The hidden history of mankind, or what do religion, state, and blockchain have in common?
We do not always realize how much everything that surrounds us is a product of collaboration of billions of people. For example, millions of people all over the world collaborated so that you are able to read this text on your phone or computer. “Millions” seems to be an exaggeration, but only because we don’t fully understand what effort is required to develop and deliver one product to a single customer. Let’s have a closer look.
The device itself and every single component were developed by a team of scientists, designers, and engineers. Workers at factories in different countries made the spare parts and then assembled them into a final product. Managers, drivers, loaders at factories and distribution centers were part of a long logistics chain that ended when the device reached your hands. Designers and marketers have created all the packaging, texts and instructions, which were checked and translated by lawyers and translators. Thousands of programmers developed the operating system and the application or computer program to allow you to read this text. HR managers hired all these people.
Of course, one such team consists of thousands, not millions of people. But other teams developed, manufactured and delivered equipment to produce each of the components. Workers and engineers extracted raw materials to provide these equipment and spare parts; other teams pumped and refined oil to fuel the logistic network. Someone designed and produced a tanker, which transported the oil. And if you continue this way, at some point you understand the full scale of what is happening.
In order for such large-scale cooperation to happen, we need solutions for two fundamental difficulties which arise in each collaboration — problem of coordination and problem of trust. Problem of coordination is about finding an efficient way to reach an agreement (who, what and when will be doing). Problem of trust is a lack of confidence that these agreements will be fulfilled.
Therefore, the history of humankind is the history of interchanging and increasingly effective ways to solve these problems. Solutions represent social inventions, such as rules, institutions, norms, or laws, which in essence are ideas about human interactions. A distinctive feature of all these inventions is that they are not physical technologies. Physical technologies work regardless of whether an individual or a group of people believe in them, or not. Social innovations work and become a part of reality only if enough people believe in them. For example, traffic rules are an effective solution to the problems of coordination and trust for the organization of traffic.
The most powerful solutions to the problem of coordination are market and money. The market allows sellers and buyers to voluntarily exchange and freely determine the price of a product or service*. Money, unlike barter, allows making this exchange faster and more efficient. These two innovations led to specialization and division of labor which resulted in the growth of productivity by thousands of times. They are the main engine of economic growth and in fact the foundation of the whole modern world **.
However, solving only the problem of coordination does not maximise the outcome. This was shown by John Nash with the help of game theory, for which he received the Nobel Prize.
Problem of trust
Let’s have a look at the most basic example. Fred and William reached an agreement, that Fred will sell William a product (this could be, for example, an iPhone, an apartment or a batch of cocaine), and that William will pay for it $10,000. After the agreement is reached, there are four possible scenarios of the future:
- Fred delivers the product. William pays his part. Let’s say both get a $1,000 profit from this transaction.
2. Fred delivers the product, but William pays with counterfeit money. Fred loses $10,000. William gets $11,000 (product, money, and profit).
3. William pays his part, and Fred disappears with both product and money (iPhone turned out to be a fake, the apartment belongs to other people, cocaine is a pack of flour). William loses $10,000. Fred gets $11,000 (product, money, and profit).
4. Both cheat. Both remain with zero (nothing lost, nothing gained).
Let’s combine all four variants in one scheme (the “game matrix”).
Let’s see how the buyer will make a decision: if Fred delivers the goods, then it is more profitable for William to cheat since in this case, William will take both the goods and the money (+$11,000 > +$1,000).
If Fred cheats, it is also more profitable for William not to respect the contract in order to stay at least with his money (0> –$10,000).
It turns out that no matter what the seller chooses, it is more profitable for the buyer to cheat. The same is for the seller — it is also more profitable for him to act opportunistically.
Knowing this, both understand that it is not beneficial for another party to comply with the agreement, so the transaction will not take place (without any additional conditions, which will be discussed below). It is important to note that this collaboration is potentially beneficial for both participants — if both respect the agreement, then both get positive returns, but there is a problem of trust — expecting the other party to fulfil the contract is irrational, so cooperation will not take place.
The first solution — religion
Abrahamic religions represent one of the most effective solutions to the problems of trust. The essence of the decision is the following: there is an all-seeing and all-knowing God and after death he will reward everyone for their deeds by sending to heaven (eternal salvation) or hell (eternal torment) ***. Now let’s translate this into the terminology of the game theory. We add an infinite reward (let’s assume +$100,000) to all cases of cooperation: the cooperating person will get +$101,000, if the other cooperates, or +$90,000 (-$10,000+$100,000), if the other cheats. We give an eternal torment (let’s assume -$100,000) to all cases of cheating: the cheating person will get -$89,000 (+$11,000–$100,000), if the other cooperates, or -$100,000, if the other cheats. If you add such conditions to the game, then the four variants of the future change as shown in the diagram:
If William believes in God, he will come to a different decision than in the first case. The logic is similar, but the outcome is different: if Fred delivers the goods, then it is more profitable for William to pay since otherwise, he will go to hell (eternal torment does not pay off $1,000). If Fred cheats, it is still more profitable for William to respect the agreement, since then he expects to go to heaven after death (eternal salvation makes up for the loss of $10,000).
