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The Courts Government News

Contracts in Cyberspace 61

Posted by Hemos from the talkin'-bout-game-theory dept.
phutureboy writes "In his online Journal of Interesting Economics, economist David D. Friedman (son of Nobel laureate Milton Friedman) presents some interesting ideas about the enforcement of contracts in cyberspace. The gist is that he sees a gradual shift away from public enforcement of contracts (i.e. government courts) to private enforcement (e.g. third party arbitration, reputationial enforcement). The rest of his site is interesting as well - he even has an archive of his open-source economics software, which includes a neat trading simulation game called Hansa."
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Contracts in Cyberspace More

Contracts in Cyberspace

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  • Is forgetting to cancel them before my $2.99 trial membership is over...

  • private enforcement (Score:4, Funny)

    by wiredog ( 43288 ) on Monday November 04, 2002 @10:11AM (#4594027) Journal
    If youse don't comply wit da contract, we're gonna put yerse fingers in da car door. Den we're gonna close da door. See?

  • In other news... (Score:2, Funny)

    by Anonymous Coward
    Never trust someone who says "I'll deploy your IT infastructure and manage the department" over IRC.

    It never works out.

  • Nice game. (Score:4, Funny)

    by meringuoid ( 568297 ) on Monday November 04, 2002 @10:14AM (#4594042)
    Hansa looks interesting... conquer the world through EU financial hegemony! Muhahaha! Civ with fewer soldiers around; nice idea.

    Shame about the large images... not good in mid-slashdotting :-)

  • ...Taipan, a game where you ran a trading vessel in the South China Sea. It ran on my primary school's old Microbee computers (yay!). It was written in BASIC, so myself and my friends would go through the source and change all the items and places. In my game, you travelled to ports like Manilla and traded whores. Aaah, fifth grade! I wish I could go back...
    • ...Taipan, a game where you ran a trading vessel in the South China Sea. It ran on my primary school's old Microbee computers (yay!).

      Machiavelli, perhaps? You play the head of a Venetian merchant family, ship goods around the Old World, and manipulate Venetian politics and the Church for your own ends. Oh, and you can hire mercenaries and take over cities for yourself. Having a monopoly on trade with Florence was _profitable_...

      • It was ten years ago, and I was ten years old at the time (memories, particularly childhood memories, can easily become warped over time), but I'm pretty sure it was entirely based in Southeast Asia. The game was fairly simple (being written in BASIC), and I think all you could own was a ship (besides the goods you traded). You could buy upgrades (cannon, armour, etc.) to fend off pirates and you could upgrade your ship, but I think that was all you could do.

        It's funny you mention Italy, though, since one of my Taipan mods was based around Italian ports. I was learning Italian in school at the time, and I found that this made it much more fun.
        • It was ten years ago, and I was ten years old at the time (memories, particularly childhood memories, can easily become warped over time), but I'm pretty sure it was entirely based in Southeast Asia. The game was fairly simple (being written in BASIC), and I think all you could own was a ship (besides the goods you traded). You could buy upgrades (cannon, armour, etc.) to fend off pirates and you could upgrade your ship, but I think that was all you could do.

          Sorry, I was a little ambiguous there. I didn't mean that Machiavelli was the game you meant - it's a far more recent DOS game. I was suggesting it as a trading game in a similar vein to yours and to Hansa.

          Did you ever play Pirates, or Elite? Those were both games along the same lines. In Pirates you have a letter of marque from either England, France, Spain or Holland, and plunder the shipping of your nation's enemies. Find and loot the Spanish treasure fleet and you're wealthy for life. Sack and plunder Havana and you're _insanely_ wealthy for life.

          Elite was a magnificent space trading and combat game back in the days of the BBC B. Ah, the countless pirates and aliens I took down in my old Cobra mk. III... 3D vector graphics, extremely impressive for the day. No politics in it, though; while in Pirates a particularly successful looting of a town might actually lead to it seceding to your country, your actions in Elite didn't affect the overall state of the universe.

