You can’t con an honest man

Here’s another libertarian type argument for not having govt rules against fraud.

The boundary between fraud and ‘honest mistake’ is a fairly slippery one. Clearly if I have conclusive evidence, that I accept, that the bridge I’m selling you is about to collapse, then that’s fraud. But what if I’ve just recklessly ignored the evidence? Or what if I’ve just been negligent in finding out whether I owned the bridge? What if I’m uncertain about whether the bridge is structurally sound, in part because of that nasty engineering report I just got, but I figure it’s probably up to you to work out for yourself whether it’s a worthwhile risk?

There’s lots of hard cases here. A government ban on fraud will have to decide where to draw the line, and that line will be at best arbitrary. And it might be best to draw the line at different places for different industries or different areas. Maybe some people prefer trading with shady customers, taking their chances in exchange for the better prices. Maybe some markets function more efficiently than others under buyer beware. If we leave it to the market to sort out what the standards of honesty required are in any given case, perhaps with market-based penalties like loss of reputation or loss of fingers for breaching those standards, then we’ve at least got the possibility that the standards will be flexible enough to reflect local requirements.

Of course, there’s also the possibility that everything will go about as badly wrong as they possibly could, but that’s always a risk with libertarian solutions.

The bridge example is interesting, because I think that most libertarians would question whether the buyer should have a right of recovery in the absence of any affirmative misrepresentation. That’s my instinct, anyway.

I think, though, that there is a good market efficiency argument for both the traditional law of fraud and for limited disclosure duties. It’s better for the market, not just for society, if we can trust the people we do business with, under circumstances where it is reasonable to do so. After all, the seller is generally in a better position to know the defects of the item for sale than the buyer. Strict caveat emptor would raise transaction costs and is, I think, generally viewed by law and economics types as ineffecient.

It might be worth noticing that those who suffer from fraud are often different from those on whom the fraud is perpetrated. Take the recent case of the owner of the sex.com domain: a fraudster persuaded Network Solutions to reassign the domain name. They didn’t lose, but the real owner did. This doesn’t really fit the description “offering them an opportunity to harm themselves” unless you want to assign all liability for the loss to Network Solutions. Similarly, fraudsters might target trustees to the detriment of the beneficiaries etc etc.

Barry, I have to take issue with this point:

>>They thought that they were investing in sound companies, with honest management and honest accounting.

Massively, for the most part, they were. Far more money was lost on Amazon, Timewarner and Yahoo, three companies whose probity has never been questioned, than on Enron and Worldcom.

Paul, Ichikawa: I’m sure you realise, though, that allowing government interference on grounds of “market efficiency” opens up a hole through which social democrats would be only too happy to drive a coach-and-four.

Surely if you’re a “libertarian”, you have to believe that (a concept of) liberty is more important than anything else. If you’re a member of the libertarian party on utilitarian grounds, you’re a utilitarian.

As best I can judge, Libertarians generally follow JS Mill in his notion of the legitimate use of power by constutional government to constrain personal liberty: “The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant.” [On Liberty]

From that, most would likely construe “harm” to include fraud. Whether some offer of sale in which essential information is withheld constitutes fraud by intent is up to due process of law to decide. Where fraud is perceived as a likely pervasive risk of any business transaction – or government policy decision? – the probable outcome is a general loss of trust with the social cost that inflicts. As put by Fukuyama: “people who do not trust one another will end up cooperating only under a system of formal rules and regulations, which have to be negotiated, agreed to, litigated and enforced, sometimes by coercive means. . . .Widespread distrust in a society . . . imposes a kind of tax on all forms of economic activity, a tax that high-trust societies do not have to pay.” [Trust (1995) p27]

>>From that, most would likely construe “harm” to include fraud.

Why? Or more specifically, why, if we don’t (as Mill wouldn’t) construe it to include the giving of rabble-rousing political speeches, printing of racial tracts or selling of heroin, which also have the effect of reducing trust and inflicting social costs.

Daniel – Why is fraud harmful? Because someone (or more) was (were) induced to purchase some good or service on the basis of false or absent relevant information and the buyer has alternate uses for the amount spent. It is up to the courts to decide whether there was a wilful intent on the part of the seller to deceive in order to make the sale. And we agree that a climate of general distrust fostered by pervasive fraud does impose social costs.

