A global reputational system: Possibility and consequences

Discussion in 'Ethics, Morality, & Justice' started by Schmelzer, Nov 21, 2015.

  1. Schmelzer Valued Senior Member

    I think the idea of a global reputational system which I have proposed deserves a separate thread. I will begin it with describing the basic ideas:

    The idea is to organize a global system, open for everybody who wants to participate, which supports freedom of contract, volitional arbitration based on arbitrators accepted by above sides, and penalizes contract breaking in form of non-acceptance of the decisions of the accepted arbitrators.

    Whoever wants to sign whatever contract is, of course, free to do this, anyway. Nobody can prevent this, given that only the participants have to know the contract itself, and, if they trust each other, and the trust is justified, nobody who does not like the contract will even know about it. But, unfortunately, sometimes, too often, there appear some conflicts. A known method to solve such conflicts is arbitrage. An independent and non-prejudiced arbitrator decides about who is right and who is wrong. But who decides who is the best arbitrator? This may be another source of conflict. Fortunately, a straightforward solution exists: One simply has to fix, as part of the contract, who will be, in case of conflict, the arbitrator. Then, the acceptance of the arbitrator, by above sides, becomes part of the contract itself.

    But what happens if one side does not like the decision of the arbitrator, and refuses to accept and to follow it? This is a potential danger, and there is not much one can do about it.

    To use brutal force to enforce the decision is, clearly, one possibility. One can often hope that the state provides this force - but this is possible only if the state acknowledges that the decision is correct. Unfortunately, in modern states this happens only in quite restricted cases: The contract itself has to be in agreement with state regulations, millions of pages you cannot even know without consulting specialized lawyers, and if they don't, they will be modified in some unpredictable way, the arbitrators are not people you trust, but bureaucrats chosen by the state as judges. For international contracts, it is often not clear which state has to rule, and having the "own" state to rule gives a strong advantage to one side, who knows much better how to handle the "own" justice (in particular, how and how much bribes one has to pay). Many may find this possibility nonetheless acceptable, but it will be ignored in the following as unacceptable. The other possibility to use brutal force is the mafia method: To use own weapons and execute the contract breaker. This is possible only to sufficiently strong mafia gangs and will be ignored too.

    What we consider in the following is the enforcement by a reputational system with a blacklist for contract breakers. The contract breaking itself remains, but the contract breaker appears on an openly accessible blacklist for contract breakers. This prevents repetitions. If one has broken a contract, and appears on the blacklist, everybody can easily find out that one has, in the past, broken a contract. If one knows about this, it would be foolish to trust this contract breaker. This does not completely prevent contracts, but these contracts will be of a safe type, where the contract breaker has no real chance to break it and to get some advantage out of it. Roughly, payments have to be made in advance, wage is paid only after the work is done and checked, and no credit will be given.

    The main problem of such a blacklist is defamation. Assume I'm free to write a negative entry into such a blacklist. This would allow me to destroy your reputation as a honorable guy who does not break his contracts. Because of this possibility, many people would not trust such a blacklist. So, the true, correct entries would be lost in the large amount of defamation. And everybody would have to decide if some entry is defamation or not - which would be difficult, and, on a large scale, impossible. Such a blacklist would work only in a small community, where one knows almost everybody, and where one has some own, independent knowledge about who can be trusted and who is a liar.

    Fortunately, the very system of contracts with freely chosen arbiters allows to restrict the danger of defamation to a minimum. The sides of the contract accept the arbitrator, from the start, and sign this acceptance. This is something one can check. Then, it is only the arbitrator who has the right to decide about a conflict. And one can, therefore, restrict defamation by a very simple restriction: Only the arbitrator accepted by the contract violator is allowed to give the information about the contract violations. And that one is such an arbitrator, one can prove, by the signed contract itself, signed by the contract violator. And, of course, the arbitrator has to sign his entry into the blacklist himself.

    But in this case it remains possible that I will be cheated by a bad arbitrator. I sign some minor contract, accept some arbiter I do not really know, and it appears that this guy puts me on the blacklist for violating this contract. Is there something what can be done against this danger?

