's a game theory argument that the system is somewhat self-managing; though you could defect in any single transaction your reputation would suffer and it wouldn't be worth it. Perhaps it's a good counterexample because of its size: everybody purchasing directly in the commodities market (i.e. people who take delivery) can afford to have one bad batch because their volume is so high. But still, that depends on some degree of gatekeeping on the input side.
    - i_am_proteus 6y ago
      Indeed, and good food for thought. The fungibility is a feature both of these products being commodities in general, and of their quality being measurable. When measuring quality is cheap and easy, the risks for a defector are high. When measuring quality is expensive and/or difficult, the risks for a defector are lower, and the defector's incentives may therefore be comparably greater.
- dcx 6y ago
  I've spent a few years in a couple of bulk commodities, and I'm sorry, but your thought about commodity markets is simply not true in my experience. There are entire webs of institutions and mechanisms that make sure people do not defraud each other. Some keywords - look into Letters of Credit, Bills of Lading, Certificates of Origin, INCOTERMS, and the requirements to make these work (such as inspection certificates from independent third-party organisations like SGS or CIQ). Bulk commodities can be sampled, tested and certified as many as 4-8 times in between buyer and seller, on a dozen different criteria. Bulk commodity trading happens in an intrinsically low trust environment - it is frequently arms-length, cross-border, multiparty, for millions of dollars per transaction, and with a crazy number of different risks that have to be mitigated. The incentives to defect and come away millions richer are huge. And much of the system was developed for a time before the Internet. While this is a noble sentiment, the structure and transaction costs are absolutely essential for the whole thing to work.
  - gumby 6y ago
    Thanks for the info based on actual experience!
meheleventyone 6y ago
Large systems aren’t inherently low-trust though. For example dealing with the same point of contact. Like your local GP in the NHS. I definitely remember home visits from our GP as a kid. So within a generation. Or with our kids family nurse that did all the pre and post checkups for both children.
- throwaway0a5e 6y ago
  AKA the "Algerian Resistance" model. Everyone works with the same or slowly changing set of subordinates below them (patients in the case of an NHS physician) and same handler above them so despite the organization being big and faceless everyone has a long term high trust relationship with the people directly above and below them.
  - dcx 6y ago
    This sounds interesting and Google is not coming up with useful leads - would you be able to point me to more information on the "Algerian Resistance" model you describe?
    - throwaway0a5e 6y ago
      Read up on the ANLF. The ANLF structured their organization such that nobody had good knowledge of the organization except the portion of the org chart immediately above and below them. This annoyed the French because they would capture the grunts and it was a hell of a lot of work to work their way up to knowing who the leaders were since you'd need an unbroken chain of N people willing to narc on their boss. This is made harder because people are more likely to narc on their boss's boss who they don't really know vs their boss who they have a hack of a working relationship with but that depends on knowing who your boss's boss is. Be advised that I glossed over some details in my original comment.
jrumbut 6y ago
This is why I've never much loved blockchain on a conceptual level. Even if you can make existing transactions trustless, you need more and more new transactions to negotiate the boundary between the physical world and the data on the blockchain.
m463 6y ago
One thing I took away from the beginning of Matt Ridley's book Rational Optimism is that with trust, commerce is unlimited. And here we are stuck in this world where the computer in your pocket is untrustworthy, and you can't tell a useful benign app from an app trying to upload your life. and it's a shame.
- deleted 6y ago
  [deleted]
- zamfi 6y ago
  > you can't tell a useful benign app from an app trying to upload your life. This is going to be an unpopular opinion, but it appears only 32% [0] of people care enough about privacy to switch to a service that preserves it. I suspect an even lower percentage know that apps on their phones might even be trying to upload their lives. This is not the source of "mistrust". [0]: https://hbr.org/2020/01/do-you-care-about-privacy-as-much-as-your-customers-do https://hbr.org/2020/01/do-you-care-about-privacy-as-much-as...
  - the_jeremy 6y ago
    I strongly disagree with your take on that survey. For one, it only mentions switching, not removing something (like social media) from your life. I have not switched providers because I found one that was more private. I have deleted facebook.
  - roenxi 6y ago
    To be fair on those 68% who "don't care" they can't tell if they are using something that cares about their privacy or not. Imagine two options of (1) an organisation who claims to do the right things and (2) an organisation who makes no claims. Picking either option could be a rational response for someone who cares about privacy. Any strategy has to account for the existence of liers/incompetents who claim to do something then don't. To make privacy conscious decisions requires monitoring many information channels and having a nuanced understanding of the history and motivations of the people involved. That is too hard to do for most rational people. They need clearer support outlining what they are meant to be doing than what they get.
Graziano_M 6y ago
One thing of note is that communities that can rely on trust and thus have lower transactional cost overhead should be able to out-compete those that can't rely on trust. An example of this is with the Hasidic jews in NY's diamond district. This is something that Thomas Sowell touches on in a few of his books. EDIT: Found my note > What economist William Easterly has called “the radius of trust” varies greatly from group to group and from country to country. Within groups like the Marwaris of India, the Chinese in Southeast Asia, or Hasidic Jews in New York’s diamond industry, transactions involving substantial sums of money can take place without written agreements or recourse to the legal system, giving these groups competitive advantage over other members of their respective societies who cannot safely engage in similar low-cost ways of doing business. Whole nations likewise differ in the levels of honesty. Bicycles can be left parked without locks in Tokyo but doing so in many other countries would be a virtual guarantee that they would be stolen. [1] [1] "Economic Facts and Fallacies" Thomas Sowell