Btw I’m unconvinced that Mill did exclude rabble-rousing demagoguery or political speeches as potentially fraudulent. He did insist on virtually unrestricted freedom of expression but in his essay on Utilitarianism he is explict in distinguishing different qualities of utility, hence poetry is better than pushpin and “better Socrates dissatisfied than a pig satisfied,” which admittedly raise all sorts of awkward problems for those also committed to “democratic” representative government.

In that, he was probably reflecting the general ambivalence of even liberal-minded Victorians about extensions to the franchise at the time but it does show his willingness to differentiate between different kinds of responses to events, presumably including political advocacy. However, it wouldn’t be inconsistent with Mill to describe a political speech as fraudulent if it purported to offer some policy that was knowingly unfeasible or where there was no prior intent to implement on election. A political manifesto or platform could be described as “fraudulent” or a “false prospectus”, where appropriate, without doing violent injustice to Mill’s position.

Keith – “In short, they simply refuse to recognize that markets can’t exist without regulation.”

I agree, or almost since even bandits might trade among themselves in the desert or jungle on the basis of honour among thieves.

Libertarianism is a simple solution to a simple problem. Unfortunately, the problem isn’t “what is the principle which justly organizes society”. Rather, it’s “what simple-sounding yet very hand-wavy principle can I use to rationalize my mostly unconsidered, locally coventional and prejudicial beliefs about the proper organization of society”.

The principle of liberty, or Mill’s force-or-fraud principle, are not the be-all-end-all of the discussion. They are simply rough guides to what most libertarians would value in most situations. In the same way, modern liberals consider egalitarianism as the highest value; modern conservatives value tradition and virtue, but few, if any, place these values above all others in every possible situation.

The only thing that libertarians are consistent about is that their notions of liberty roughtly correspond to the status quo. Put another way, in practice libertarianism is not a constructivist social principle, it’s a reactionary defensive stance.

This is incredibly silly. Legalizing all drugs? Abolishing the welfare state? Free-market anarchism? These positions “roughly correspond to the status quo”? Please. You are confusing libertarians with conservatives.

In short, they simply refuse to recognize that markets can’t exist without regulation.

Yep, that unregulated illegal drug market is simply a figment of our collective imagination.

Richard Epstein offered an interesting explanation in a talk given at Columbia Law School a few years ago (which I haven’t seen in print, though it may be out there somewhere).

He used the concept of the idea of a veil of ignorance, and said that force and fraud prohibitions were okay, since everyone would agree that they were good, even not knowing whether their role would be oppressor or oppressee / defraudor or defraudee.

All other legal restrictions (in general) are not allowed.

Of course, this reasoning begs the question — how can one be sure that other categories of prohibition (such as antidiscrimination laws, which Epstein opposes) would not have been adopted as well under a veil-of-ignorance plebiscite?

Mischa, the difference between truly principled libertarianism and the status quo is much greater then the difference between actual libertarianism and the status quo. It is in the latter that the differences between conservatism and libertarianism lie. I hate to break it to you, but I used to consider myself a libertarianism (in my younger days, when it’s excusable to be very foolish), I know quite a few libertarians, and I know what libertarianism is. Yeah, I’m aware that many liberals confuse conservatism with libertarianism, but I don’t. Outside the US what we’re calling “libertarians” are rare, and within the US–particularly in the more liberal areas of the country–libertarians are rare. But, as a said, that’s certainly not the case here in Texas. Most libertarians I know are of the techno-libertarian variety, probably because I’m in Austin.

And what Daniel said. Markets can’t properly function in the presence of force, explicit or implicit. They need a regulatory Leviathan to reduce or eliminate such force. When markets naturally arise, regulatory mechanisms also naturally arise, not unlike government. It can be informal, just as rudimentary government is. The illegal drug markets have their own regulatory mechanisms. I would imagine, although I’ve not studied this, that any descriptive, anthropological economics would demonstrate this over and over again.

