Suppose an eccentric entrepreneur is raising money for a new venture. It could be a sort of metaverse hula hoop or some revolutionary way of financing a public good (in the economic sense) or whatever. He tells potential adult investors something like:
You know I am an eccentric genius. If my idea works, you and I will make piles of money; if it does not work, I will not gain anything and you will lose your investment. According to my estimates and my entrepreneurial intuition, I think there is a good chance of the former. As you suspect I will run my baby as I want and your only real recourse if you are not happy will be to sell your participation if you can find a buyer.
We may further imagine that the state under which the eccentric investor lives actually does want to increase information and reduce transaction costs in investment decisions—more than, say, deepen its surveillance and control powers. Recall that transaction costs are the costs of finding contractual partners, agreeing with them, enforcing the agreements, and such. Our ideal government has decreed that all corporations who offer the sort of caveat emptor conditions described above will have to append “EE” (for “Eccentric Entrepreneur”) to their corporate names. We may conjecture that this legal rule would meet Friedrich Hayek’s requirement that any new rule be consistent with the general system of rules of the spontaneous order of a (more or less) free society. Our eccentric investor creates an EE corporation through with he raises money from investors.
In one case or the other, any adult is free to invest or not to invest and, of course, to refuse to patronize any third party who does (conservative bankers are likely to abstain). Suppose that, Mr. A or Ms. B, “natural equals” in James Buchanan’s terminology, or hedge fund C, whose own investors are natural equals as well, decides to invest money in our eccentric entrepreneur’s venture. What is the problem with this voluntary exchange?
If nobody chooses to risk his money, there is no problem either, and no reason for the state to encourage investment by making people believe that there is no risk because of its benevolent regulation.
One objection (typical of the Law & Economics school) is that the state can find other ways to further reduce transaction costs in order to compensate for the fact that the eccentric investor has more information about his venture than the potential investors do—the asymmetric information argument. For example, the state could force eccentric entrepreneurs to regularly publish detailed and verified financial statements of their ventures. One problem with this sort of informational mandate is that they tend to grow non-stop over time, in volume and scope, as we have seen since the early 20th century. The more powerful “the regulator” becomes, the higher are the transaction costs that citizens face in their relations with their own government.
A related idea worth remembering has been succinctly expressed in Geoffrey Brennan and James Buchanan’s book The Reason of Rules:
There is no necessary presumption that simply because markets are imperfect, political processes will work better.
READER COMMENTS
Craig
Nov 25 2022 at 11:58am
“For example, the state could force eccentric entrepreneurs to regular publish detailed and verified financial statements of their ventures. ”
What I think you’re missing here is that EE sells shares and once I buy any shares, even one share, I am now a co-owner and I’m now equitably entitled, as an owner, to the information with or without the statute. Remember the separate nature of corporate personhood is a legal fiction.
Now to the extent the bylaws do not compel corporate disclosure to the shareholders, you’re setting yourself up for a cacophony of litigation because if I want the disclosure as a shareholder and you’re EE, the eccentric entrepreneur pointing to the bylaws, you’re still stuck with the problem that failure to disclose gives rise to a reasonable inference of conversion — remember this is a civil court, not a criminal one.
The second I aver that EE is converting the funds unlawfully in the complaint a judge cannot summarily rule that the complaint is false. For purposes of a motion to dismiss, which is pre-discovery, the standard is that every averment and reasonable inference is given to the non-moving party, ie “Even if everything I am saying is true, I would still lose as a matter of law”
Do you see the rub? An impartial arbiter/judge looking at the civil complaint that EE is enagaged in conversion (or breach of a fiduciary duty, the duty of loyalty or engaged in some kind of preference pre-bankruptcy filing) isn’t going to know one way or the other whether or not EE actually is or isn’t engaged in the unlawful act(s) of converting corporate funds. So even if the bylaws state that the corporation isn’t obligated to provide disclosure, well, all those records actually are discoverable notwithstanding the bylaws.
There’s no such thing as non-disclosure.
The statute is essentially setting the standard and the corporation can’t insist on doing less, but also I can’t insist on the corporation doing more.
“What is the problem with this voluntary exchange?”
