Gay Marriage and The Obligations of Contracts

No state shall ... pass any ... Law impairing the Obligation of Contracts ...

(U.S. Constitution, Article I, Section 2)

Which raises an interesting question. The recognition of gay marriage by a state changes the meaning of terms, such as "spouse," that are used in private contracts. Suppose an employment contract includes health insurance for the employee's spouse. Does that mean that, when gay marriage is legalized, same sex spouses are automatically covered by existing contracts? If so, the state would appear to have changed the terms of, which would seem to violate the contract clause.

In that particular case, one could argue that the change expands rather than impairs the obligation, but one can easily enough imagine the reverse situation, where the result of a legal change is that some people who had been considered spouses when the employment contract was signed ceased to be.

And if the answer is that changes in the meaning of the terms in a contract do not "impair the obligations," it is hard to imagine anything a state government might want to do along those lines that could not be disguised as a redefinition of terms.

How Anonymous is Bitcoin?

After a number of discussions at Porcfest, the Free State Project's annual get together, I think I now understand the essentials, although not the mathematical details, of how Bitcoin works. If I correctly understand it, it is well suited to be a private online currency but poorly suited as an anonymous currency, although there may be ways of converting it into one.

This is how I think it works—those more familiar with it are welcome to correct any errors:

1. A bitcoin is created by "mining," finding a solution to a particular mathematical problem. The problem has a known number of solutions, about half of which have so far been found, so about half of all bitcoins that will be mined have been.

2. Someone who has mined a bitcoin informs all other users of bitcoins that he has done so in a way that demonstrates the existence of his solution and prevents anyone else from claiming to be the miner of that particular bitcoin. It is now his.

3. Any transfer of bitcoins (or fractional bitcoins—they are very divisible) is publicized to all users of bitcoins. Hence, at any instant, every user has access to a complete list of who owns every bitcoin or fractional bitcoin in existence.

4. Users are identified not by realspace identity but by the public key of the wallet in which they store bitcoins. One individual can have an unlimited number of wallets.

5. Any disagreement about who owns what bitcoin can be settled by checking the lists of two or more users—many more if someone is trying to deliberately spoof the system by creating fake lists that show him owning bitcoins that he does not actually own.

One way of understanding the economics of the Bitcoin system is to analogize it to a hundred percent reserve commodity money. Each bitcoin corresponds to a one ounce ingot of gold. All of the gold sits in a bank somewhere which keeps track of who owns which ingot or fractional ingot. Payments are made by changing the label on the ingot. Mining bitcoins corresponds to mining physical gold, casting it into a one ounce ingot, and putting it in the bank labeled as belonging to the miner.

Seen from this standpoint, the bitcoin system has both the advantages and the disadvantages of a commodity money or hundred percent reserve banking system. The disadvantage, relative to a fiat money or fractional reserve system, is that the creation of money consumes real resources—time and effort to mine gold, computer processing time to mine bitcoins. The advantage (and disadvantage) is that the value of the money depends on factors not under the control of any government or central bank. That is a disadvantage if you expect a central bank to do a good job of managing a currency or expect the factors controlling the supply and demand for a commodity currency to change unpredictably. It is an advantage if you are concerned that central banks (or governments) will do bad job of managing a currency, for instance inflating for short term political benefits, as a way of funding government via money creation, or as a way of inflating away government (or private) debts.

The Bitcoin system differs from what I have analogized it to in three interesting ways.

1. The record of ownership is radically decentralized—there is no bank holding the bitcoins and keeping track of who each one belongs to. This means that the system does not depend, as other schemes for anonymous digital currency do, on a trusted bank, hence that it does not depend on the existence of a government willing to defend it. A fully anonymous digital currency makes money laundering laws unenforceable, which means that most governments don't want such a currency to exist, which is probably why, prior to Bitcoin, there were no such currencies.