Daniel, the clear implication of what Keith meant when he used the word “regulation” was government regulation. If you want to split hairs and pretend that he meant something else, by all means do so, but I’m not really interested in that line of argument.

Keith,

I’m aware of the fact that absolutist libertarianism is more extreme than pragmatic libertarianism, but neither advocates the status quo, as you claimed.

I don’t think it is helpful to accuse libertarians of being foolish, any more than it is helpful to accuse socialists of being evil, godless thieves who want to destroy all things sacred.

Invariably, at the end of these discussions on libertarianism, Mr. Davies will most likely quote John Kenneth Galbraith, as he frequently does, claiming that “The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”

What “the modern conservative” has to do with discussions on libertarianism escapes me, as does the usefulness of ad hominem that can so easily be countered by replacing the words “conservative” and “selfishness” with “social democrat” and “theft,” respectively.

Markets can’t properly function in the presence of force, explicit or implicit. They need a regulatory Leviathan to reduce or eliminate such force.

Professors David Friedman, Bruce Benson, and Randy Barnett, among others, have challenged this assertion. Benson, in particular, in his book, The Enterprise of Law, has shown ample empirical evidence for market-produced law and law enforcement.

Now, to return to Davies’ original post, which until now I have not had time to respond:

Davies claims that,

“The prohibition on force is easy to understand. The prohibition on force is easy to understand. Force is nasty; it harms people directly and interferes with their liberty.”

This is true, but it doesn’t tell the whole story. Libertarians try to avoid (although not always successfully) relying on simple intuitions to justify their moral arguments. For the most part, libertarians oppose the use of force not simply because it is “nasty”, but because it violates individuals’ self-ownership, the most fundamental right.

If one wishes to poke holes into libertarianism, the best place to do it is when we try to move from self-ownership to ownership of physical property. However, once this maneuver is granted, justifying the argument against fraud is simple: it is identical to theft. The right to own property includes the right to transfer that ownership through the use of mutually agreed upon (voluntary) contractual relations. When two parties enter into such a contract, they both receive rights to the ownership of what the other person agrees to trade them, and at the same time, they create positive obligations on themselves to give up the rights to their own property. By committing fraud, the guilty party has violated the contract, violated his obligation to uphold his side of the bargain, and violated the property rights of the other party. Essentially, the fraudulent party stole the property of the other party.

Now, one can certainly press libertarians further on this issue. How are we to decide what constitutes fraud? Where do we draw the line between actual fraud and free speech? The recent Nike commercial speech case demonstrates this problem perfectly.

Earlier in this thread, Davies claimed that reliance on common law is incompatible with Nozick’s contractarianism. I don’t believe this is the case. Even Nozick must acknowledge some method for settling disputes. How do we decide whether Nike committed fraud or simply exercized its constitutional right to free speech? Minarchists would have no problem agreeing that a government court should answer this question. Anarcho-capitalists would prefer private arbitration firms, but either way, both courts are going to be relying on some common law. It is simply more efficient to base decisions on the outcomes of previous cases, and for the most part, libertarians have no problem with courts using common law to adjudicate these difficult questions of where to draw the line.

True enough. As I said, most (perhaps all) moral arguments do come down to intuition in a certain sense.

However, I think there is a difference between basing one’s objections to force on “nastiness” and basing it on self-ownership. In terms of self-ownership, it is more than simply a feeling that individuals own themselves; it is recognizing that the alternative to self-ownership is slavery. I think most people don’t object to nastiness, per se, depending on the situation, but would object to slavery in all cases. (To which someone should respond: what constitutes slavery?

My intuition right now is telling me that arguing about the derivation of ethics with a professional philosopher is probably not the best use of my comparative advantage. I think I’ll go play some video games :P

what I actually meant was ‘regulation’ in David’s broad sense.

If that is the case, then your original claim that “[libertarians] simply refuse to recognize that markets can’t exist without regulation” is completely meaningless. Which libertarians are guilty of this? If you had instead been referring to state regulation, at least your comment would have made sense, insofar as many libertarians, myself included, believe that markets can exist without a state to regulate them. But if you were simply referring to intra-market regulation, such as private mafia bosses killing each other for failure to honor a contract, how could you possibly accuse libertarians of denying that this is the case?

