Top 9 Nick Szabo Concepts & Terminology


Mental transaction costs

In our day to day, we’re involved in thousands of micro transactions. As a lazy species, we would always like life to go as uninterrupted and flowing as it may. I can give a late new regulation in Israel as an example — it is now mandatory for supermarkets to charge 10 cents on every plastic bag you use to take groceries home. When the legislator came up with this bright idea, he was probably saying “Well 10 cents are really not much”. Yet the mental transaction cost involved is quite high — You already pay for the groceries, so now you need to pack them all up in an unknown amount of plastic bags, only then you know how many bags you might take, you need to reach out again for your wallet and look for the exact amount of cents, which you probably don’t have, so you need to pay and get change from the cashier again. It’s a quite cumbersome process that personally annoys me a lot. One conclusion Szabo reaches is that while smart contracts enable us to pay different and changing small amounts according to our transactions, it might just be that a subscription model with constant pricing of some kind would better fit our desire of reducing mental transaction costs.

Social scalability

“The secret to Bitcoin’s success is certainly not its computational efficiency or its scalability in the consumption of resources. … 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”

Franchise Jurisdiction

You would assume in a way Szabo to be an anarcho-capitalist, given his role in the cryptocurrency movement. This is not the case. He’s a big believer in the justice system and the common law, and does not believe a society can be based on voluntary transactions alone, a case he demonstrates best with a fable of the doctor and the music store, or the fable of the farmer and the train company.

If Rothbard’s principle would be the non-aggression principle, Szabo’s would be the ‘no first aggression’ principle. I don’t believe though he comes up with a complete system of ideas, as it’s a slippery slope once you start accepting a certain amount of aggression in your society building. By his historical analysis, Szabo believes that there was once a functioning system of Franchise Jurisdiction, where local lords and governments were able to exercise authority without an all-arching sovereign. With certain precautions such as having the local jurisdiction being non-binding, so you can always move to another jurisdiction — is the kind of legal system Szabo advocates for.

Smart contracts

This is probably the idea that came out of Szabo’s blog which got the most traction, as it is now one of the fundamental terms in the cryptocurrency sphere, implemented into platforms such as Ethereum, EOS and others. The basic idea is that by implementing no-touch, no-human intervention contracts in our world we can reduce mental transaction costs and achieve greater prosperity. Smart contracts are a general concept and they are not necessarily the ones implemented on the blockchain. His iconic example is the vending machine — Nowadays I would take the Ofo Bike as the most iconic smart contract.

Pascal Scams

In his take on Pascal’s wager, Szabo introduces the idea of Pascal scams — widespread panics that attribute horrible consequences to low probability events.

Book Consciousness

This is the concept I probably like the least because I feel it’s in a way banal and doesn’t adhere to his general way of thinking. Usually, Szabo doesn’t attribute great powers to technology advancements or capabilities but rather to the institutions that allow them to blossom. In the case of the agricultural revolution, he believes that while hunter gatherers had the capability of developing a vivid agriculture, and were probably even much more knowledgeable about different plants and their living environments than agricultural revolution era men, the society was not ready for the change for various eco-political reasons. He holds the same about the way the west tries to change developing countries through the Washington Consensus, when trying to impose free markets without the ready environment of property rights and eco-political institutions.

In the case of Book Consciousness though, Szabo attributes a lot of power to the printing press and the growing literacy among western europe’s inhabitants. He sees it as the basis of what lead this small undeveloped corner of the world to become rulers and pioneers of science and technology.

Colonialism is dead

“It’s no longer our highly educated and culturally unified mercenaries taking sides in wars between badly divided and largely illiterate native polities, as during the colonial era. National sympathies, stemming mainly from ties of a written language and shared religion, now unify millions of people at a time into cohesive, educated, and highly motivated political blocs that we try to control at our peril. The sophisticated communications and financial networks such nations set up (even if they are stateless) cannot be disrupted for long. A small subset of such megagroups who have particularly strong views can, on the other hand, now severly disrupt traditional occupation and traditional government.”

Seperation of Science and the state

Science is a trial and error thing. It’s not a system of Dogma or a form of heavenly enlightment we should all adhere to. As Robin Hanson recently put it,

“The more I heard about that, the more I wondered, “What’s that? That sounds really important, and it doesn’t make much sense.” They kept saying contradictory things about it, so I wanted to get to the bottom of, “What is this science thing that’s supposedly so great, that we have all this stuff called science because of it?”

What I found is, there is no such thing. It’s a myth. It’s just a name for a whole collection of idiosyncratic detail in different areas that has very little in common, or coherent. Once I realized that it was one of these myths, then I lost interest.”

Anything connected too heavily with the state and political power becomes corrupted and biased. That’s why Szabo is sceptical of ‘the space program’, funding modern physics theorists and overreacting politically to global warming findings.

Proxy measures

As it is sometimes hard to measure intrinsic value, we use proxy measures to evaluate things. That’s why we like the shininess of gold, and that’s why we measure work done by hours spent at the office. With the term, which he attributes to Yoram Barzel — an Israeli economist I believe a few in Israel have heard about — Szabo argues that the system of short-term compensation by time spent and long-term compensation by evaluating the work done is the most viable scalable compensation system we currently have. He also attributes much of progress and modernity to the inventions of the hour clock and the sand glass. Personally I believe that people are much better off being compensated with shares and options of the company / revenue stream of what they work for, but there’s no doubt that hourly and monthly wages are a thing to be explained and discussed.

I Would be happy to Interview Nick on these subjects and others in a Tyler-Cowen like format.

Here are a few questions I would ask him:

  • What would you say to the idea of consent in recent movements such as #MeToo, and its relation to your idea of reducing mental transaction costs?
  • In the blog you were talking about wanting constitutionalists in the US Supreme Court. Are you happy then with Neil Gorsuch ?
  • It seems like you are advocating a return to a Franchise Jurisdiction system. As we lack information and sufficient research on the history of the transformation to modern day politics and the establishment of nationalism and government sovereignty, don’t you think the power structures just changed according to the realities of the times — e.g. more communication, transportation, etc — and there’s no going back ? You may reinitialize the variables but very soon the system will find its stable state in the same place + a lot of suffering and violence on the road there.
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Top 9 Nick Szabo Concepts & Terminology was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.