There’s nothing wrong with the exchange barring fraud in the inducement itself which isn’t discussed here. It doesn’t mean that, subsequent to the voluntary exchange, that EE might not commit unlawful acts, civil torts, breach of contract or even straight up crimes (which of course would coincidentally be actionable civilly)
Craig
Nov 25 2022 at 12:18pm
To expound a little bit further, you’re advocating establishing a doctrine where people would be able to contract in a way where one party’s subsequent malfeasance (which we are assuming was not intended, ab initio) would be opaque to the other party. This in the face of centuries of examples of majority interests in corporations perverting minority interests.
[Sadly I am knee-deep in this corporate nonsense]
Pierre Lemieux
Nov 25 2022 at 2:05pm
Craig: Thanks for your comment, but I am speaking about what would happen in a free society, defining a contract, including a business venture, as what the parties themselves want it to be (with perhaps some common-law restrictions à la Hayek, but no constraints from liberticidal statutes). In a free society, any party could bring a suit before a judge, but the latter could quickly dismiss it if makes no legal sense in a free auto-regulated order. This being said, I am certainly interested to hear oany Hayekian or perhaps Buchanan-type objection that could be raised.
Craig
Nov 25 2022 at 2:29pm
Well, Hayek writes: “in a system where the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan… The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all”
F. Hayek, The use of knowledge in society, Am. Econ. Rev., 35 (1945)
But I digress, because sadly Hayek isn’t with us anymore and life is for the living and here’s the thing. When I give you my money, for any purpose, I have a right to know what you’re doing with it whether you like it or not. In fact, PARTICULARLY when you don’t like it. And while I am writing that concept very succinctly and without regard to nuance, that concept absolutely underpins the law.
robc
Nov 25 2022 at 3:28pm
That makes no sense. I have no right to know what you do with the money after I buy a product from you. I dont think you really meant “for any purpose”.
Mactoul
Nov 25 2022 at 9:08pm
Is America not a free society?
Aren’t the rules and laws that govern corporations product of centuries of experience and evolution?
Have these laws not led to unprecedented prosperity?
Pierre Lemieux
Nov 25 2022 at 10:52pm
Mactoul:
The “laws that govern corporations” are in large part the product of two centuries of legislation by state politicians and a bit more than one century of legislation by federal politicians, all that legislation having partly hollowed out the common law. This legislation is not as bad as that of most other countries. A good starting historical-theoretical starting point to understand these issues, even if one wanted to challenge the conjecture I propose in my post above, must remain Hayek’s The Constitution of Liberty.
Craig
Nov 26 2022 at 10:19am
The legislation mirrors well developed common law duties though. Since we’re discussing financial disclosure generally, you might see the statutes setting brightline rules like the requirement to file a 10-Q or 10-K as being the product of statute. And that’s not wrong, but make no mistake about it, absent the statute, the duty to disclose would still exist and common law decisions would develop the contours. But you would be constantly litigating this and the frequency and depth of the disclosures would create an absolute train wreck at the courthouse. And you’d have cases where if you and I had a store that was incorporated that the court would compel daily disclosures of the daily drop at the bank. And there would be thousands of cases and fuzzy/grey areas where any specific duty to disclose would be described as, “It depends”
Perhaps one might prefer this, but its not consistent with liquid secondary markets. The Nasdaq has what? Something like 3000+ securities on it? All of them are going to have different reporting standards?
As I write this its 11/26/2022 so its the middle of the 4Q so looking back the disclosures from the 3Q are out and are now priced in and of course looking forward the market is trying to expect future results going forward.
Imagine bylaws stipulating to annual disclosures and its now 11/26/2022 and the last disclosure was 11 months ago and the shareholders think the CEO is raiding the cookie jar. The judge isn’t going to just defer to the bylaws because a contract is a contract but the allegation is that the contract is being breached.
And so they filled in the fuzziness of the common law duty to disclose with brightline statutory duties.
Pierre Lemieux
Nov 26 2022 at 12:04pm
Craig: How did listed companies prove to their shareholders that they were profitable before the mandating of financial information after WWI? Research has shown that they did this by paying more dividends, which diminished as compulsory disclosure grew. I can’t immediately put my hands on the classic article on that for America (perhaps a reader will help?), but lots of other similar research followed, for example:
Craig
Nov 26 2022 at 1:00pm
Dividends are important and establishing a track record of dividends is important indeed to this day there are still dividend ‘aristocrats’ known for never decreasing their dividends. Still a dividend needs to be taken into the context of the payout ratio, the sustainability of the dividend. Even today high dividends lure investors into what is often called a ‘dividend trap’ a high unsustainable dividend yield which has a high probability of being cut in the near future.