Further, as I mentioned in one of the Barnett threads, you are guilty of the same hypocrisy of which you accuse Barnett: you are lumping all libertarians under the label of fools. In your own words, “physician, heal thyself.”

At any rate, thanks for providing an example of the libertarian habit of thought that mysteriously distinguishes between “government” and everything that acts like government. “Government” is what you say it is; and because it’s government, its usually wrong. Convenient, that. It’s an example of how libertarianism is reactive, not constructive.

Yawn. I’m not really interested in debating the proper definition of government with you. If you believe that competitive, market produced police and arbitration sources constitute government, I couldn’t care less. I would just like to point out, again, that you are doing the exact same “lumping” of which you accuse Barnett.

And yet you attempt to justify this lumpage, ignoring the diverse and often-times incompatible branches of libertarians. Granted, they may be small in number (relative to modern liberals and conservatives), but it is simply ignorant to lump Objectivists, Chicago-school economists, Austrian economists, paleo-libertarians, anarcho-capitalists, minarchists, etc, etc. Earlier, you claimed to be a libertarian in a past life, so you should know that all libertarians do not hold the same views, and you should not try to justify your hasty generalization through feigned ignorance.

>.What “the modern conservative” has to do with discussions on libertarianism escapes me

It always does …

>>Even Nozick must acknowledge some method for settling disputes.

The fact that you need something for your theory to be plausible does not mean that you are entitled to assume that it must be consistent with your theory.

Keith,

Forgive me, but you are not coming off as entirely honest. Earlier in the thread, you claimed that you “used to consider myself a libertarianism[sic],” claimed that “I know quite a few libertarians, and I know what libertarianism is,” distinguished between “truly principled libertarianism” and “actual libertarianism,” among other comments that indicate that you are familiar enough with libertarianism to know that it represents a much broader concept than simply party politics.

You now claim that you were only referring to members of the political party, and not others who describe their political philosophy as libertarian. This strains credulity based on your previous remarks, and it appears to me that you are simply trying to avoid the label of hypocrisy for accusing Barnett of lumping (and he is clearly guilty) and then doing the same. Whatever. Believe what you want to believe.

The point about markets and regulation is that markets require an mechanism of force that exists to prevent the subversion of the market by force. This is essential and organic. It really doesn’t matter in this context whether it’s a group of Mafia dons or a government regulatory agency. The point is that in either case, regulation is not an external imposition that necessarily reduces the efficiency of the market. Instead, it’s an essential requirement for the market’s existence. Regulation is not antithetical to markets. Libertarians—at least the groups and individuals that most often and most loudly speak for libertarians and invoke libertarianism—claim otherwise.

Let me repeat, in case I didn’t make myself clear earlier: No libertarians claim otherwise. None. Not even Libertarian Party members. The only people that could concievably fit into the mold you just created are absolute pacifists, and I have yet to meet an absolute pacifist who calls himself a libertarian.

In other words, you are now defining “regulation” as “responding to force with force” – otherwise known as self-defense. Self-defense being a central component to libertarianism, I don’t quite see how you can claim that “most libertarians” oppose self-defense as a market mechanism.

Chris,

Your comments remind me of some of the arguments made by G.A. Cohen in Self-Ownership, Freedom, and Equality, where he responded to Nozick’s “eye-transplant egalitarianism” scenario by denying self-ownership.

I’m curious if you agree with him. What are your thoughts on Nozick’s “eye-transplant egalitarianism” scenario as a justifaction for self-ownership?

Not sure I really understand the force-fraud distinction. Some thoughts:

1. You can generally defend yourself against force just as you can against fraud. One preys on physical weakness, the other on mental.
2. It’s not always possible to defend yourself against fraud (credit-card theft? or would the theft itself be deemed an act of force – even if committed surreptitiously/electronically?).
3. There are often ways of escaping force altogether (consider the possible different answers to “Did you spill my pint?”).
4. Force doesn’t necessarily involve violation of self-ownership (e.g. vandalism to property).
5. Fraud CAN violate self-ownership (Alder Hey?).