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Jim's post is a great defence of the futility of trying to protect
others from their folly.
However, the claim that individuals can and should by the only
protectors of themselves from fraud misses the mark.
Jim wrote:
> The only way to defend an individual against
> fraud is for that individual to exercise caution, to
> be wary, and to be vigilant. That's the price of
> freedom, and every individual must pay.
>
> Self-government means the individual is responsible
> for his own welfare. It means that he is free to
> be cheated, free to starve to death, and free to
> find better people to deal with, while yet being
> free to get rich. Encumber him with rules if you
> must, and watch out for him as you please, but don't
> imagine that you can make another a whit more safe
> or a bit more free.
Liability for one's actions and commitments is as fundamental to
freedom as is due process of law. To the extent that an individual
may be found to have caused damage or broken contract or acted
fraudulently, giving them due process of law, they should be held
responsible. The ability of trading partners to hold each other
responsible in this way reduces the uncertainty and transaction costs
of trading. The removal of this option may force traders accept
inferior (higher transaction cost) alternatives such as reputation,
and this obviously may be so unsatisfactory as to render the trade
unviable.
Jim also wrote:
> The presence of any agency, even a private one, that
> attempts to protect against fraud, creates a false
> sense of security. It cannot be wholly effective, but
> if it suggests to some users that they cannot be
> defrauded, it does them a disservice.
>
> Information is not free, either. Remove the cost of
> knowledge, and you remove much of its value. Not everyone
> can learn every lesson from others; some must be learnt
> by direct experience. Yes, fraud does much damage, but it
> also teaches wariness, suspicion, and reflection. Deals
> that appear too good to be true should be regarded with
> suspicion. How do you teach others to be suspicious?
Reputation is a substitute for legal remedy in avoiding fraud losses,
and reputation is attached to a producer. Like any producer, the
reputation owner, enjoys some degree of economies and diseconomies of
scale and scope. Thus the reputation holder may attain some scale and
scope and specialise in certifying the performance of other traders.
Thus an agency may act as a fraud risk assessment for many potential
trading partners, and do so effectively, reducing information and
other transaction costs and creating a legitimate sense of security
on the part of traders.
Just as armed security guards provide a legitimate sense of security
to those they protect ( I know I dispatched a security guard to a
bank that had a break and enter on new year's eve and the girls at
the branch were very much assured), so intermediaries and agencies
with good reputation can provide better default and fraud risk
management than the dispersed traders. And just as individuals should
have the right to be armed to protect themselves (a right I
explicitly do not enjoy under the laws of New South Wales,
Australia), so individuals should have the right to be suspicious to
protect themselves from fraud. Of course I am not saying that any
particular market model is optimal for all situations, only that the
ability to sue those who defraud or deal deceptively or default on
contracts should not be taken away just because the administration of
justice, even under common law, is imperfect.
> Rather than protecting the consumer or investor from
> being defrauded, I would suggest that all efforts to
> help others in this area be turned toward the matter
> of compensating them once they've been cheated. Having
> the SEC seize the assets of alleged criminals helps the
> SEC; it does nothing for the victims.
>
> A program to identify fraudsters and their victims
> and a program to achieve the compensation of the victims
> by the criminals would be useful steps. I'm not at all
> sure how to proceed with either program.
>
A better way to reduce transaction costs and enable people to deal
with each other in greater certainty is to improve institutions
(rules, laws). The removal of unnecessary regulation and complexity
and the rationalisation of law based on the development of a clear
hierarchy of laws and the principle of universality of rules (rules
that apply to unknown number of future circumstances and persons),
and the constitutionally bound evolution of the rules. This provides
legal certainty and allows people to trust those they do not know and
have never met before, e.g. you might go to another country and walk
into a bank and give someone you have never met before a large amount
of money, in perfect confidence that your money is safe! It is this
environment of minimum legal uncertainty that efficient market
structures develop and evolve dynamically.
But I'm quite confident that giving coffee and donuts
> to SEC agents isn't helping combat fraud.
>
> Regards,
>
> Jim
Have to agree with you on that one Jim!
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