          • I can't say I've ever had the pleasure of playing those games. The closest games to those that I've played would probably be Sid Meyer's Colonisation, Gold of the Americas [mobygames.com] and Wing Commander Privateer. Colonisation isn't really a pirate game (it's similar to Sid Meyer's earlier game, Civilisation), but you can play it like one. Gold of the Americas is similar, but lesser known: your aim is to settle the New World and build up colonies. Privateer is mostly a space combat game based around privateers.

            • Both Machiavelli and Pirates were by Microprose, and from the same era as Civ and Col. I liked Colonization... I used to ship Trade Goods and Tools to the Incas for Silver, then ship that home. Once the London price of Silver had collapsed, I'd start selling it to the Dutch - and keep a fleet of privateers off their coast to steal it straight back once they tried to get it back to Amsterdam. Then I'd sell it to them again...

              I played Privateer 2 for a while a few years ago, and it's similar in concept to Elite, but doesn't feel quite the same somehow. Elite 4 is currently in Development Hell; if you want to play the original, co-author Ian Bell [clara.net] makes just about every version ever produced freely available.

  • I have to agree (Score:5, Insightful)

    by EnsGDT ( 617042 ) on Monday November 04, 2002 @10:16AM (#4594058)
    It seems to me that third party contract enforcement is the only way to go. With the internationality of the internet, one single governmental entity isnt going to be able to take care of matters that may arise. Besides the fact that they have more important things to concern themselves with, they would most likely be out of their jurisdiction.
    On a seperate note, if this whole third party thing does progress, it may be an interesting buisness in get involved in. Either as an investor, or as a "contract enforcer" if you will. heh
    • It seems to me that third party contract enforcement is the only way to go.

      Not so fast there, Skippy. There is one significant difference between private parties and government; government can use force to get what it wants and private industry cannot. What you're promoting is granting a private party the authority to use force to further its interests. Not a good thing. Why? Picture the MPAA or their hired help with the authority to kick down your door and drag you off to interrogation if they suspect you've violated a term of your licensing agreement. Any questions?

      Don't just do something, stand there!

      • I'm not sure i understand what you're point is... That kind of stuff happens all the time now. Banks take over houses because of mortgages, The dealership down the street will take your ride back because you're behind on your payments. Basically somebody requests some sort of repossession notice or permit from the governement. After they're apporved, they hire a private firm of repossessors who scour the country looking for whatever it is that hasnt been paid for. I remember one episode where they took back a plane. The fact of the matter is that third parties are currently in the buisiness of contract enforcement, its just that the laws for applying this to the internet havent been written up yet.
        • I'm not sure i understand what you're point is... That kind of stuff happens all the time now. Banks take over houses because of mortgages

          Yeah, but they don't do that on their own. They get an order from a (government) court, and serve it. If the order is not followed, then ultimately the Sheriff (or an equivalent officer in states which don't have county/parish sheriffs) forcibly removes the people in violation (and may arrest them on contempt charges, depending upon jurisdiction.)

          Do you really want a private entity to have the power to issue binding court orders and arrest people for violating them? A somewhat-similar situation exists in the area of bail bonds, and so-called "bail enforcement agents" are the biggest bunch of morons in the cop-wanna-be industry.

          Read up on the labor movements pre-WWII. In Dubious Battle by John Steinbeck is pretty good. Private police who are not ultimately responsible to the public have historically been a disaster every time they've been tried. If I do something wrong, I have to account to my sergeant, who has to account to the watch commander, who has to account to the patrol division captain, who has to account to the chief, who has to account to the city manager, who has to account to the mayor, who has to account to the electorate. That's a long chain of command, but by god ultimately the public does have control.