    Yes, one can make further specifications in the contract. In particular, one can fix, from the start, the maximal possible penalties - usually this will be simply maximal fines. And, as well, one can fix in the contract itself the conditions how the fines have to be paid, in such a way that you obtain a confirmation which allows you to prove that you have paid the fine, signed, say, by a trustworthy bank. And part of the entry has to be a confirmation, signed by the same bank, that no such payment has been made. As a consequence, if you have a confirmation for payment, you cannot appear on the blacklist - because, in this case, the bank would have to give also a confirmation that you have not paid - and signing two confirmations which contradict each other would immediately destroy the reputation of the bank itself.

    Thus, the risk of a bad arbitrator can be reduced, first, by the upper limit of the possible penalty related with the contract in question - in the worst case, you have to pay this maximum penalty, such is life. The other danger seems negligible: not only the arbitrator, but also the bank would be cheating, and, moreover, the bank would be ready to destroy its own reputation only for your single particular case. (Note: This last danger disappears if one uses bitcoin to transfer money. In this case, the transfer itself would be part of the public record.)

    Given that, with these restrictions, the participators of the system are quite safe from the danger of defamation, those who use this information can, on the other hand, trust the records. All what they need to trust is signed, with an electronic signature which is impossible to fake. It is the contract violator himself, who has accepted as the arbitrator, as the bank which realizes the payment of a penalty as reliable. That means, what they tell us - that this guy has broken the contract - comes from sources reliable according to the guy himself. So why not trust them, if one thinks about trusting this guy? Of course, a good cheater will have a (not really) plausible story which explains all this by a devil conspiracy or so. But careful people will not trust such stories, but, instead, trust the blacklist record, once it is signed in accordance with the rules.
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  3. Schmelzer Valued Senior Member

    What are the consequences of the existence of such a system? Contract breaking by participants of the system becomes almost impossible. Whatever the conflict around the contract, it would be decided by accepted arbitrators. And not to accept the arbitrage will be penalized seriously, by an entry in a blacklist which will be considered, by almost everybody, as sufficient evidence that one has really broken a contract, by not accepting the arbitrage by a reliable, accepted arbitrator. Such people will be rejected as liars, contract breakers, and nobody will trust them, simply out of egoistic self-interest - nobody wants to be cheated.

    I think it is important to note that in such a system it is possible to forgive. In particular, it would be possible, and reasonable, to forgive contract violations made by young children, or by newbies to the reputational system as beginners errors. But if one forgives such errors remains a personal decision. There will be a lot of people ready to forgive such contract breaking as a childhood as a sin of one's youth or a peccadillo, and it would be useful, to make this easier, to include information about the age, the time one has participated in the system, and the penalty one has not paid, or the time one has paid it too late, into the record. And the reaction may be different as well: some may not want to sign contracts at all with known contract violators, others may only want to have payments in advance, or will be ready to pay only later for their service, once the other guy has already a record of contract violation. This is nothing which will be fixed by the blacklist. The blacklist gives the information. How the information will be used is decided by those who use it. You are free to forgive, but nobody can force you to forgive.

    One thing worth to note is that the blacklist contains only negative information. The only positive information which is provided is that you have not yet an entry in the blacklist. But is this enough? One may want to have some positive information to, some reliable information that one can really trust somebody. This would be something one could develop based on the negative information from the blacklist.

    In particular, one could start to develop a system of positive trust based on sureties. The basic idea is that the non-existence of a blacklist entry is already some positive information. Even if somebody is a pure newcomer, thus, there is no experience in the past that he has fulfilled any contracts, the very existence of the blacklist itself, and the danger to appear on this blacklist forever, is already some, even if for some newbies small and not really recognized, deterrent. Would one care about appearing on a blacklist, which will be stored somewhere in the internet, copied many times, and never forgotten, where one is presented in a quite unfavorable way, as a contract breaker, forever, if one gains, say 5 Euro? I doubt. It is, of course, hard to estimate what would be the amount of money some unknown person would consider as a sufficient gain to appear, once and forever, on this blacklist. Let's say, you estimate this as X Euro. But that means, if there are, say, twenty people, who not only trust some guy, but give a surety for this guy of X Euro, which would be paid to the victim of this guy if he cheats, then one can risk 2000 times X Euro on this contract, because if the contract will be broken, one gets 2000 times X Euro compensation.

