In this courtroom drawing, defendant Ross William Ulbricht listens to proceedings from the defense table during opening arguments in his criminal trial in New York. (Elizabeth Williams/AP)
I just wrote an article at Aeon, looking at the rise and fall of Ross Ulbricht, the Texan who created and ran the online drugs market Silk Road. The piece uses arguments from social science to understand how Silk Road worked. Here’s some of them (in greater detail but worse prose than the actual essay).
States and mafias have a lot in common.
The main argument of the piece is stolen from two classic articles by sociologists, Charles Tilly’s War making and state making as organized crime and Diego Gambetta’s Mafia: The price of distrust. Tilly’s article shows in brutal, elegant prose that the state began as a kind of protection racket, where kings protected their rulers from each other and from other rulers in exchange for a payoff. Over time, many states have changed and become more responsive to their populations, trading legitimate governance for taxes, building what Margaret Levi calls a ‘state of trust,’ in which the state itself is reasonably trustworthy and also helps build trust among its citizens. Gambetta shows, in contrast, how modern day protection rackets like the mafia started by underpinning trust in deals between who would otherwise distrust each other, while injecting enough suspicion into the relationship that they weren’t able to trust each other independent of the mafia.
Sites like Silk Road are a more elegant version of the protection rackets that Tilly and Gambetta describe; somewhere between a (very underdeveloped) state and a (very loose) criminal organization. They prevent drug dealers and drug sellers from cheating each other, in exchange for a cut of the profits. They also try to stop people from dealing with each other as individuals, while poaching sellers and customers from other sites. However, it turns out that it is hard to stop some kinds of market destabilizing behavior without the threat of violence. This is why Ulbricht’s initial ambition of creating a zone of online civility was doomed, and why he eventually found himself trying to contract out the murder of people whose activities were disrupting his business model.
There’s a social science logic behind the pseudonym ‘Dread Pirate Roberts.’
Fans of the awesome book and movie “The Princess Bride” were familiar with the Dread Pirate Roberts long before Silk Road was invented. The male lead, Wesley, is captured by the ferocious Dread Pirate Roberts, and then forced to become a pirate too. But then the Dread Pirate Roberts decides to retire, and reveals that he is not in fact the Dread Pirate Roberts. He inherited the title from someone else (who wasn’t the true Dread Pirate Roberts either) and wants to hand it on to Wesley in turn. The reputation of the Dread Pirate Roberts travels with the name, allowing its owner to control a pirate crew, and to instil terror in the victims of his piracy.
This is very close to Stanford economist David Kreps’s explanation of why corporate reputations are valuable. As corporations come to be associated with certain ways of behaving, their customers learn to trust the corporate brand and reputation to behave in those ways in unanticipated future situations, making it valuable. This both makes the owners of the corporation more likely to behave in a trustworthy fashion (because they don’t want to trash their valuable reputation) and allows them to pass on or sell the valuable brand and reputation to new owners (who will have an incentive to behave in a trustworthy fashion too).
Hence, when Ross Ulbricht chose the pseudonym of the Dread Pirate Roberts, he was sending a very strong signal that he had built an identity that could be passed on from person to person. This generated useful confusion as to who the actual Dread Pirate was. Ulbricht claimed in an interview that he had inherited the title of Dread Pirate Roberts from someone else, just like Wesley in the movie. This tall tale may also have lain behind his bizarre legal strategy after he got caught (his lawyer suggested that he had founded the site, left it, and then been dragged in again to become a fall guy after most of the really bad stuff had happened). Finally, the choice of the Dread Pirate Roberts pseudonym made it clear that the title was an asset that could be sold on (Ulbricht claimed that he wanted ten figures, but presumably would have settled for rather less).
Silk Road looks a little like medieval trading arrangements before the modern state
Important results from economic history and game theory help explain why drug dealers converged on the Silk Road model. Over the past 25 years, a small cluster of economic historians have used game theory to think in a more systematic way about how non-modern economies were organized. Avner Greif, Doug North, Paul Milgrom and Barry Weingast modeled various trading arrangements (such as medieval merchant guilds and ‘champagne fairs’) as ‘equilibria’ in simple games.
As Randy Calvert suggests in an important overview article, this family of models suggest some simple lessons about how to enforce honest trading without a state. First, they say that you can have honest trading even if people don’t communicate with each other – but only if the community of people you are interacting with is very small, so that cheaters are going to have to deal with the people they cheated with again in future. Second, you can have honest trading with a larger group of people, as long as they can talk to each other about who cheats and who doesn’t, so that bad actors can be shunned. However, again this doesn’t scale very well – as the community gets bigger it gets harder to tell everyone about bad behavior, and cheating again becomes attractive. Finally – you can have honest trading in a large community as long as you centralize communication, trusting someone to say who is behaving well and who is behaving badly.
This explains why non-state-enforced trading arrangements tend to gravitate towards some kind of arrangement with centralized communication and enforcement like Silk Road. Dealers on online drug markets can carry their pseudonyms and reputations with them from one organized market to another if they need to (they can verify that they are who they say they are using public key cryptography), but they seem to want and need an organized website like Silk Road to allay the distrust of customers. Barak Richman describes how somewhat similar institutions govern Jewish diamond traders in New York, who are law abiding, but prefer to handle their trading relations outside the court system. However, as Calvert notes, centralization also creates risks. The person at the center can take advantage of their position to cheat other people. This is a particular problem for online drug markets, which usually have some kind of escrow system to try to enforce honest relations between buyers and sellers. The people running the escrow system may be tempted to loot it and run. Other online drug markets have collapsed, as the people running them have succumbed to temptation.