Dividends have decreased in popularity because personal income taxation means one of the best ways to lawfully avoid taxation on dividends is to simply not pay them out and the market, as a result has had a tendency to prefer taking their gains in the form of a long term capital gain which is currently subject to preferred rates. And what has become increasingly popular are share buybacks which, if you think about it, is really a ‘dividend’ to those who want an ‘all-out’ dividend and those who don’t want a dividend retain a higher % of ownership of the corporation that remains post-buyback.
And further companies have been known to engage in what are called ‘dividend recapitalizations’ ie they borrow money to pay dividends. So while the dividend is associated with the cash flow of a profitable company taken in and of itself a dividend is not dispositive there.
Craig
Nov 26 2022 at 1:10pm
Just to illustrate what I mean about what personal income tax does to dividends consider a simple example.
Company A is profitable, it makes $1000 per year after all corporate level taxation.
With the $1k in profit, the company can do one of two things: 1. it can pay the $1000 out to the shareholders or 2. it can retain the earnings and reinvest it in the company.
So if there is 0% income tax in the US, the shareholders have to decide if they want to take the $1000 payout and use it or to leave the $1000 in the corporation as retained earnings to invest in subsequent operations/growth.
Now we will see what personal income tax does to that. Same situation but now once the shareholders receive the $1000, we will assume 10% taxation, the shareholders don’t get $1000, they get $900. So now the shareholders have to decide if they would prefer to take a $900 payout and to do whatever they want with that $900, OR to leave the $1000 in the corporation and let the corporation reinvest the $1000.
There is no definitive answer, but one can easily see how personal income taxation skews the playing field and decision making process, ceteris paribus, in favor of retained earnings.
Mactoul
Nov 26 2022 at 11:51pm
I have read Constitution of Liberty though not recently but I don’t recall Hayek regarding all legislation as anti-liberty per se.
This again hinges on the philosophy of proper domain of political action which I don’t think libertarian thought has it fully consistent.
I mean why should political action be considered not consistent with spontaneous order per se. Over many centuries, a great many people have deliberated in the press, in the academies, in legislatures. What is the connotation of spontaneous order that rules these deliberations to be somehow not fully legitimate?
Pierre Lemieux
Nov 27 2022 at 12:09pm
Mactoul:
Your question (as I read it in your last paragraph) is interesting. The objection it suggests is the following: by definition, everything is part of the spontaneous order and, therefore, nothing (including Stalin, Hitler, slavery, or eugenics) can be criticized because it is just what it is.
This definition is not very useful, though. It neglects what distinguishes a spontaneous or self-regulated order from a (imposed) goal-directed organization. Reynolds’s boids would not be a self-regulated order if one “bird” commanded the rest. What is useful to read on this is Hayek’s Law, Legislation, and Liberty, although it is perhaps not an easy book to read. From my Econlib review of vol. 1 (which I have tried to make easier to read):
vince
Nov 27 2022 at 1:20pm
“Dividends were a substitute for income statement transparency.”
A very bad substitute. A corporation can have a loss but pay dividends.
vince
Nov 27 2022 at 1:24pm
Craig wrote: “There is no definitive answer, but one can easily see how personal income taxation skews the playing field and decision making process, ceteris paribus, in favor of retained earnings.”
Letting corporations deduct dividends could eliminate the skew.
robc
Nov 29 2022 at 9:46am
No, the NASDAQ would set reporting standards for being listed with them. No need for the SEC, let the exchanges set their own rules. All the liquidity benefits and etc that you mention could be handled by the exchanges wanting those benefits.
And there might be am exchange without those rules, but they wouldn’t benefit from the liquidity, so would probably have less members.
robc
Nov 25 2022 at 3:26pm
Couldnt the EE, under your restrictions, not SEC ones, meet the standard by regular reporting to the owners, but with an NDA preventing them from sharing the info with non-owners?
Pierre Lemieux
Nov 25 2022 at 10:55pm
ROBC: Yes, but the main idea is that it is for the EE and his investors to determine the standard.
Craig
Nov 26 2022 at 9:58am
Yes, and its not that uncommon I would suggest with respect to what one would typically call a closely-held corporation or ‘private’ corporation (private as distinguished from publicly traded corporations). Of course those corporations’ shares are typically not traded at all and if they are the corporation might have some kind of right of first refusal. Of course if you were to sell them the person buying them would perform some kind of due diligence and a person who prequalifies to purchase the shares himself might sign an NDA/confidentiality agreement to agree not to divulge the information provided even if that prospective purchase ultimately decides not to go forward.