2. The value of bitcoins, like the value of gold, depends in part on mining technology. But the total quantity of bitcoins has a known upper bound. This is both an advantage and a disadvantage from the standpoint of making future value predictable. A bitcoin hyperinflation due to a large increase in supply is impossible, however cheap computing power might become. But bitcoins are more vulnerable than a gold currency would be to changes in value, in particular increases in value, due to changes in demand. If the demand for gold increases, the resulting increase in its price will result in more gold being mined, holding down the price increase (increase in the price of gold, corresponding to a fall in prices measured in gold). The corresponding effect for bitcoins is limited by the limited quantity of bitcoins available to be mined, a much tighter limit than the limit on total gold available to be mined.

If you hold bitcoins, an increase in their value is a good thing. But if you are making future contracts in terms of bitcoins, uncertainty in their value, in either direction, is a bad thing, since it means that the real terms of your contract are subject to random change.

What about reduction in value due to a decrease in demand? In the case of both gold and bitcoins, the existing stock is already out there, so a drop in value only reduces the rate at which it is increased by mining. But gold, unlike bitcoins, has nonmonetary uses, which limit by how much its value will fall in response to a drop in monetary demand. Bitcoins have no nonmonetary demand.

3. A bank holding deposits of gold has a record of what account owns which ingot, but that record need not be public. The record of what wallet owns each bitcoin, on the other hand, is available to every user.  This means that bitcoins, used as I have described, are not only not an anonymous currency, they are in a sense the least anonymous currency ever created. 

The distinction between wallet and owner provides some degree of anonymity, analogous to the anonymity provided by a numbered Swiss bank account. To see the limits of that anonymity,  imagine that the FBI decides that the Free State Project is a subversive organization—as, in a sense, it is. An FBI agent procures some bitcoins and uses them to pay for his registration at Porcfest. He now has the public key of a wallet connected to the Project—call it wallet A. If he wants to find out whether some suspicious person that uses bitcoins has ties to the Project, he makes a payment to that person's wallet and then checks to see if it has ever sent or received a payment to or from wallet A, or to a wallet that has sent or received a payment to or from wallet A, or ...  . He can, in other words, engage in traffic analysis using only public information—no need to tap any phones.

There are, I gather, solutions to this problem, ways in which a group of wallets can put their bitcoins into a pool, retrieve a corresponding number from the pool, and so break the link between coin and wallet. I do not believe that any such solution is currently in routine use, but would be happy to discover that I am mistaken.

Corrections on that or any other part of this description welcome.

P.S. Lots of interesting corrections of details and additional information in the comment thread.

Gaming Islamic Tax

My previous post mentioned zakat, the Islamic religious tax. An earlier post discussed the question of how strongly religious believers actually believe, where religion lies on the range between a pretty story and a real fact, between belief in Santa Claus and belief that the sun will rise tomorrow.

It occurs to me that the behavior of Muslims with regard to zakat provides one possible way of investigating the question. With zakat, as with most tax systems, a clever taxpayer can adjust his behavior to minimize the amount he owes. Someone paying because the state forces him to or because his neighbors will see him as a bad Muslim if he doesn't would presumably try to arrange his affairs to minimize taxes. Someone who is paying because God will reward or punish on the basis of perfect information about what he does and why or someone paying because he believes that he ought to do what God wants should be less willing to try to game the system.

How could one do so? Zakat consists of two categories. One is a fixed percentage of output for certain agricultural crops—ten percent for crops that are not irrigated, five percent for crops that are. The other is a capital levy of 2.5% on certain forms of wealth—gold and silver (except for jewelry) and a merchant's trade goods. For both, there is a minimal level below which no tax is owed. For agricultural crops it is something on the order of half a ton a year of dry produce, low enough so that a small farmer might choose to try to hold his output just below the cutoff so as not to have to pay any tax on it. If one had good data on agricultural output by individual Muslim farmers in a place where zakat was paid, it would be interesting to see whether farms producing crops that zakat was due on tended to produce quantities just below the cutoff.