gumby 6y ago

> It seems that as systems scale (in size) they tend to become inherently lower-trust. I think the commodity markets (grains, coal, oil, steel, etc) are a significant counterexample: they do use spot checks but by and large run pretty lean on mechanism and rely on trust. Another one is customs enforcement.

AnHonestComment 6y ago
Isn’t broken trust due to low quality Chinese steel and Chinese counterfeits eroding the international order? Those seem like a weird example to hold up as a success — that high trust spot checking system is failing in the face of trying to integrate with a low trust actor and is tearing down international trade with it.
i_am_proteus 6y ago
I'll agree, but also note that commodities are fungible.
- gumby 6y ago
  Sorry, that was precisely my point. Commodities depend on their fungibility: that wheat is all durum and has an impurity level below X; the sulphur level of that crude oil is between Y and Z, and so on. Plus that the seller will deliver per the contract There's a game theory argument that the system is somewhat self-managing; though you could defect in any single transaction your reputation would suffer and it wouldn't be worth it. Perhaps it's a good counterexample because of its size: everybody purchasing directly in the commodities market (i.e. people who take delivery) can afford to have one bad batch because their volume is so high. But still, that depends on some degree of gatekeeping on the input side.
  - i_am_proteus 6y ago
    Indeed, and good food for thought. The fungibility is a feature both of these products being commodities in general, and of their quality being measurable. When measuring quality is cheap and easy, the risks for a defector are high. When measuring quality is expensive and/or difficult, the risks for a defector are lower, and the defector's incentives may therefore be comparably greater.
dcx 6y ago
I've spent a few years in a couple of bulk commodities, and I'm sorry, but your thought about commodity markets is simply not true in my experience. There are entire webs of institutions and mechanisms that make sure people do not defraud each other. Some keywords - look into Letters of Credit, Bills of Lading, Certificates of Origin, INCOTERMS, and the requirements to make these work (such as inspection certificates from independent third-party organisations like SGS or CIQ). Bulk commodities can be sampled, tested and certified as many as 4-8 times in between buyer and seller, on a dozen different criteria. Bulk commodity trading happens in an intrinsically low trust environment - it is frequently arms-length, cross-border, multiparty, for millions of dollars per transaction, and with a crazy number of different risks that have to be mitigated. The incentives to defect and come away millions richer are huge. And much of the system was developed for a time before the Internet. While this is a noble sentiment, the structure and transaction costs are absolutely essential for the whole thing to work.
- gumby 6y ago
  Thanks for the info based on actual experience!