Indeed, that process is relatively burdensome and one can see how the benchmarked disclosures of publicly traded corporations allow for a very liquid market to exist on secondary markets where buyers/sellers are almost always unknown to each other and sellers don’t need to make any independent disclosures to buyers. The buyers and sellers can refer to the public disclosures which are in the form of 10-Ks, 10-Qs and are readily understood and digested by the investing community.
Pierre Lemieux
Nov 26 2022 at 11:36am
Craig: Consider how complicated and non-liquid the marriage market is compared to the market for listed-corporation shares! Why doesn’t the state also work to reduce transaction costs in the former? Would a SEC (Sexual Exchange Commission) do the trick?
PS: By the way, the economic distinction is between listed and non-listed corporations. The corresponding distinction between “public” and “private” corporations participate in the general, including legal, confusion (Newspeak) between what is public and what is private. I admit that the confusion has bled in economics too, perhaps ever since the New Deal but, I would guess, especially in the past few decades.
vince
Nov 27 2022 at 1:28pm
“By the way, the economic distinction is between listed and non-listed corporations. ”
Note that listed companies, ceteris paribus, have a much higher market value than non-listed. The difference is often called marketability premium.
Brian T
Nov 25 2022 at 1:26pm
I don’t follow the objections. Given the upfront disclosure of the freely accepted terms or rules of the game, no investor has any subsequent reason to complain unless those terms are violated. And in that case, a simple complaint for breach of contract does the job or, in worse cases, complaint for breach of fiduciary duty. Regardless, it does seem compelling that there “is no necessary presumption that simply because markets are imperfect, political processes will work better.”
vince
Nov 25 2022 at 2:44pm
Craig: A co-owner is entitled to information, but don’t corporations carefully select domiciles that suit their interests, for example incorporating in a state that is hostile to derivative lawsuits?
Pierre: I’m not sure what you’re proposing. Public companies have to file regular reports. Every security must be either registered with the SEC or meet a Regulation D exemption.
Pierre Lemieux
Nov 25 2022 at 10:40pm
Vince: RE your last paragraph, this is what I am questioning: not only the New Deal laws like the ones creating, and around, the SEC, but also the ones earlier in the century. A caveat on the latter, though: at a time where stock exchanges were (I think) still private associations, the regulations decided by them for their listed companies would be justified as private experiments engaging only private contractual parties.
Craig
Nov 26 2022 at 9:50am
Many corporations obviously select Delaware and Nevada. With respect to Delaware, Delaware state courts have well developed case law surrounding corporate law.
Most derivative suits are at federal level.
David Seltzer
Nov 26 2022 at 6:02pm
Pierre: Wonderful discussion! In terms of disclosure, READ THE PROSPECTUS!! BTW. It wasn’t government regulators who determined FTX was worthless. It was CoinDesk, a small news site chronicling the volatile crypto world. It was reported SBF used customer’s segregated funds to leverage Alameda Trading and worthless collateral o secure loans. I’m dubious when it comes to information asymmetries in the marketplace. Thousands of imitators respond to the slightest change of expectations almost instantaneously.
Pierre Lemieux
Nov 27 2022 at 12:27pm
David: You’re right that asymmetric information is the least persuasive objection when it pertains to finance, where it is in many people’s interest to divulge information. (Decriminalizing insider trading, as it was before the 1960s in America and 1980 in Europe, would help in this regard. Many people now seem to think that the criminalization of insider trading goes back to the Big Bang that created the physical universe. See my Apologie des sorcières modernes [Paris: Belles Lettres, 1991].)
vince
Nov 27 2022 at 1:33pm
David wrote: ” It wasn’t government regulators who determined FTX was worthless.”
Rightfully. It’s not the job of regulators to determine the value of a company.
Jim Glass
Nov 27 2022 at 5:22pm
Wonderful discussion! In terms of disclosure, READ THE PROSPECTUS!!
What prospectus? Why would there be a prospectus?
Haven’t you enjoyed the great tales of the all massive corruption in corporate governance in the 19th Century? Like, oh, Credit Mobilier…
Imagine the consequences if the heavy boot of the state had oppressed those corporations into disclosing who their officers and directors were, in, you know, … a prospectus.
