One of the consequences of scientific management is the view that if we could just specify everything exactly then we can achieve better and more efficient outcomes. We have seen this mindset play out in reengineering, continuous improvement, big data & now blockchain. The complexity of a globally connected world means that precision is not always the only answer. There is also a corollary of precision which is that it enables financial speculation. When precision leads to financial speculation as the cure all, it may be precisely the wrong answer.
As a former lawyer, I have been following the discussion of blockchain’s potential to deliver smart contracts with interest. There are plenty of opportunities to disrupt the practice of law and improve its efficiency.
However smart contracts are an engineering solution to the problems of legal agreement. Attributing inefficiency to uncertainty, blockchain smart contracts are specific lists of steps with self-executing value. Financial transactions are an example of where the basis of value exchange can usually be specifically identified and self-executing contracts may well replace the many standard agreements that underpin financial market transactions like ISDAs.
Not all agreements are better when the steps are precisely specified. Most legal agreements aren’t a value exchange. They are a risk exchange. One party specifies a desired outcome and the value attached and leaves the method of achieving that outcome mostly open. The purchaser allocates the risk of delivery for a fixed cost to the person who wants that risk and is usually better placed to manage changing circumstances. More specification usually gets in the way of efficient delivery because it prevents adaptation and the ability to leverage new information. Most legal disputes occur when the parties specified the wrong future scenarios or they began from diverging understandings of the outcomes.
Distributed Autonomous Organisations.
Currently there is a buzz about the idea of using blockchain to form and manage a Distributed Autonomous Organisation. Essentially people trade claims on the blockchain for units in the DAO. Those units come with voting rights and a share of the outcomes of the DAO. Examples so far look like cooperative investment funds not unlike historical mutuals.
The challenge ahead for DAOs is to step beyond the precision of financial transactions. Corporations manage uncertainty through agency. Self-executing value tied to precise actions needs an ability to be precise. How will DAOs adapt to changing circumstances and methods of execution? Intriguingly some of the non-financial discussions of DAOs are drawn back to financial speculation given the strength of our precision mindset and the financial speculation opportunities it presents.
Complexity not Precision.
The challenge for the future of work is to better manage complexity not deliver greater precision. We are in the early days of the blockchain revolution and more innovations will come. We need those innovations to move beyond precision and financial transactions to more complex domains of uncertainty, learning and risk allocation.