Saturday, September 11, 2010


From Econned page 148:

Greenspan was hardly alone in his dogmatic belief in the wisdom of leaving “free markets” to their own devices . . . Judge Frank Easterbrook and Daniel Fishel, then University of Chicago Law School dean, asserted in 1991: “[A] law against fraud is not an essential or necessarily important ingredient of securities markets.”

I find this line of thinking to be rather remarkable. The two classic libertarian roles for government are to prevent force and fraud. Markets can’t be efficient if information is missing or removed – in a world where identities can be re-invented then you simply can’t have a national (let alone) global market if fraud is a permissible business strategy. The only way to trust people with your money or in business deals would be a long history of relationships.

This line of thinking requires one to think that there are no information asymmetries in the real world. Furthermore, a rational agent permitted to engage in fraud might be willing to destroy their relationship for a large enough pay-off. Yves Smith gives an example of how this thinking is leads to odd conclusions:

Easterbrook went so far as blocking a plaintiff from presenting a case that argued that an auditor has assisted in a fraud. The judge claimed it would be “irrational” for the accountant to behave in that way, given his interest in preserving his reputation.

Of course, one could argue that all potential criminals have an interest in preserving their reputation. But one might very well risk their reputation for a sufficiently high pay-off – especially if one is highly unlikely to be prosecuted.

I do not think that this type of thinking is universal among “free market” advocates but it is extremely concerning that these arguments can be advanced without public mockery.

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