Jim Glass
Nov 27 2022 at 6:21pm
I just noticed “FTX” in the comments. Is the Eccentric Entreprenuer story meant to make a point about that? The facts are so different I thought it was about a whole other subject.
If so, I’ll add a bit more fact to make the stories parallel. Then look back to the fundamentals of classical liberalism via Smith and Jefferson to see what they’d likely think the state should do about such a case. Then consider the late, great ‘minarchist’, Nobelist Ronald Coase, on what the state actually can do about it.
Going backward to go forward like this may take a few comments, but then I’ll be done with FTX forever!….
Jim Glass
Nov 27 2022 at 6:32pm
The Eccentric Entrepreneur’s Venture….
Fine. People are free to invest in EE Inc., assuming any risk they agree to with EE. Routine and uninteresting. But how can they invest in EE?
To help them do so I create a new exchange, JGX, through which investors can buy and trade EE Corp stock and other stocks and bonds, etc. I hire Tom Brady to tout JGX and he brings in a million trusting customers. These customers “assume the risk” of trading EE stock and the rest, of course. But they incur is no investment risk, zero, in using JGX as a broker-exchange.
They have no investment in JGX. Whether their investments in EE corp or anything else goes up or down doesn’t matter to JGX because its income comes from fees per trade, either way. All of JGX’s customers’ deposits are 100% backed by either their deposited cash itself, kept on hand, or the EE stock (or whatever) purchased with it — I explicitly, solemnly promise! Even if the JGX business fails, the full loss will fall on its equity owners, zero on the fully secured depositors.
This is how all honest exchanges work, so investors will expect nothing different. (And with Tom Brady touting JGX, surely it is honest!)
Since these customer-depositors have no investment in JGX, clearly they have entered no voluntary “contract” with JGX assuming any investment risk in it should it fail. There is a contract, but it is the reverse! JGX has explicitly contracted with its customers to keep them whole, their deposits 100% backed and secure, come what may.
Then someone notices $1 billion of customer deposits are missing, and I’m sending Tom a thank-you note from nobody knows where. (Maybe I was working for the Mafia all along?)
I have committed a gross crime, stolen big, committed a huge theft. Should the state have acted to prevent this?
Many people compare investment markets to a casino. When you go to a casino you enter an implied contract with it assuming gambling risk when you play roulette, craps, whatever. But you do not voluntarily assume any risk that a casino employee will blackjack your skull and empty your pockets, or use your credit information to hack your accounts and steal your life savings. This is why the state has forced the Mafia out of the casino industry.
Has the state abused its power by forcing the Mafia out of the casino industry? What would the classical liberals say?…
Jim Glass
Nov 27 2022 at 6:46pm
2.
The classical liberal prescription is “Life, Liberty and Private Property” (“pursuit of happiness” being a Franklin edit). The first item is Life — safety, security — before Liberty. That’s not an accident. Obviously, if you are dead, maimed, living in fear, regularly assaulted and robbed into poverty, how “free” are you?.
Adam Smith in WoN says the state has three duties: “The second duty of the sovereign, [is] that of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, the duty of establishing an exact administration of justice…”
Jefferson, (Mr. “Life, Liberty” … himself) said the first justification of the state is to ‘prevent my neighbor from knocking me down and taking my purse.’
I took a billion dollars worth of purses. Looks to me like Jefferson and Smith would have wanted the state to prevent that, and go “as far as possible” to do so.
But is it possible for the state to do it? Doesn’t it always grow to such excess to be harmful overall? As to “Life”, isn’t the state the #1 perpetrator of violent death?!!
I once heard the great Ronald Coase (my #1 fave economist) talk about this. He said he’d spent his life showing government programs and regulations to be inefficient and self-defeating with goals best met by private actors (lighthouses!) — only to be afflicted by anti-government hard-libertarians who claimed all government is toxic, and that he himself had proved it.
No, no, he said, government provides fundamental essential benefits as shown by the universal existence of the state in all modern societies. (“Failed state” is not a place you go on vacation.) Citing things the government is bad at to deny there is anything it is good at is illogical.
He said that, like all kinds of entities, government grows past its optimal size into falling returns — but that looking at a curve of variable returns and seeing only the down end, denying there is high part of the curve, is bogus analysis. So even though he wrote and edited paper-after-paper showing the failure of government programs, Coase insisted on being neither ideologically anti-government nor pro-government — but on being impartial in examining every case on its merits.
