From: jamesd@echeque.com
Date: Sun, 19 May 1996 02:19:00 +0800
To: Wei Dai <hfinney@shell.portal.com>
Subject: Re: anonymous companies
Message-ID: <199605171837.LAA09867@dns1.noc.best.net>
MIME-Version: 1.0
Content-Type: text/plain


At 06:42 PM 5/16/96 -0700, Wei Dai wrote:
>
> I'll just give one problem: the principal-agent problem.  How do owners of
> the company make sure the managers operate the company in their best
> interest?

Actually looting of companies happens a lot right now today, and very
seldom leads to criminal charges.  Twice I have lost a job because the
company I worked for went under, apparently due to looting.

> Solution: reputation.  If the managers don't do the right things, the
> owners arrange so that the managers lose reputation and won't get hired in
> the future.  Unfortunately the science of reputation is not so advanced
> that we know this will actually work.

At present venture capitalists seem to rely on the sniff-their-arses
method.  They talk to people and try and get a feel as to whether they
are planning a robbery.  This method is obviously likely to be less
effectual as businesses move to the net.

This problem is probably the major reason why Net startups are physically 
located in Silicon valley, rather than world wide or nation wide.  Of course
the problem is that if the venture capitalists can find them to sniff
their arses, the bad boys can also find them to shake them down.

In some businesses we can solve this problem by cryptographic control
mechanisms, such as open books banking.  In others, such as net startups,
I see no solution other than increased reliance on personal individual
capital.

Athenian capitalism worked largely on personal capital.  Because of their
terrible arithmetic system, bookkeeping was really bad, and in consequence
stock investments tended to go sour.  Socrates lost a bundle in this 
fashion, which may explain his lack of enthusiasm for capitalists.

> Solution: smart contracts.  This is Nick Szabo's idea of building
> contractual obligations into cryptographic protocols so that the parties
> have no choice but to fullfil them.  But again we don't know whether this
> will actually work for this problem.

It will work for many particular cases of this problem.
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