The other category provides at least two different and more effective tactics for minimizing taxes. To begin with, gold and silver are taxable if held as wealth but not if used as jewelry.  Convert your working cash into jewelry, convert it back when needed for your business, and you avoid most of the tax. It would be interesting to see whether Muslim populations are more inclined to hold wealth as gold and silver jewelry than other populations that are in other ways similar.

The second tactic is based on the fact that the tax on a merchant's trade goods is based on the weight of the gold or silver for which they were purchased. Here again, there is a minimum value below which no tax is due. The weight of silver below which no tax is due is about eight times the weight of gold below which no tax is due. If the price ratio between gold and silver was eight to one, which isn't too far off what it was in the Middle Ages, the quantity of trade goods on which tax was owed would be the same whether they had been bought for gold or silver. 

Currently, an ounce of gold is worth about sixty-five times as much as an ounce of silver. That means that the minimum value of trade goods on which tax is due is about eight times as high if the goods were bought for gold than for silver. It would be interesting to see whether, in countries where zakat is collected according to the traditional rules, merchants, especially small merchants, deliberately arrange to do business in gold instead of silver in order to stay below the level at which it would be due.

Is Islamic Law Law?

We usually think of "law" as referring to rules enforced by government. I have now read most of a 14th century text on Islamic law (also available online), and one conclusion is that that is a misleading way of looking at the subject. It is true that many of the rules are enforceable by the state, but that, seen from within the system, is not what they are really about. Ultimately, all of the rules are seen as enforced not by the state but by God.

That point is illustrated by a mistake I made in my initial attempts to understand the system. In Islamic law, there are five categories of acts, ranging from obligatory to forbidden. I thought an obligatory act was one you could be legally punished for not doing, a recommended act one that you should do but were not legally obligated to do, and so on down the list. In fact, if my current source is correct, that is not what the categories mean. An obligatory act is one that God will reward you for doing and punish you for not doing. A recommended act is one that God will reward you for doing but will not punish you for not doing. The distinction has nothing to do with what the state will or will not punish.

In an earlier post, I raised the question of what the difference is between punishment and failure to reward. I think, although I am not certain, that I now understand the answer in the context of Islamic law. As best I understand the view, at least the version presented in the book I have just been reading, all Muslims eventually make it to heaven—although that has to be qualified by the observation that someone with sufficiently heretical beliefs doesn't count as a Muslim even if he thinks he does. Punishment is what a Muslim has to go through before he gets there, reward is what he gets when he finally makes it. Hell, for Muslims, is purgatory. It is permanent only for some non-Muslims.

The distinction between state law and divine law is paralleled by the distinction between taxes in the sense most of us are familiar with—money we have to give the government to be spent as it chooses—and zakat, Islamic religious "tax." The rules for how much you owe are similar in both systems. The difference is in whom you owe it to.

A good Muslim is supposed to pay an amount of zakat based on how much crop he has produced during the year or how much wealth of certain sorts he has. The money goes to eight categories of recipients: the poor, those in need, travelers, unpaid warriors for Islam, ...  . In three of the four schools of law, it is supposed to be evenly divided among the categories, in one the payer is free to allocate it as he wishes.

But in all schools, as best I can tell, the payer is free to decide who in each category gets his money. He can, if he wish, pay the money to the ruler, who is then supposed to hand it out appropriately. He can, if he prefers, pay it to some private individual who will distribute it for him—and is entitled to one of the eight shares as payment for doing so. He can distribute it himself. Again, the ultimate obligation is to God and exists whether or not there is a ruler to enforce it.

All of which I find interesting.

What is the Default Afterlife?

I have been reading more Islamic law and continue to find it interesting. One issue implicit but not yet explicit in what I have read is the title of this post.

