Economic Governance

Institutions are sets of rules that govern human interaction. The main purpose of many institutions
is to facilitate production and exchange. Examples of institutions that affect human prosperity
by enabling production and exchange include laws, business organizations and political
government. Economic governance research seeks to understand the nature of such institutions
in light of the underlying economic problems they handle.

One important class of institutions is the legal rules and enforcement mechanisms that protect
property rights and enable the trade of property, that is, the rules of the market. Another class of
institutions supports production and exchange outside markets. For example, many transactions
take place inside business firms. Likewise, governments frequently play a major role in funding
pure public goods, such as national defense and maintenance of public spaces. Key questions
are therefore: which mode of governance is best suited for what type of transaction, and to what
extent can the modes of governance that we observe be explained by their relative efficiency?

This year’s prize is awarded to two scholars who have made major contributions to our understanding
of economic governance, Elinor Ostrom and Oliver Williamson.

More...

NB: this post does not imply that I subscribe to the notion of "pure public goods" :)

Smart Contracts: Building Blocks for Digital Markets

Smart Contracts: Building Blocks for Digital Markets

The contract, a set of promises agreed to in a "meeting of the minds", is the traditional way to formalize a relationship. While contracts are primarily used in business relationships (the focus of this article), they can also involve personal relationships such as marraiges. Contracts are also important in politics, not only because of "social contract" theories but also because contract enforcement has traditionally been considered a basic function of capitalist governments.

Whether enforced by a government, or otherwise, the contract is the basic building block of a free market economy. Over many centuries of cultural evolution has emerged both the concept of contract and principles related to it, encoded into common law. Algorithmic information theory suggests that such evolved structures are often prohibitively costly to recompute. If we started from scratch, using reason and experience, it could take many centuries to redevelop sophisticated ideas like property rights that make the modern free market work [Hayek].

The success of the common law of contracts, combined with the high cost of replacing it, makes it worthwhile to both preserve and to make use of these principles where appropriate. Yet, the digital revolution is radically changing the kinds of relationships we can have. What parts of our hard-won legal tradition will still be valuable in the cyberspace era? What is the best way to apply these common law principles to the design of our on-line relationships?

Computers make possible the running of algorithms heretofore prohibitively costly, and networks the quicker transmission of larger and more sophsiticated messages. Furthermore, computer scientists and cryptographers have recently discovered many new and quite interesting algorithms. Combining these messages and algorithms makes possible a wide variety of new protocols.

New institutions, and new ways to formalize the relationships that make up these institutions, are now made possible by the digital revolution. I call these new contracts "smart", because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises.