e$: The Wealth of Nation-states

Robert Hettinga
44 Farquhar Street, Boston, MA 02131

Comments: rah@shipwright.com


At 7:05 AM -0400 5/3/96, Michael Loomis wrote in cypherpunks:
> 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.


Bob Hettinga


Updated: June 13, 1996


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