Laws in the Shivas Kingdom (Part 1)
Malt Liquidity 128
Something people might find surprising about me is that, for someone steeped in the thickets of “traditional” finance, one of the most formative books I ever read was David Graeber’s Debt: The First 5,000 Years. Having been raised on the Wall Street Journal, my intention was not to go full “Occupy”, as Graeber himself espoused (but more on that later), but to figure out a way to comprehend exactly how to think about systems of money and finance in a manner that scaled properly. As such, you might recall that, a little over a year ago, I wrote this parable about finance being framed around debt:
However, when boiled down to its simplest elements, the system is essentially made up of three pillars: equity, currency, and debt. Equity provides liquidity to hope. Currency provides liquidity to bargaining — our transactions have to be denominated in something. The most important pillar, and what underpins it all, is debt, which provides liquidity to trust. The systems of law and government provide a safeguard of enforcement to trust, but trust without liquidity cannot scale — there is no society without it.1 …
The simplest form debt takes is “I-owe-you”, the precursor to a loan. Imagine a community where everyone knows everyone else. In this community, if person A borrows a hammer from person B, it’s unlikely that this transaction requires liquidity provision — personal knowledge of the borrower’s creditworthiness is probably sufficient to decide whether person A is going to return the hammer. Maybe person B knows that person A is a nice fellow and is likely to show his gratitude in some manner, and decides that he doesn’t need any explicit promise of repayment or compensation. As this community attempts to scale, personal attestations of creditworthiness becomes less and less reliable. Perhaps person B trusts person A when he vouches for the creditworthiness of person C, whom B does not know, but the signs of illiquidity start to show. Trust’s liquidity is inversely correlated with degrees of separation to an exponential degree. A better system is needed.
While that narrative centers around debt, I glossed over the concept of “laws”, without which the entirety of society will crumble apart. A not only requires sufficient compensation for lending to C, but also needs a method of recourse rather than, well, breaking someone’s kneecaps. Intuitively, we can derive the primary purpose of modern law from this hypothetical: it’s about property rights first and foremost. Law primarily exists to settle property disputes so that people with resources do not mobilize them to war over said property. Criminal law, on the other hand, exists as a sort of societal insurance — for egregious misconduct, alright, one loses their privilege to participate in society (as long as these laws are enforced).
Thus, the standard of proof being lower for civil cases makes sense: time is of the essence and, ideally, minimal monetary and legal resources are expended to arrive at a settlement. You don’t want to settle disputes in a hamfisted, drawn-out, “beyond a reasonable doubt” manner, as it would kill liquidity (and, as Coase pointed out nearly a century ago, that’s precisely why matters end up settling between companies rather than through lawsuits.) When we inverse this idea, we reach kind of an odd solution — the optimal amount of fraud is in fact non-zero. Trying to stamp out each individual crack in the system reduces the ability to provide liquidity to each part of the system, similar to how I was talking about emergency liquidity:
I can’t overstate how lucky we were in 2008 to have the exact man who made an academic career out of researching the Great Depression in charge of the Federal Reserve. Much of Bernanke’s actions in that time can follow from a couple key points:
There is a very limited window to provide emergency liquidity before the market demand overwhelms the supply (this is what caused bank runs)
If you are providing emergency liquidity, speed is of the essence. Adding conditions to make sure it gets to the right place defeats the purpose of providing emergency liquidity. You don’t want to be selective and make sure it goes only to where it is needed, you want the tide to raise all ships.
The same principle applies whether it is bank bailouts or PPP loans (while some businesses may not need the liquidity and might even just take advantage of it) because the time spent making sure a business actually needs the money is counterproductive to helping that business survive, as what they can’t afford is the time to relief.
You don’t need to be an expert in health policy to understand why Cuomo’s policies of million dollar fines for vaccines going to the wrong place and $100k fines for not utilizing every vaccine in a 10-pack are extremely counterproductive - you just need to understand emergency liquidity. Cuomo is too concerned with where he deems the vaccine is imperatively needed - in this case doctors, nurses, and other healthcare related providers - to the point where he disincentivizes the spread of the “emergency supply” by violating both of the principles of emergency liquidity. If you want to use your vaccines as efficiently as possible, you can’t be extremely selective about where they go, and putting a financial disincentive on top of that if you don’t follow these rules will pretty much ensure your emergency liquidity of vaccines gets rolled out at a glacier-like pace. Harsh restrictions make it harder for resources to be allocated where they need to be.
This is why endless subcommittees, nonprofit-review, hearings, and more artificial gates drive up the cost of building a public toilet to $1.7 million (though this was “reduced” to $300,000 with private donor subsidies.)
They really just don’t get it.
However, this does raise a proper point in that private regulation is somewhat unsettling. Everyone is aware of the whole “we investigated ourselves and found no evidence of wrongdoing” trope that primarily operates as a cover to drop a story. Here’s one from two days ago I found from searching that phrase:
Rep. Cori Bush, D-Mo., confirmed Tuesday that the Department of Justice is investigating her campaign's spending on security services.
The St. Louis Democrat says she retained her now-husband as part of her security team and claims he is able to provide services at or below-market rate.
