Here's a longer potential title, for what may one day become a white paper: "Peer-to-Peer Risk Allocation Strategies: Learning From the Failure of Chaco Canyon to Improve the Resiliency of the Modern Financial System"
For those not familiar with what I mean by "risk-allocation," see my previous post "Financial Wizardry & Collapse."
- Chaco Canyon developed as a centralized marketplace to facilitate the distribution of the risk of crop failure among a system of producers
- The Chacoan System (as best understood) failed for two reasons: 1) The maintenance costs of the central structure created excessive inefficiency in the risk-allocation mechanism, and 2) The centralized and hierarchical topology of the system reduced its resiliency to recover from systemic shock
- The risk allocation mechanisms within our modern financial system (hedge funds, credit default swaps, volatility indeces, etc.) exhibit the same vunerabilities to systemic collapse as the Chacoan System.
- High-maintenance, hierarchical systems for centrally pooling and re-allocating risk developed because centralization allows for the accumulation of surpluses by an elite, who then protected that system against alternatives.
- Today, the legal and communications framework exists to facilitate the development of an alternative risk allocation system based on a peer-to-peer topology.
- Peer-to-peer risk allocation can enhance systemic resiliency by elminating the potential for central place failure.
- Peer-to-peer risk allocation can further enhance systemic resiliency by reducing the rent on transactions extracted to maintained a centralized structure.
- This reduction in transaction costs further enhances systemic resiliency by 1) Decreasing barriers to entry, thereby expanding hte breadth of the risk allocation network to directly include "retail" consumers, and 2) Expanding the depth of the network to new kinds of risk allocation such as exposure to fluctuating energy costs, healthcare needs, life insurance, littigation risk, etc.
So, there's the theory: our financial system primarily performs two functions: matching supply with demand and allocation of risk. The matching of supply and demand is already fully engaged on peer-to-peer topology, but will not move away from centralized production and consumerism until energy costs and diminishing marginal returns force such a move. Risk allocation, however, has yet to make this conceptual move--this represents a huge opportunity, both to lay a rhizomatic grid over the top of our current hierarchical system, and, potentially, to make a fortune as the next "Napster" or equivalent. It really is the kind of situation where a young internet whiz coupled with a few well schooled financial theorists could take down the Wall Street and City (of London) elite, much as Shawn Fanning sent shock waves through the recording labels.
Why would you want to do this? Doesn't it just prop up our current system? Maybe not. What I think it would do is create a "diagonal" market structure. A market structure that could survive dramatic, systemic shocks that will knock down the remnants of hierarchy. It will survive market shocks like the transition away from high-energy consumption to localized consumption. A sufficienty dynamic risk-allocation network (e.g. one not burdened by an invested elite) could survive the decline of the internet and telecommunications if it comes to that--the peer-to-peer topology is quite well suited to festival-based information processing.
Just a thought. It also raises another issue: while it may call into question what definition of "complexity" that one uses, does investment in flat-topology complexity (rhizome) lead to diminishing marginal returns in the same way that investment in peak-topology complexity (hierarchy) does?