The law surrounds the market and lets it work

“The law surrounds the market and lets it work”. I wrote that 20 years ago for a study sponsored by the Competition Bureau on the effect of the Internet on markets. The study argued that the Internet would create, reconfigure and destroy markets with blinding speed. If only I had seen how much and how fast.

This is a longer quote from that study.

“The kind of competition spoken of by the Bureau of Competition Policy takes place in a framework of law, and not otherwise.  Economic competition can only occur when a certain form of legal and social relationships has been achieved.  The law surrounds the market and lets it work.  The legal structure of a market presumes a group of people empowered by law to buy and sell. with clearly understood rules regarding ownership and property.  Economic competition occurs when people compete in terms of price, quality, nature of product or service; it is harmed by any number of factors, some of which completely escape the domain of competition law.  Theft, fraud, robbery, inflation, lack of information, and excessive taxes can all drive people out of the market.  In other words, before societies reach the stage of needing a competition law to deal with the more refined aspects of economic crime, basic conditions of law and order must be met.  When these conditions have been met, the practices that the Competition Act seeks to correct become possible.”

from Timothy Denton (1995) “The Competition Act and the Program Delivery Marketplace”

This was sent to me by a friend, and it serves as a fine birthday present. [I  turned 65 on Tuesday. I feel I am just getting started understanding what I do.]

He also sent a link to the article about Ross Ulbricht, founder of Silk Road, the underground market on the Internet, found at

The point of the article was that Ulbricht found himself increasingly having to assume the authority of the state over the criminals using his marketplace. The whole arrangement depended on trust, trust that the customer records of illicit transactions were being destroyed by the sellers. They were not. Ulbricht found himself forced to hire an assassin to police his libertarian market place.

The article by Henry Farrell, titled “Dark Leviathan”, recounts the ineluctable problems of trying to enforce market morality on pirates, and why the state (Leviathan) is needed, even by libertarian marketeers.

As money began to flow into the hidden internet, so too did cupidity and Realpolitik. Initially, Ulbricht saw himself as bringing ‘order and civility’ to a black market where others, like him, were committed to libertarian ideals. Yet order in actual markets depends on threats of violence – whether the penalties embedded in the laws of the state, or the bloody interventions of mob bosses. In the absence of such arrangements, predators move in. The Silk Road’s business model worked only if genuinely ruthless people didn’t notice its critical vulnerabilities. As soon as it began to attract attention – and earn enormous amounts of money – its course was set.

I am constantly reminded of Larry Lessig’s diagram, I think from “Code and other laws of Cyberspace”.  Imagine a square box, with a dot in the centre. The dot in the centre represents a person, whom we shall call the “regulated subject”. One side of the box is called “law”, another side “society”, a third side “markets” and the fourth “architecture”. Lessig called the architecture of the computer world “code”. “Architecture” can be the walls, heights of kerbs, size of parking lots, degree of fire resistance,  and street widths of the physical world, or the code of cyberspace.

The professional deformation of lawyers is to imagine that the other three sides respond to the sovereign called law. The professional deformation of economists is to think that the other three sides scarcely exist. The professional deformation of sociologists is to think that society determines the other three forces. The professional deformation of nearly everyone is to ignore the reality of code (architecture) in shaping the effects of the other three forces. In truth, they all interact.

In Bangladesh, for instance, the exceptional  height of kerbs on streets is used to prevent people from driving on sidewalks, because people would if they could. A diminished sense of social responsibility, compared to Canada or Japan, for instance, has to be met by a physical barrier. And if you doubt the power of social consensus, try going to the head of the line anywhere that people line up. Try watching someone doing it without an immediate rush of wrath to punish the perpetrator.

A tendency of lawyers is to assume a social rule must be enforced by laws when society enforces the rule without its assistance. Conservatives place more trust in social enforcement of rules, and markets in wealth distribution; liberals tend to place less trust in the same phenomena, and want explicit rules of distributional fairness to govern assignments of wealth, status, and power. Regardless of the position one takes about how much can be left to social enforcement and market distributions, one has to acknowledge the dispute is about something real, and not imagined.

Thus the quote in my bumper sticker from the Roman historian soldier-statesman Tacitus:

“The more numerous the laws, the more corrupt the state”.

Tacitus is recording the cause and effect of a low-trust society. Think about that when you regulate, lawyers.

Trust is the basis of a working market society. More than that, it is the basis of the social order. Diminish that trust, and markets need more laws and state enforcement, raising transaction costs. Trust does not arise from markets, however, but from social institutions, such as families, and the fair enforcement of legitimate laws. Hence the grim conclusion of Farrell’s article on Internet-mediated secret marketplaces:

The libertarian hope that markets could sustain themselves through free association and choice is a chimera with a toxic sting in its tail. Without state enforcement, the secret drug markets of Tor hidden services are coming to resemble an anarchic state of nature in which self-help dominates.

The libertarian dream of free online drug markets that can magically and peacefully regulate themselves is just that: a dream. Playing at pirates is only fun as long as the other players are kids too. The trouble is, once adults with real swords appear, it may be too late to wake up.

Thus, when I read of some liberal judge saying vengeance has no basis in the law, as I have, I feel the need to rebuke him and say that precisely calibrated, and socially sanctioned,  vengeance is what makes the rule law different from a protection racket. Thomas Hobbes saw this, and a polite society and ensconced privilege tends to make one too squeamish to admit it.

Trust, but verify. And to verify, you must have powers to sanction non-compliance. Thus markets do not stand on their own, and economists, like fish, do not perceive the water they swim in.

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