From: Robert Hettinga <rah@shipwright.com>
Date: Sat, 4 May 1996 15:48:08 +0800
To: cypherpunks@toad.com
Subject: e$: The Wealth of Nation-States
In-Reply-To: <Pine.SUN.3.93.960502012945.614A-100000@polaris.mindport.net>
Message-ID: <v0300661eadafb09fa31b@[199.0.65.105]>
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At 7:05 AM  -0400 5/3/96, Michael Loomis wrote:
> No tax system will ever been perfect, but  income taxation is a good
> system of taxation.  Income taxation inevitably requires some accounting
> costs, but these costs should be going down with advances in computing
> technology and other technology.

Cashflow taxation, like the income tax, is a good *industrial* system of
taxation. It operates very well in the hierarchical communications network
of an industrial economy, especially in a world of expensive automated
processors. It favors unsecure transactions on secure, closed networks.
SWIFT (the interbank funds transfer system), NASDAQ (the "over-the-counter"
equity market system), and NIDS (the old National Institutional Delivery
System, where institutional trades were settled), are all just closed
networks, "clubs" as Eric Hughes calls them. Expensive bulletin boards.

However, in a world of ubiquitous, exponentially increasing semiconductor
switches of financial information, all using strong cryptography on
geodesic public networks, you get the virtual end of intercompany
book-entry transaction processing. Instead of swapping book-entries across
secure links, economic entities will eventually trade using anonymous
digital bearer certificates across insecure links, usually in an auction
market of some kind, settling all of their transactions for cash at the
time of the transaction.

It's economics, actually. As Moore's law progresses, the size of a given
economic entity, especially the financial intermediaries responsible for
underwriting and clearing certificates, gets increasingly smaller, until
someday it's an automated bot of some kind. At the same time, the cost of
maintaining a spaghetti-bowl of audit trails between all of those entities
becomes increasingly harder to sustain, and not just in computing
resources. It's also in time value of money. You collect the time value of
your money while it's "in transit": while it's actually sitting in your
bank account waiting to be paid to the other party of a trade. Unpaid
bills, check float, and unrevolved monthly credit card balances are all
good examples of this. As financial entities get smaller, more ubiquitous,
and more competitive, margins shrink and this becomes much more important.
Kind of like gravity and mass. Insignificant at one size, virtually the
only force at the other extreme of the scale. Because it settles instantly,
without any float, cash literally becomes king in this environment.

All of this is just as well. Strong cryptography makes the point moot.  Not
only do you have internet-level anonymizing protocols, but you also have
the certificate protocols themselves. You can't know who you're doing
business with, anyway.

When you don't have book-entries (cashflows) to tax, you can't tax
book-entries, which means nation-states can't have income, value-added,
sales, excise, import, export, or any other transaction tax, because they
just can't see any of those transactions behind a wall of strong
cryptography.

Fortunately, the nice thing about these certificate-based technologies is
that as they become more prevalent, the need for nation-states to apply
force to guarantee the honesty of the trading parties diminishes. The need
for force doesn't go away; physical security is always necessary, just like
air is. However, it is no longer so necessary to use it to deal with
repudiated trades in a large number of markets, especially those for money
and information.

At the transaction level, the protocol breaks if the requisite conditions
of the transaction aren't met. At the relationship level, if someone
repudiates a trade, they can be shunned. As Moore's law collapses the size
of the trades themselves, the abundance of competing entities in a given
certificate-based market reduces the risk of repudiation point-failure in
that market effectively to zero. Which means, you don't have to pay Uncle
to keep trading partners honest anymore. Which, as we saw before, is a good
thing, because you couldn't find them, anyway. ;-).

Given that the modern nation-state is a hierarchical industrial
organization anyway, -- a literal "force trust", to misapropriate ninteenth
century parlance -- it seems that its inability to finance itself in a
geodesic market seems inevitable. Competitive markets for all the services
it performs will eventually emerge.

We live in interesting times.

Cheers,
Bob Hettinga







-----------------
Robert Hettinga (rah@shipwright.com)
e$, 44 Farquhar Street, Boston, MA 02131 USA
"If they could 'just pass a few more laws',
  we would all be criminals."    --Vinnie Moscaritolo
The e$ Home Page: http://thumper.vmeng.com/pub/rah/