Ok, so what is government good at, essential for, even? Let’s consider “Life” again. Does the state prevent violence? Coase says, ignore ideology and see the facts.
Look at the data on the amount of death-by-violence in pre-state societies versus in state societies, in the chart at minute 3:15 in Stephen Pinker’s Ted Talk on the historical decline of violence. That’s pretty stark!
Monopoly really does reduce quantity supplied!
But what about the state’s police powers against crime, ability to prevent purse stealing?….
Pierre Lemieux
Nov 27 2022 at 8:53pm
Jim: For what Coase really thought (with precise references) and some critique too, you might like to have a look at my obituary of him. (I am sure you’ll find ideas to criticize in my critique; I myself do after finally conceding many points to Buchanan and Hayek.)
Jim Glass
Nov 27 2022 at 6:58pm
3.
For a society to function its members must trust they can walk down the street safely. (Why Nations Fail, Violence and Social Orders.)
So a cop walking a beat benefits society not merely by catching an occasional perp but, much more valuably, by deterring other crimes from happening at all. Even if he is a minion of “the state”! It is a fact. There is a mountain of evidence on this.
So if I live in NYC in an area where there is high crime and no police coverage, I might ask, “Hey, I want some police patrols over here, to keep my purse safe!”
To which the ideological anti-stater may reply: “But if you have cops on the street you’ll have a growing costly cop bureaucracy and corruption with it. You know all the corruption in the NYC police since Serpico on. Police Commissioner Bernie Kerick was convicted and sent to jail! Do you really want his corrupt guys in your neighborhood? Would your next step be to have a cop in every house?”
And I’d reply, impartially respecting the mountain of evidence, as per Coase: “No, I want a couple of those guys walking the beat around here.” As the cost of the cop bureaucracy and occasional corrupt Commissioner in no way comes anywhere near to offsetting the benefit to society of street patrols. Thus demonstrating that the argument: ‘government interventions must grow to be a total net negative’ is bogus, as per Coase.
Unless one thinks the cost does produce a total net negative – in which case one will be not a mere “defund the police”-er but an *abolish all the police*-er. Anyone here for abolishing the police?
Can “the state” police investment crime to prevent it?…
Pierre Lemieux
Nov 27 2022 at 8:57pm
Jim: Sorry, but it is difficult not to reply to your glorification of the state. I recommend an antidote: Anthony de Jasay’s The State.
Mactoul
Nov 27 2022 at 11:49pm
State of nature??
Property is definable only in a state of laws. Indeed it is a vital role of the state– to define laws that allow property to be.
Property is a conclusion from the moral premise that a man would eat from sweat of his labor. In other words, a thing gets to be owned by a person mixing his labor with it.
But how much labor must be mixed with what thing –is not settled by the axiom and can only be settled by particular laws of particular people.
Mactoul
Nov 27 2022 at 11:53pm
In particular, property rights in land are absolutely unmeaning absent a state.
You may say I have fenced this bit of land and so it is yours. But i may equally validly claim that you need to farm it for this many years
Or you had no right to fence this common land in the first place.
Who is to decide between us?
Pierre Lemieux
Nov 28 2022 at 11:41am
Mactool: Your objections to anarchy are old arguments, starting from Locke and even the Ancients. For an antidote, see (inter alia) Michael Huemer, The Problem of Political Authority. The biggest contemporary challenge to statism is, in my opinion, Anthony de Jasay’s The State; but it is a technical book and, furthermore, in order to understand it, one has to really forget for a moment everything one has learned in the reigning culture. You may not agree with these revolutionary views about the state, but it is important to be aware of, and understand, them.
Jim Glass
Nov 28 2022 at 10:56pm
Jim: Sorry, but it is not difficult not to reply to your glorification of the state. I recommend an antidote: Anthony de Jasay’s The State.
Alas, I fear the statists Smith, Jefferson, Coase and Fogel have poisoned my mind towards the subversive challenge of conservative anarchists. Too old for new ideas, perhaps.
“The second duty of the sovereign, [is] that of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, the duty of establishing an exact administration of justice…”
Damnable Commie!
Pierre Lemieux
Dec 1 2022 at 10:32am
It is useful to distinguish a broom from a wheelbarrow.
Jim Glass
Nov 27 2022 at 7:32pm
4.