    What would be the motivation to give such sureties? The straightforward idea is to exchange them, once one has realized a contract without a problem, so that there is already some base for mutual trust. This should not be much. Say, 10% of the gain one has made by this contract. Maybe 5%. It does not really matter, because, anyway, reliable people will be able to gain, quite easily, large enough amounts of sureties. Such sureties will be, each, quite small, but there would be a lot of them. And it would be reasonable to expect that none of all these guys would refuse to pay the surety, simply because it is small enough, and the alternative - an entry in the blacklist - would be much worse.

    What would be the danger of this surety system? It would be the possibility to cheat a lot of people at the same time. The typical example would be a bank which works nicely, but at some moment the owner runs away with all the money. The first guy who calls the arbitrator to get his money back will be compensated by all the surety given to the bank owner, maybe the second too, but not all of the victims, because the system does not have a method which would allow to estimate what a particular guy owes to other people.

    Nonetheless, despite these problems such a system of sureties would allow to construct some positive system of surety too. And there would be possibilities to improve such system in such a way that this problem will be solved. For example, one could develop a system where sureties may be blocked for some time, so that they are "owned" during that time to a single person, who gets the money if one particular contract is broken.

    What would be the consequences of the existence of such a system? It seems reasonable to expect that, once started, it will easily raise. The point is that all those who know about the system have an interest that all their contract partners - more accurate, all those they don't want to cheat themself - will use this system for the contract, for the simple reason that this increases the reliability of the contracts.
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  5. Schmelzer Valued Senior Member

    Because the systems you mentioned have an inherent restriction for the number of participants. This point we have agreed about.

    The problem is inherent with positive reputation based on recommendations. You have to trust the guy who signed the recommendation. The system I propose is a negative one. Your recommendation consists of being a participant and not being on the blacklist. The closest thing to it in the classical world is the empty criminal record. And it is an improvement, because the blacklist cares about what is important for me if I want to sign a contract with somebody. Which is not if he has used illegal drugs in his youth.

    About how to exclude other people from the reputational system:
    Let's look at the interest for developing a restricted reputational system, if there exists one open for everybody. If you think about signing a contract, you are certainly not interested in ignoring reliable negative information about him. The open blacklist would provide it. Thus, you will not ignore this open blacklist, simply out of self-interest.

    If you are cheated, you want to penalize the cheater as much as you can. Additionally to destroying his reputation in your closed community, you can add something to the penalty if you can add an entry into the open blacklist. Because the higher penalty works as a deterrent, you are interested in having this ability from the start. And if your potential partner thinks differently, this is clearly suspect. Maybe he is a professional cheater, hopping from one closed community to the next? So, you will ask him to sign the contract in such a form that in case of violation he will appear on the open blacklist too. Except if you want to cheat yourself, of course, so not asking him to do this makes you suspect.

    So, there would be, even among closed communities, a sufficiently strong personal interest of the members to use the open system.

    Then, there is, of course, nothing in the system which prevents you from organizing closed communities if you like them. Many like this, many prefer to cooperate with people who think similarly, like and hate similar things, behave similarly, are interested in similar things. There is nothing wrong with this, so, such communities will appear.

    But there is no inherent necessity for forcing the members of the community not to cooperate with other communities. In case of conflicts between such communities, there is such an interest - one wants to be sure that he fights on your side, not on the other one. But this is also mainly a problem of insufficient trust: If you would, say, trust him that he will not violate the own rules (forbidding, say, to give relevant information to the enemy), and, on the other hand, accept that he will not violate the rules of the enemy as well (thus, not participating in the war as a soldier fighting against them), this guy would not be a problem too. He would be, instead, even useful for negotiating peace talks. So, missing trust is the problem here, not the fact that some member of the community also cooperates with other communities.
    I agree, this is the hard problem. A reputational system, which works globally and is not restricted to small groups as the classical ones, would be a good base for such a society. The reasons why there has been no such system up to know are clear and obvious, there was no technical possibility to obtain it.

    If the non-existence of such a global reputational system is the only reason for the creation of a state is an open question. What is clear that without such a system, some replacement which works for large societies is necessary. The state provides such a system, with state-governed judges, whose decisions are enforced by a state-controlled police. So, those who sign contracts can rely, in a state, on the police that it will enforce, if necessary, the contract.

    The other question, if there is a necessity for a state beyond this, remains open.
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