meheleventyone 6y ago

Large systems aren’t inherently low-trust though. For example dealing with the same point of contact. Like your local GP in the NHS. I definitely remember home visits from our GP as a kid. So within a generation. Or with our kids family nurse that did all the pre and post checkups for both children.

throwaway0a5e 6y ago
AKA the "Algerian Resistance" model. Everyone works with the same or slowly changing set of subordinates below them (patients in the case of an NHS physician) and same handler above them so despite the organization being big and faceless everyone has a long term high trust relationship with the people directly above and below them.
- dcx 6y ago
  This sounds interesting and Google is not coming up with useful leads - would you be able to point me to more information on the "Algerian Resistance" model you describe?
  - throwaway0a5e 6y ago
    Read up on the ANLF. The ANLF structured their organization such that nobody had good knowledge of the organization except the portion of the org chart immediately above and below them. This annoyed the French because they would capture the grunts and it was a hell of a lot of work to work their way up to knowing who the leaders were since you'd need an unbroken chain of N people willing to narc on their boss. This is made harder because people are more likely to narc on their boss's boss who they don't really know vs their boss who they have a hack of a working relationship with but that depends on knowing who your boss's boss is. Be advised that I glossed over some details in my original comment.

jrumbut 6y ago

This is why I've never much loved blockchain on a conceptual level. Even if you can make existing transactions trustless, you need more and more new transactions to negotiate the boundary between the physical world and the data on the blockchain.

m463 6y ago

One thing I took away from the beginning of Matt Ridley's book Rational Optimism is that with trust, commerce is unlimited. And here we are stuck in this world where the computer in your pocket is untrustworthy, and you can't tell a useful benign app from an app trying to upload your life. and it's a shame.

deleted 6y ago
[deleted]
zamfi 6y ago
> you can't tell a useful benign app from an app trying to upload your life. This is going to be an unpopular opinion, but it appears only 32% [0] of people care enough about privacy to switch to a service that preserves it. I suspect an even lower percentage know that apps on their phones might even be trying to upload their lives. This is not the source of "mistrust". [0]: https://hbr.org/2020/01/do-you-care-about-privacy-as-much-as-your-customers-do https://hbr.org/2020/01/do-you-care-about-privacy-as-much-as...
- the_jeremy 6y ago
  I strongly disagree with your take on that survey. For one, it only mentions switching, not removing something (like social media) from your life. I have not switched providers because I found one that was more private. I have deleted facebook.
- roenxi 6y ago
  To be fair on those 68% who "don't care" they can't tell if they are using something that cares about their privacy or not. Imagine two options of (1) an organisation who claims to do the right things and (2) an organisation who makes no claims. Picking either option could be a rational response for someone who cares about privacy. Any strategy has to account for the existence of liers/incompetents who claim to do something then don't. To make privacy conscious decisions requires monitoring many information channels and having a nuanced understanding of the history and motivations of the people involved. That is too hard to do for most rational people. They need clearer support outlining what they are meant to be doing than what they get.

Graziano_M 6y ago

One thing of note is that communities that can rely on trust and thus have lower transactional cost overhead should be able to out-compete those that can't rely on trust. An example of this is with the Hasidic jews in NY's diamond district. This is something that Thomas Sowell touches on in a few of his books. EDIT: Found my note > What economist William Easterly has called “the radius of trust” varies greatly from group to group and from country to country. Within groups like the Marwaris of India, the Chinese in Southeast Asia, or Hasidic Jews in New York’s diamond industry, transactions involving substantial sums of money can take place without written agreements or recourse to the legal system, giving these groups competitive advantage over other members of their respective societies who cannot safely engage in similar low-cost ways of doing business. Whole nations likewise differ in the levels of honesty. Bicycles can be left parked without locks in Tokyo but doing so in many other countries would be a virtual guarantee that they would be stolen. [1] [1] "Economic Facts and Fallacies" Thomas Sowell