– June 14, 2020
trusting hands

Near the start of the COVID-19 pandemic, I decided that it would be a good idea to buy a pair of noise-canceling AirPod Pro earbuds that would allow me to switch seamlessly from device to device without having to mess with wires. They were on their way after a few taps of my laptop’s trackpad, and they arrived a few days later. You might be thinking “so what? This is an utterly unremarkable sequence of events that a lot of people enact a few times a week if not a few times a day.”

The authors of The Trust Revolution want us to think a bit harder about this and specifically on all the places where trust could fail but doesn’t. Henderson, who edited the 2018 Cambridge Handbook of Classical Liberal Thought (to which I contributed) and Churi, Henderson’s former colleague at the University of Chicago Law School who left to found the venture capital firm Trust Ventures, want to focus readers’ attention on the parts of these transactions that look mundane and routine but actually conceal a complex array of political, social, cultural, and commercial innovations.

These transactions are, for the most part, guided by the invisible hand of the market with the visible fist of the state lurking in the background and making occasional appearances. Buying AirPods online is a surprisingly complex body of transactions with lots of ways things could go wrong. Will the AirPods work as advertised? Will they be delivered as promised? Are they even “AirPods” if I’m not ordering them directly from Apple? Even paying for them is a complex web of actions involving a lot of different people and organizations. Chase, which issued our Amazon credit card, pays Amazon, which pays Apple. Chase then collects funds from my bank when the bill is due. People have an opportunity to abscond with my money at several different points, but they don’t. Henderson and Churi argue that this is the real story: how, they ask, can eBay process ten thousand transactions every second without unmitigated disaster, widespread confusion, and massive fraud?

Their answer is that markets are pretty good regulators. Where a lot of the literature on regulation emphasizes government regulators like the Securities and Exchange Commission, the Occupational Safety and Health Administration, and the Environmental Protection Agency, Henderson and Churi focus their attention on what they call “microregulators.” These are small-scale, private providers of trust and assurance–in their words, “technologies that enable people to cooperate in more efficient ways.” Ride-sharing firms Lyft and Uber, they argue, are not competing with taxi companies. Fundamentally, Uber and Lyft are competing with taxi commissions.

The Trust Revolution would pair well with Duke University economist and political scientist Michael Munger’s Tomorrow 3.0, which argues that we are in the midst of an economic revolution because people are earning fortunes not by growing crops or transforming raw materials into manufactured goods, but by reducing transaction costs and making it easier for people to match up with others who have physical capital (like cars and houses) or human capital (like handyman skills).

One reason this pairs so well with Munger is that just as Munger talked about three economic revolutions, Henderson and Churi talk about three important political revolutions. There was the Revolution of the Individual as exemplified by the Scottish Enlightenment and the American Revolution. There was the Revolution of the Expert during the New Deal, when it was widely “acknowledged” that Roosevelt’s Brain Trust knew best. There has been, finally, the Revolution of the Digital Tribe whereby “citizen-consumers using digital platforms (as one example) can act collectively to create a more effective and efficient form of regulation” (p. 5). This Revolution of the Digital Tribe they describe is important as they explain on pages 46 and 47, especially with reference to innovations like prediction markets: 

“A single expert is better than a single non-expert, but a crowd of non-experts is better than a single expert. This is true in guessing the weight of cattle, but also in determining whether or not a consumer will have a good experience.”

They offer a brief survey of the history of trust and markets for it, explaining the importance of personal trust (“other individuals acting alone”), government trust (“various institutions characterized by a monopoly on legal violence”), and business trust (“provided by profit-seeking businesses that are also selling other things”p. 7). Trust in government has been falling. Meanwhile, the tech sector was, for the sixteenth consecutive year, named the most widely-trusted industry in 2016 (p. 21).

That people are aligned against innovation shouldn’t surprise us. People have opposed innovation for generations, and in his excellent 2016 book Innovation and Its Enemies, the economist Calestous Juma explained how in different places and at different times, groups have arisen to oppose things as mundane as recorded music and refrigeration. It is no surprise, then, that they are afraid of the rise of microregulators. People worry, perhaps rightly, that algorithms and artificial intelligence might inadvertently encode “oppression;” however, as they note that the relevant question we should be asking is not “are algorithms perfect” but “are algorithms better than the alternative,” which in the case of the legal system is primarily things like human judges. 

Trust technology has evolved over time, and microregulators make it easier for people to bridge gaps between groups. Religion serves this purpose to a certain extent, and language (which is hard to fake) is a significant signal that you are part of the group. If anything, the market for trust has gotten a lot thicker. When you shop at Walmart or Nordstrom or anywhere, you are getting multiple layers of assurance of varying quality. 

I have a minor technical quibble with a claim they make on page 117: 

“The rules of the game for altruism are largely determined by tax policy. The tax rules are biased against corporate delivery of altruism. For instance, a donation to a charity to help poor farmers in Ethiopia is tax deductible, while the portion of fair-trade coffee that is a donation to help poor Ethiopian farmers is not.”

This is true of your taxes and mine. However, Starbucks can write off what they donate to help poor Ethiopian farmers and then pass the savings on to customers. I suspect too that some economists like Bruce Benson, David Friedman, Peter Leeson, and Edward Stringham would disagree with the authors about the inevitability or advisability of the state, and macroeconomists like George Selgin and Lawrence H. White would disagree regarding the need for government to control the money supply. These are minor points in the larger story, though.

One of the main problems, which they explain on page 146, comes from the fact that “Deregulation is a product of the same sausage-making process as the regulation it is meant to eliminate, and thus is vulnerable to the same problems. Therefore, even where regulated markets function poorly, the process of deregulation may not be an improvement.” The analysis of crude proxies suggests that heavy regulation has reduced economic growth, as John W. Dawson and John J. Seater argued in a 2013 paper in the Journal of Economic Growth. Rolling the regulations back in a constructive way may prove to be too difficult, politically. Hence, there might be more opportunities for technology innovators to step in and replace government where it functions poorly.

By and large, Henderson and Churi are correct: developing microregulatory technology is part of a “trust revolution,” and one that promises to change and direct the 21st century economy and beyond. They are identifying, I think, a new way to think about regulation, regulatory burden, and technological change. Instead of working specifically to roll back the state, it may be more worthwhile to simply work to make the state obsolete.

Art Carden

Art Carden

Art Carden is a Senior Fellow at the American Institute for Economic Research. He is also an Associate Professor of Economics at Samford University in Birmingham, Alabama and a Research Fellow at the Independent Institute.

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