If both buyer and seller are true believers, then it is always advantageous to fulfill their obligations, because God can not be deceived, and because any gain generated during lifetime does not compensate for the punishment of eternity in hell.
In this sense, religion is a very elegant solution as it preaches that all information is fully open to God, and that punishment is infinite and guaranteed.
The drawback of this solution is as follows. Firstly, the punishment is postponed to the afterlife round. Secondly, not all people believe in God and behave themselves righteously. If in the example above only one of the participants believes in God and the second does not, then the believer will always lose, and the non-believer will receive both money and product.
The second solution — state or mafia
Another potential solution to the problem of trust is an agreement with a third party that if someone fails to fulfil the contract, the third party will fine the guilty person and compensate the damage for the victim. This means, if Fred or William escapes with product and money, he will be found and he will return the goods and pay $5,000, and the cooperating party will get 0 (the goods or money will be returned).
In this case, the potential results again change and it again becomes unprofitable to cheat for both of them (if the fact of punishment is 100%).
Such third player is usually a state (or mafia) with its set of laws, fines, and prisons. At the same time in real life the probability of returning goods or money is greatly reduced due to the fact that a third party intervenes only after the money is transferred.
Also, in order to carry out the punishment, it is necessary to record the fact of cheating. That’s why we have the court system that determines which of the parties is right.
In real life, the court has its own significant limitations. The above example involved a standard product, that’s why it would be more or less easy for a court to work on the case. A very different situation arises when there is a dispute about a product of intellectual or creative nature. Such examples are numerous: developing a mobile application, writing an article, coming up with the concept of a commercial, drawing a logo, developing a strategy. In all these cases, it is problematic to go to court, as there are difficulties with objective assessment of the quality of intellectual and creative work.
The second limitation is high costs — protecting your case in court is expensive in terms of money, time and lost profit. In many situations, this price is too high, and often participants in transactions with smaller budgets do not apply to court at all. Therefore, the risk of opportunistic behavior in such transactions is higher.
The third solution — reputation
Most types of cooperation involve not a single, but repeated transactions — people sell more than one phone, make more than one logo, develop more than one application. Obviously, if one of the parties fails to comply with the terms of the transaction, the repeated cooperation between the two parties will be ruled out. This is the way reputation works. The problem with the reputation in its current form is that it is limited in distribution — information about bad behavior remains only with the parties of the transaction and those who know them directly, and the new partner does not have accurate information about past results.
The new solution — blockchain
Development of blockchain and especially Ethereum made it possible to create a trusted environment of smart contracts. Such contracts are straightforward and cheap to conclude, and forgery is impossible because the contract is stored and executed in a decentralized ledger. Unfortunately, most contracts require a human evaluation of the results. A smart contract cannot replace such an assessment and cannot resolve conflicts explicitly. However, it may be possible now to devise such rules that make not following them not rewarding.
Conclusion
In this article, we considered collaboration as the main engine of human development and saw that all social institutions from religion and state to new technological solutions are an attempt to solve problems of coordination and trust. The essence of this article was to show that human cooperation is multifaceted and diverse, therefore, there is no single answer to all the complexities of building trust and it will not appear in the foreseeable future. However, we as a species are able to come up with more and more efficient solutions, and thus collaborate and achieve more.
The Collabs Team,
Anton Pronkin, Zhanna Sharipova, Mikhail Semenov
* Under the market in this case, we mean exactly this opportunity of free exchange and determining the price of a product or service.
** This is exactly what Adam Smith wrote in his book, “Wealth of Nations,” concluding that when every member of the group acts selfishly, pursuing their own interests, this leads to an effective level of equilibrium. He called this principle “invisible hand of the market”.
*** For example, on the walls of the stock exchange in Valencia (Lonja de la Seda), built between 1482 and 1548 years, it is written:“Try and See, fellow-citizens, how negotiation is such a good thing when there is no lie in the speech, when it swears to the neighbour and does not deceive him, when it does not lend money with an interest charge for its use. The merchant who acts this way will prosper galore and at the end he will enjoy the eternal life”.