          Also, I as a (public) officer (and therefore a state actor, in the legal jargon) can be held civilly liable for violations of civil rights. Private people acting in their private interests cannot. They're subject to regular civil law, but unless they act under the direction of a state actor they don't fall under the civil rights statutes (primarily 42 USC 1984) and cannot be held liable under them.

          In other words, you have little recourse against private cops. They're responsible to their chain of command, but that chain terminates with stockholders, rather than the public at large. Do you really want to hock your home to buy Wackenhut stock just so you can have a say in their behavior?

  • International Law (Score:4, Interesting)

    by CatWrangler ( 622292 ) on Monday November 04, 2002 @10:23AM (#4594073) Journal
    The big concern I see, is not so much local laws dealing with internet transactions, but when the transactions apply internationally.

    There are also questions of jurisdiction. If you buy something from a company in Mexico, which is a subsidiary of a US company, but they outsource their credit collection to a group in Canada, and you are a resident of the U.K., which country's courts does the company use to seek redress against you if you fail to live up to your contract?

    • The real problem is recognition and enforcement of foreign judgments and arbitration awards - in the end, the only thing that matters is registering/obtaining judgment in debt in the courts of the country in which your debtor lives and has assets. You can get judgment in whatever country you like, but unless the judgment debtor has assets in that country that you can seize, good luck getting paid.

      Any "private" enforcement regime is going to depend on public enforcement methods and the courts at some point, because private citizens making unauthorized withdrawals from other people's bank accounts and/or driving away with their cars is looked down upon by the criminal justice system of most nations.

  • Private enforcement of contract not new (Score:4, Funny)

    by wowbagger ( 69688 ) on Monday November 04, 2002 @10:25AM (#4594078) Homepage Journal
    The private enforcement of contracts has been around for quite some time.

    It was especially popular in Kansas City, during Prohibition.

    However, I was not aware that the legality of this means of enforcement had been accepted.

    If it has, then I must see a man about some spammer's patellas, and the forceful restructuring thereof...
    • Wowbagger writes: "The private enforcement of contracts has been around for quite some time. It was especially popular in Kansas City, during Prohibition. However, I was not aware that the legality of this means of enforcement had been accepted." Reputational enforcement, which is what I discuss in the article, is legal, ancient and widespread. A standard example is the Lex Mercantoria, which Benson has discussed in various of his writings--the private legal system from which our UCC ultimately evolved. A current example is Ebay. Private enforcement of law via the use of force is also quite an old institution, but one that is legal only under state supervision in modern day America. David Friedman
      • That was the sound of a joke whizzing over your head.

        You see, during Prohibition, Kansas City was a hotbed of Mafia activity.

        The Mafia are well known by many for paying individuals to kill other individuals - these were euphemistically known as "contracts". The individuals who carried out the killings were often known as "enforcers".

        These actions were quite illegal then, and still are.

        Therefor, the humor in this matter is the likening of the private enforcement of contracts by arbitration to the Mafia tactic of killing anybody you had a business disagreement with.

        You see, it is what we who live in a place called "the real world" call "humor".

        Perhaps you can visit someday.

  • Arbitration isn't novel but anonymous contrats are (Score:4, Interesting)

    by mr_teem ( 126142 ) on Monday November 04, 2002 @10:46AM (#4594114) Journal
    The trend toward third-party arbitration has been happening for a while. The arbitration process, as I have read, is cheaper for both parties and quicker to resolve. So, I'm not certain why this is seen as a novel trend.

    On the other hand, the development of contract assurance techniques for dealings with anonymous parties for open purposes is rather novel. Ordering a pallet of widgets from digital signature 7YkkeL33Tphubar6 is a little more shaky than ordering them from ACME Co.'s.

  • The Good Dr. Friedman (Score:5, Interesting)

    by Effugas ( 2378 ) on Monday November 04, 2002 @10:47AM (#4594115) Homepage
    Whoa, Friedman made Slashdot. Not bad.