Adam Smith wanted the state to go “as far as possible” to stop me from commuting my crime of looting my firm’s deposits. But could the state actually do it?
I had to siphon off the $1 billion of deposits gradually over time, of course, leaving most in the firm to keep it operating and my employees from noticing. Following Sam, I employed no accountants (none!) who might spot things, installed a messaging system that self-deleted my messages, and built software specifically designed to hide the misuse of customer deposits. Thanks, Sam! I was clever … what could the state have done about all that?
Well, it might have stomped down its jackboot and ordered me to hire a licensed accountant to publish for my customers regular statements of assets against deposits, periodically audited by an independent third party, a “cop on the beat”. That’d have stopped it. Finis. Back to being a business school TA.
But even so, wouldn’t preventing my crime this way have been worse for society overall, given:
One problem with this sort of informational mandate is that they tend to grow non-stop over time
Let’s get Coasian and look at the data. Sure regulation can grow absurdly, and paperwork can get too damn thick (dealing with all that has been my career) … but what are the net results?
Here’s the data I see (and provided previously, twice):
[] In four years, 140+ crypto financial firm-exchanges disappeared with all investments “without a trace”, plus 20 more revealed to be complete scams.
[] Since 2010, in 12 years, among regulated fiat institutions, all of seven bank runs world wide, and none (zero) disappeared “without a trace”.
That real-world score looks pretty good for ‘team financial statement’ to me.
And it looks good for the health of the ‘financial statement’ investing world too. Because just as people must trust to walk their neighborhoods in safety, without being mugged and robbed, to have a healthy community, so they must to be able to invest in EE Inc. and the like, without being mugged and robbed by their brokers and exchanges, to have healthy investment markets. (There’s a lot of data on this too.)
If people fear they will be mugged and robbed by their brokers and exchanges before they get to risk their investment in EE Inc, they’ll keep their savings in coffee cans and shoeboxes. And how will that help eccentric entrepreneurs?
Of course. Coase said that 1,000 times. He also said there’s no justifiable presumption that political processes can’t work better.
Do you really want to abolish the police? How wrong was Smith?
~~~
Finis.
Pierre Lemieux
Nov 28 2022 at 11:54am
Jim: Sometimes, it is useful to ask fundamental questions to get out of intellectual ruts (yes, yes, I need to do that too!). What do you mean by “for society overall” and ” benefit to society”?
vince
Nov 27 2022 at 9:57pm
Jim said: “As the cost of the cop bureaucracy and occasional corrupt Commissioner in no way comes anywhere near to offsetting the benefit to society of street patrols.”
Corruption is OK so long as the benefits exceed the costs? True story. I met a retired NY copy many years ago. His pension was six figures. The pension was based on something like high 3 years of pay. He said when cops were near retirement, they got unlimited overtime. No questions asked. Thanks NY taxpayers!!!!
Jim Glass
Nov 28 2022 at 11:01pm
He said when cops were near retirement, they got unlimited overtime.
Not the cops I know. Don’t believe everything you here.
That was the transit workers.
Mactoul
Nov 28 2022 at 6:47am
Hayek in Individualism and Economic order
“Once we extend the power to make contracts from natural persons to corporations and the like, it no longer can be the contracts but it must be the law which decides who is liable and how the property is to be determined and safeguarded which limits the liability of the corporation.
Pierre Lemieux
Nov 28 2022 at 12:15pm
Mactoul: Which article are you quoting from precisely? Hayek did have some reservations about “legal persons,” arguing for example that cartel arguments should not be enforced by the state (see vol. 3 of Law, Legislation, of Liberty). But I don’t know that anything he said on this would mean that an eccentric entrepreneur (even as a corporation) and an adult investor could not make any contract they want within the general rules of law necessary to maintain a liberal order. Note what I said in my post: this is a conjecture.
Mactoul
Nov 29 2022 at 4:48am
I am quoting from the essay “Individualism: True and false” where Hayek also writes
” True individualism is, of course, not anarchism< which is but another product of the rationalistic pseudo-individualism to which it is opposed. It does not deny the necessity of coercive power but wishes to limit it–to limit it to those fields where it is indispensable to prevent coercion by others and in order to reduce the total of coercion to a minimum”
robc
Nov 30 2022 at 9:25am
And isnt that the question at hand? Whether or not SEC regulations are indispensable?
They may be useful, but that isn’t the same thing.
Comments are closed.