So writes Yuval Noah Harari, in Sapiens.
There is simply no such thing as a market free of all political bias. The important economic resource is trust in the future, and this resource is constantly threatened by thieves and charlatans. Markets by themselves offer no protection against fraud, theft, and violence. It is the job of political systems to ensure trust by legislating sanctions against cheats and to establish and support police forces, courts, and jails which will enforce the law. When kings fail to do their jobs and regulate markets properly, it leads to loss of trust, dwindling credit and economic depression. That was the lesson taught by the Mississippi Bubble of 1719, and anyone who forgot it was reminded by the US housing bubble of 2007, and the ensuing credit crunch and recession.
There is perhaps something to be said for the notion that there is an interior optimum for trust in government. Too little, and you have weak property rights and an inability to safely make long-term investment. Too much, and government takes on too much power and creates a false impression that it can guarantee the safety of dangerous and misguided investment.
Interesting to think about how much of the balance between trust and distrust is likely to (or should) come in the form of ambivalent individuals and how much is likely to come from a constant tug-of-war between different people who are pro- and anti-establishment.
Good point.
That is usually the nexus where libertarians can work with whichever is the current out of power party in a certain domain.
“Markets by themselves offer no protection against fraud, theft, and violence.”
This is not entirely true. Put aside the issue of common law apparatuses, private arbitration/mediation solutions, and other solutions. How often do we forget that reputation plays such a critical role in private markets? Reputation is at a premium, especially in today’s hyper-connected world. If an investment firm were to engage in fraud, even without a criminal charge, I am quite sure that it would likely lose customers, lots of customers – at least the ones who did not benefit from fraud. The same applies to theft and violence. Outside of criminalized markets (drugs), how often would a consumer come back to an establishment that stole from them and then beat them over the head? How long would a stock exchange last that was rife with fraud? Reputation is an absolutely critical regulator of markets. It is much of what instills trust in markets.
Of course “good” government can help instill trust, assuming the regulators don’t end up captured by the cheats and frauds and assuming the regulators themselves are not cheats and frauds. Unfortunately, government seems to be made up of people, meaning there is likely to be the same proportion (or more) of cheats and frauds as that in the general populace.
Even in criminalized markets, there is competition.
The fact that there are criminalized markets at all says things.
You might want to question some of your assumptions here:
http://www.marketwatch.com/story/large-banks-have-paid-180-billion-in-fines-since-2007-2014-12-02
There are still cases where reputation matters, but the idea that it can serve as serious counterbalance against fraud, theft, and violence ended with the 20th century. Each of us only have so much capacity to judge things. The choices we have in today’s markets overwhelm that capacity.
The government came to the financial crisis to draw chalk lines around the bodies. It isn’t even clear their post hoc remedies haven’t made it even more likely to have crises in the future. the propaganda stress testing may be the most salient example of how government prefers appearance over real trust. So, just saying.
I don’t think reputation is a panacea. But other examples o can think of where government actively undermine it as a free market function include the ratings agencies monopoly position and the Triple A requirements that resulted in rating grade inflation. I also realize that some will blame the private actors in such examples.
Isn’t this one reason that people often prefer to trade with others from their own culture?
Willman’s Rule – Government is like bood pressure. Too much is bad, too little is bad.
The problem with reputation – reputation is a mechanism of delegated evaluation – other people I know and trust say that Jo is OK/competent/etc. That alone might work at the level of a local village. At the level of “pick a knee surgeon in Seattle metro” it’s still part of the method, but cannot be the only method.
Perhaps, if you think product reviews, consumer reports, and ratings don’t exist or don’t count as reputations.
Let me ask you how you found this blog? How did you choose your college? Car?
They do exist, and sometimes count. But currently, web visible ratings for complicated services like, say, surgery, are useless. People babble about how nice the office staff is. What your really want is some weighted statistical model that says this surgeon/lawyer/etc. is good.
For things like movies, many eateries, etc. public reputation is plenty good enough. You are totally right, it DOES serve for some things – things where consumers can make a clear final judgement that would match yours, there are lots of them, etc.
But pray tell, what “reputation data” anywhere would have told you to avoid Bear Sterns or Lehmann Brothers?
In general I agree. But also, a knee specialist gets to his or her specialty by the reputation he or she develops with his or her educators and employers.
To generalize, a lot of market stuff is rubber stamped by what we think is government regulation.
I don’t buy that meme. Even if I did, it wouldn’t argue for even less free markets. And as much as I see “I’m from the government and I’m here to help” I am more radical every day.
It’s fine to say they’re is an optimal level of government that is not 0.
That’s the easy part. But then let’s not hand wave away the idea that the optimal level may be much smaller than it currently is today.
I liken it to someone with dangerously high blood pressure saying, ” well, no blood pressure is deadly too! “
Yes, we usually do say it is a non zero optimum. This paricular narrative is almost always packaged with “…therefore we need more government for X Y and Z.” Here it implies deregulation and the financial crisis, which Russian Roberts famously pointed out, then why don’t they ever want only to put back what was supposedly deregulated instead of a bunch of new non sequiturs.
Tyler Cowen says that I should just go with Russian Roberts instead of Russ because I need to follow my computer’s recommendations to succeed in life.
A good question is whether any interior solution is stable in the long-run.
I think hording of fiat money in a depression is a sign that people trust Government too much. If fiat money were issued by private banks, if people got scared they would try to turn it over for real goods and hold only enough for transactions.
Also people buy government debt because government can always collect their payables. I don’t read academic papers but I never hear the blogosphere discuss flight to quality as a factor in a credit crunch.
I’ll take smaller government. And I suspect that the housing bubble of 2007 had more than a little of government to blame. The Mississippi Bubble? We survived that, right?
Hi, I enjoy reading your site! Is it okay if I contact you through email? Please email me back.
Thanks!
Harry
harry.roger10 gmail.com
leave a more detailed message
Interior optimum. Yup.
“Markets by themselves offer no protection against fraud, theft, and violence.”
This is deeply confused and should not be left standing. If there’s no protection against fraud, theft, and violence, then there’s no market.
A market is not the same thing as laissez faire. A market involves defined property rights and established rules around how to trade those rights. There are many forms of markets, some of which are informal and some of which involve official government action.
For a given market, innovation in the way we operate with each other happens within the state space of the legally possible agreements people can make in that market. Therefore, in any area we would like to see some form of progress, there almost has to be a market in which people can explore possible improvements and see how they go.