    Dr. Friedman is quite a character -- I was lucky enough to chat with him a couple times; he teaches at Santa Clara University and by some peculiar twist of fate I now possess a degree from there. So we ended up going to the same talks every once in a while -- quirky guy, occasionally reminds you of the late 90's when people really acted like the Internet Was Going To Change Humanity or something.

    Friedman's paper is overall pretty reasonable, but his calculations seem to ignore the *tremendous* nonlinearity in our responsiveness to bad news. Ten people can tell you a restaurant is good, but if one says it's bad, you're probably not going to eat there. Paypal can pass a million good transactions a year, and it only takes a couple thousand questionable ones to really make a visible impact on their quality of service. Simply having one's reputation questioned tarnishes it -- indeed, one reason so many cases settle, or go to binding arbitration, is to keep major conflicts quiet.

    It's in this context that arbitration servers have a problem. If they downgrade reputation as humans do, those who are downgraded may complain -- with apparent statistical cause -- that their otherwise good service is being mucked up by the inevitable screwups. But if they *don't*, their data is quite useless relative to the weighing the human mind does, and nobody would ever trust them.

    Now, as an economist, Friedman would probably use this as an example of how humans are irrational...I doubt that. Consider the nonlinearity a form of damage multiplication...one transaction may be tweaked to make more money, but this will impact a hundred other transactions, that will thus cause a net loss of money. This means nobody can be screwed over -- everyone must get fair service. Without nonlinearity, it's always worthwhile to screw 1-5% percent of your clientele.

    The news have it right -- bad news is much more interesting, and it should be.

    For what it's worth, I do suspect that a cross-jurisdictional system will spawn to handle global commerce, and I think it'll be a combination of Friedman and Visa. Anonymity in financial transactions is pretty doomed -- we've just gotten accustomed to handing over our wallet, and hoping we get it all back -- but my expectation is that person-to-person cash transfer over distance will be formalized, arbitrated, and most of all -- insured. There will be reputational work, but it'll be in the same context we already have institutionalized reputations -- credit checks. It's *much* more likely that we'll see ebay feedback on your Visa web page than we'll see some funky distributed arbitration notices system.

    Visa, you see, has one major advantage: The arbitration systems that Friedman describes are great for stopping the *next* fraud, but they don't do anything about *this* one. This is the big deal about government, folks -- they may not prevent crime directly, but they sure as hell respond to it. It's not like there's a murder, and the cops are like, wow, we better prevent any gun stores from letting this guy in, but that's all we can do :-)

    Yours Truly,

    Dan Kaminsky
    DoxPara Research
    http://www.doxpara.com
    • You should read his book, _Law's Order_. He goes into great detail about the difference between, and effects of, punishing crime versus preventing crime.
      -russ
    • *snip*
      This is the big deal about government, folks -- they may not prevent crime directly, but they sure as hell respond to it. It's not like there's a murder, and the cops are like, wow, we better prevent any gun stores from letting this guy in, but that's all we can do :-)
      *snip*

      Most law officers dont agree with that sort of insane blanket gun control. Most would like to see law abiding people having the ability to protect themselves, so they dont have to come 'clean up the mess' of those that cant, and get robbed/killed/raped/beaten/etc. And it is a guaranteed right/ability ( and i feel that its an obligation of ours ) under our current constitutional amendments
  • I have to say that I like the idea of this a lot. Laws seem either too big, and stop legitimite services, or are too little, leaving some hole through which the con jobs may continue. It seems that reputation protects consumers from unethical behavior more than simply illegal behavior, which is probably better for the consumer. I am still unsure how you could keep track of the validity of positive/negative comments on a person's reputation. If reputation really grows -that- important, then a kiddie could ruin a legitimate business. At first, I would think you could just give each person a second reputation, to determine the legitimacy of their comments, but that's really more complicated than it seems. I mean, how would you really cope with say, a worm that spreads and tries to post complaints about your company?
    • If I understood the essay correctly, the negative reputation would actually come from arbitor's comments rather than random people on the Internet. The random people would just be giving access to those comments.