According to Bush, the Office of Congressional Ethics, staffed by career government employees, found no evidence of wrongdoing in an investigation last year and voted unanimously to dismiss the case.
While the OCE is not exactly “private”, we see this even when external counsel and auditors are hired to conduct investigations, where glaring evidence can come out that makes one wonder “what exactly was BigLaw firm number 24 actually investigating?” Remember Ray Rice?
(For those who don’t follow sports, here’s the TLDR: an NFL RB knocked out his wife in an elevator in February, 2014. His team was shown the footage and went to the NFL to internally handle the investigation. During this investigation, the NFL apparently didn’t internally acknowledge the contents of the video, which they should/did have access to. A defense attorney at the time was quoted as saying “it’s fucking horrible.” Eventually, in September, 2014, TMZ leaks the video, which shows Rice throwing a single MMA-tier hook and KO’ing his wife, begetting the question “what exactly did the NFL investigate?”)
For a more liquid world, we’d like to not deal with these law firms and courts at all. At the same time, the mere veneer of a fair system of recourse is not enough to get people to “buy in”. In fact, the inherent skepticism of private/independent quasi-legal review is so high that the default reaction of most people is to totally ignore the fact that, at the very least, time and resources were spent doing a good amount of doc review. Beyond alternative dispute resolution methods (which have some actual legal authority) or simply paying the other side off (which doesn’t reduce public skepticism), how exactly should we go about building a more trustworthy system of review that isn’t highly illiquid and resource-intensive?
Today, we’re going to begin to take a look at one of the oldest methods of formal private governance that still exists today — the rules of golf. There’s a lot more than meets the eye beyond “play it as it lies.” What started out as an honor system to facilitate fair competition amidst golf club members turned into a full-blown, systematized “stroke of justice” allowing for “statute” enforcement, interpretation, and “judicial review” (and published “opinions”).
Beyond layman’s golf, which consists of narcs, cheating for sport, drunks, and retirees, tournament circuits do have severe consequences in the form of “capital punishment” — if you sign an incorrect scorecard, you are disqualified from the competition. Much like knowing the law can be an advantage rather than a precaution, knowing the rules of golf is a competitive advantage as well for players:
At the 2017 Open Championship, Jordan Spieth’s ball landed on a hilly slope in deep rough on the 13th hole. Rather than punch it out or attempt a highly risky shot to move it close to the pin he used another tool in his bag, the rulebook, and declared his ball ‘unplayable’.
Note, only the player can make the verdict a ball is unplayable. USGA Rule #28.
What you or I may consider unplayable, others may be willing to give a whack.
Under penalty of one stroke, Spieth was faced with multiple options:
-proceed under the penalty of stroke and distance
-drop his ball within two club-lengths of where it lay but no nearer to the hole
-drop as far back as desired on the flagline.
The ‘flagline’ is an imaginary line drawn from the flagstick through a player’s ball/line. A player can drop on that line no nearer the hole.
The first two options did not alleviate the problem of the tall thick rough or gain a playable lie. He took advantage of the third option to find an acceptable shot. Although farther from the green, he was in a clear, flat area on the adjoining practice range. From there he could hit an approach shot.
Even with the penalty stroke, Spieth escaped with only a bogey and went on to post a magnificent birdie-eagle-birdie-birdie finish, to clench the victory.
As David Rickman, The R&A’s Director of Rules and Governance put it,
“This was a “smart use of the rules.”
But it wouldn’t be fair to hold a law enthusiast to the standard of a lawyer — the rules are indeed quite complicated, so “rules officials” essentially operate as golf lawyers. Much like a legal consultation, when a player has a question, he can notify an official and ask for a ruling. However, this can be a bit of a mess — a famous controversy was during Dustin Johnson’s 2016 US Open victory, where his ball moved on the 5th hole green before he putted. While the rules official initially ruled that he didn’t move the ball, they informed him that they’d assess whether he had addressed the ball and caused it to move after the round (which would be a one-stroke penalty.) Note the ridiculousness of this in a close tournament — he didn’t know whether he’d have to win by two strokes or one!
Alex Myers of Golf Digest reported Johnson was alerted to the potential infraction when he was on the 12th tee even though the official originally ruled that he didn’t move the ball. According to Myers, the USGA’s Jeff Hall said Johnson had to watch the video following his Sunday round before the final decision was made.
According to Golf Digest, Johnson was ultimately assessed the penalty and finished his tournament at four under par. Fortunately for Johnson, Jim Furyk, Scott Piercy and Shane Lowry all tied for second at one under par, so the penalty did not impact who won the tournament.
It’s hard to make these assessments in real time, and when edge cases come up, much like an appeals process, the rules of golf are rewritten with explanations. An interesting twist was that, up until recently, television viewers used to be able to call in potential rule violations that they had witnessed to a special hotline. Here’s some sample incidents:
Though controversial and fairly neurotic, the rules of golf provide an actual template for a modern framework of private governance — robust enthusiast participation, applicability on a personal scale, and strict enforcement and formal review. The rules of golf work nearly 300 years later from when they were conceived, no small accomplishment for a good walk spoiled. These elements will be more formally explored in part 2, which examines what happenes when the private rules of enforcement get held up to formal governance scrutiny (e.g. the Supreme Court.)