Islamic law classifies actions into five categories. An obligatory action is one which God will reward you for doing and punish you for not doing. A recommended action is one which you will be rewarded for doing but not punished for failing to do. A neutral action is one for which you are neither punished or rewarded, whether or not you do it. An abhorrent action is one which you are rewarded for not doing but not punished for doing. A forbidden action is one which you are rewarded for not doing, punished for doing.

Which sounds perfectly clear, unless you are an economist. To an economist, all costs are opportunity costs—the cost of doing X is the value of whatever you have to give up in order to do it. The cost of an A on the final might be a missed party the weekend before and several Friday evenings earlier in the quarter spent studying instead of going on dates.

From that point of view not being rewarded is a form of punishment, not being punished a form of reward. To make sense of the legal categories, one needs to somehow define a neutral point, a baseline, relative to which reward and punishment are measured. If you do nothing that deserves either punishment or reward, what happens to you when you die? Oblivion? Limbo? Heaven, but a tourist class version?

The same issue is raised by a different part of the law. Adult Muslims are obligated to obey Islamic law, subject to divine punishment if they don't. But the dominant philosophical position in Islamic law holds that one cannot tell by reason alone what is good and what is evil—it requires revelation. So what happens to someone who has never received God's word, having lived in a time and place with no prophet to deliver it and no transmission of the words of any past prophet?

In medieval Catholicism, the analogous question was the status of the virtuous pagan. Christ was necessary for salvation; what happened to people who lived decent lives but had the bad luck to be born before the incarnation? Dante's answer was that almost all such people ended up in a relatively pleasant part of Hell, where the only torture was separation from God. A special few were saved, by Christ (during the time between crucifixion and resurrection) coming down to Hell to fetch them out—the "harrowing of Hell."

The Muslim answer was more tolerant than the Christian, since it did not require the pagans to be virtuous. They did not obey God's commands, not having heard them, so did not get rewarded. But they were not responsible for disobeying the commands, not having heard them, so did not get punished. Even if they sinned.

Which gets us back to the question I started with. If they were neither rewarded nor punished, what happened to them when they died? What was the default afterlife?

And I cannot resist the temptation to end with a link to Rudyard Kipling's account of  the fate of someone who did nothing good or bad. Ever.

A Gift that Keeps on Giving

There is one very important question about government surveillance that I have not yet seen discussed: What happens to the data?

To see why that matters, imagine it is 2016 or 2020 and the candidate of the incumbent party faces a serious risk of losing. Someone in the security apparatus, loyal to the candidate or believing that the election of the opposition candidate poses a serious risk to security, starts looking through a massive database containing records of all phone calls made over the previous ten years—who called whom from where—looking for calls made by or to the candidate. He finds in the pattern evidence of an extra-marital affair. He waits until the candidate has been nominated, then leaks the information to a friendly reporter. Or imagine that some important bill is up in Congress and the vote is very close. A senator opposed to the bill gets a call from someone who makes it clear that he has somehow obtained information of misdeeds by the senator, political, marital, or legal, and the information will become public if the senator shows up and votes against. 

Modern technology makes it possible to inexpensively store and access vast amounts of data. The hard drives I own have a total capacity of several terabytes; a terabyte is enough to store a significant amount of data—about six hundred words worth—on every person in the U.S. The much larger storage facilities available to the National Security Agency should have no difficulty holding the complete calling records of the entire population over a period of decades. And once the information is there, whatever the legal purpose for which it was collected, it can be used for other purposes.

Whatever else comes out of the current controversies, one thing that should come out, and probably will not, is a requirement that all data collected and not used be erased within a reasonable period, say a year, after collection.

Vinge, Heinlein the Sagas and Me

I mentioned some time back a talk I was giving at Duke on Stateless and Semi-Stateless Societies in Fiction and Semi-Fiction. It occurred to me that I should provide a link to my recording of it for readers of this blog, especially ones interested in either science fiction or anarchism.