  • Mmm not! (Score:2, Funny)

    by Greedo ( 304385 )
    No freaking way am I gonna trade my Hanson CDs. Not even in a simulation. I would rather ...

    What? "Hansa?"

    Oh. Never mind.

  • CEOs Will Decide How Long Nations Last (Score:3, Interesting)

    by serutan ( 259622 ) <snoopdougNO@SPAMgeekazon.com> on Monday November 04, 2002 @11:28AM (#4594219) Homepage
    On the one hand, business gets separate, cooperative environments for dirt-cheap labor, pollution, safety issues, and so forth. On the other hand, the increasingly confusing legal issues between jurisdictions make it difficult to estimate liability. A balkanized world would provide better business opportunities if other people's lawyers weren't so clever. Oh, what to do, what to do?

    We can debate this in terms of political philosophy, if we want to sound like those peasants by the ditch in that Monty Python movie. But the ultimate fate of the world's separate governments is a function of their utility to people who have enough money to force their decisions on politicians. My guess is that eventually we will have a single world government, but it will happen when the bigger corps decide that it's better for them.
  • "Information Wants to be Free!" is the mantra of Ken MacLeod's SF novel Stone Canal, which may sound like a cliche to Slashdot readers. However this and it sequels are actually thoughtful, engaging looks at how a future society based on true anarchic principals would work.

    Prominently featured are the notions of private courts and private enforcements of contracts. A respected judge arbitrates a violent feud between the leader of the colony and a would-be-rebel. The extreme case is the privitization of nuclear deterrence on Earth, when Kazakhistan sells "rights" to left over USSR nuclear arms, permitting countries (even welathy private individuals) to enjoy the power of threatened mutually assured destruction.

  • Anakin attack (Score:3, Interesting)

    by henben ( 578800 ) on Monday November 04, 2002 @12:03PM (#4594305)
    One problem I see with all this reputation-based stuff - how does it prevent attacks like this: http://zdnet.com.com/2100-11-530012.html?legacy=zd nn where someone builds up a good rating through legit deals, then "turns to the dark side" and suddenly commits a big fraud? Do you limit the size of trade that can be made to be less than the accumulated 'value' (by some measure) of the existing reputation?

  • Concerns with Private Enforcement (Score:4, Interesting)

    by thefinite ( 563510 ) on Monday November 04, 2002 @12:06PM (#4594310)
    I am a big free market fan, but free market only works well with enforcement of agreements made in the market. Concerns I would have in this case:

    1) Would the enforcement be impartial? Private enforcement tends to be prone to vigilante behavior.

    2) Would the enforcement be legal? In the various countries, there are laws of libel, monopoly power, etc. that could raise some concerns.

    3) Would the enforcement be respected? What power could it really yield without violating the first two issues?

    4)Would the enforcement be accountable for its actions? How can the community concerned be sure to have the right people making the important decisions?

    All in all, these are the reasons ours and other legal systems do a great job of fostering a relatively free market. Private enforcement tends to fall prey to this and other problems. Just look at all of the recent issues with ICANN for an example of some of these problems.
    • Don't forget the loss of jurisprudence. Unlike public court actions, there is no consolidated public repository for the proceedings or outcomes of private enforcements. The risk of re-inventing the wheel is a serious one, and one that mitigates the supposed efficiencies of alternative dispute resolution methods.
  • I can see now that in the near future, online contracts will have penalty clauses built into them of the form:

    Clause 37: Violation of this contract will allow the violatee to haxxor you and they W1ll 0WN JU !
  • Mr. Friedman makes a number of good points in his case, but he overlooks one major requirement for a reputation: a fixed public identity. In the case of the diamond dealers cited in the article, each dealer was known throughout the community, if not to every individual, at least to every dealer's uncle's best friend, etc. Getting caught doing something dishonest brought down the censure of the entire community: extended family, friends, congregation members & leaders, neighbors. Other dealers, especially would be likely to boycott and direct customers away from an unethical persont to protect the entire industry.

    In the case of the internet, there is no single "community." The anonymous nature of the media makes pinning a particular crime to a particular individual much more difficult. Use of aliases and private identities allows people to engage in virtual activities they would not consider in real life. For example, many pedophiles have managed to amuse themselves without families or spouses being aware of nature of their online activities until the police showed up. Your neighbor may regularly rip people off on eBay, but if you don't shop there or simply don't know his eBay identity, then you'll never know. Were he caught shoplifting down the street, he'd be likely to move out of embarassment, but on the internet he can safely defraud people hundreds of kilometers away.

    No, if anything *more* legal survelliance and action is needed to improve the cybereconomy, not less. Until there is as great a certainty that online crimes will be caught and punished to the same degree as their Real Life counterparts online business will not have the credability (much less the overall profitability) of brick-and-mortar stores.

    • Ah, see, but that's covered too. In an online sale or auction environment like eBay, if people do not trust you, you cannot participate in online transactions without first putting up money as a guarantee.

      So, if you're an untrusted buyer, you would put a certain amount of money in an online trust 'bond'. If the seller provides the goods, and you don't pay, the matter is arbitrated, and the bond money goes to the seller anyway.

      A bond becomes unnecessary once your 'cyber-identity' is well-known. Then, it is assumed that it's not worth your while to rip people, as the damage to your reputation would cost you more money than you would make by defrauding the buyer.

    • "Mr. Friedman makes a number of good points in his case, but he overlooks one major requirement for a reputation: a fixed public identity" Actually, I don't overlook it. The following is from the article: --- As long as other people are willing to deal with cyberspace personae not linked to realspace identities, I always have the option of rolling up a new public key/private key pair and going online with a new identity and a clean reputation. The implication is not that reputational enforcement will not work but that it will only work for people who have reputations--sufficient reputational capital so that abandoning the current online persona and its reputation is costly enough to outweigh the gain from a single act of cheating. Hence someone who wants to deal anonymously in a trust intensive industry may have to start small, building up his reputation to the point where its value is sufficient to make it rational to trust him with larger transactions. Presumably the same thing happens in the diamond industry today.9 The problem of spinning off new identities is not limited to cyberspace. Real persons in realspace have fingerprints but legal persons may not. The realspace equivalent of rolling up a new pair of keys is filing a new set of incorporation papers. There is a well developed literature on the result, explaining marble facing for bank buildings and expensive advertising campaigns as ways of posting a reputational bond which makes it in a corporation's interest to remain in business, and hence gives others an incentive to trust it to act in a way that will preserve its reputation.10 Cyberspace personae do not have the option of marble, at least if they want to remain anonymous, but they do have the option of investing either in a long series of transactions or advertising, in order to effectively bond future performance. --- While I'm posting, let me put in a plug for the current draft of my book _Future Imperfect_, which includes a chapter on this topic. It's webbed for comments at: http://www.daviddfriedman.com/future_imperfect_dra ft/future_imperfect.html
  • 3rd party contract enforcement. That sounds great.. if you are in the internet mafia.
  • People here should read Alexander Hamilton. If we are to have a government that promotes the general welfare, then it must have the power to intervene in commerce on behalf of the citizenry. We the people here in California did not vote for the executive management of Enron. I am of the opinion that extreme free-marketry is nothing less than kleptocracy.

    What's the difference between organized crime and Wall Street?

    Organized crime's got better accountants. :P

  • Nuclear powered vacuuum cleaners will probably be a reality within 10 years.
    -- Alex Lewyt (President of the Lewyt Corporation,
    manufacturers of vacuum cleaners), quoted in The New York
    Times, June 10, 1955.

    - this post brought to you by the Automated Last Post Generator...

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