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2007-11-30

Protection from fraud

One common baseline cited for libertarians to agree on is that government power should be limited to only the power to defend against force and fraud.

Anarchist libertarians, or anarcho-capitalists, believe in shrinking government as we know it to zero. There would no longer be a single institution claiming jurisdiction over all people within a certain geographic region as its citizens. People would still be permitted to form their own institutions for protection (and these institutions might be called governments), so long as these institutions did nothing immoral, that is, anything that would infringe the right to life, liberty, or property of anyone, such as theft (including taxation as we know it), enslavement (including conscription, compulsory schooling, compulsory citizenship, regulation, licensing), etc. Anarcho-capitalists are generally agreed that there IS a law, and that under a system of true freedom anyone whose rights were violated would be morally authorized to punish the violator, or delegate the right to do so.

In an anarcho-capitalist world, what could be done about fraud? Who is watching businesses to make sure they don't take advantage of people? Who will punish them if they do something wrong?

The answer is that these protections under anarcho-capitalism are stronger than they are under our system of monopoly government. Even if you don't assume that people actually go out and threaten justified force against perpetrators of fraud to reclaim their losses.

Under today's system, the government promises to eliminate fraud through regulation and legal action. Of course, then can never be accomplished perfectly. There will always be fraudsters who get away. The resources the government has to go after them will always be limited, so they will always have to pick and choose who to prosecute. Richer people will be more able to afford to navigate the expensive and unwieldy government system to get their rights protected.

If things don't go perfectly, the government won't admit failure. Instead they will promise that with a few changes (a new election with new officials, getting the "right" people in office who can "make a difference" (by ignoring something else that should be a priority), adding a few regulations, giving government a few more powers), eventually the problem can get better and better and axiomatically approach being fixed. The cry will not be "look at the bad job government does because of centralization"; instead it will be "look how bad things are with all this help we're providing; think how bad it would be without us! The market would never make it without this kind of protection."

All the while, government is promising that most fraud problems will be eliminated, and therefore people conclude that they can trust businesses that the government has allowed to exist, either through licensing, regulation, certification, or simply by virtue of not being shut down. How many times have you heard someone say, "If this business were doing something wrong, the government would shut them down?" When people say this, they are according a business a higher level of trust than they would in a completely free market with no big government promising to protect them.

An environment with these unnaturally elevated levels of trust makes fraud worse.

Without government promising to make all businesses trustworthy, people would realize that they shouldn't trust someone without a good reason. That good reason might be a proven track record. For example, people will trust someone they've had a longstanding positive business relationship with. Or they will check with their contacts, friends, and acquaintances when seeking out a new service provider to find someone trustworthy. Or they will look for an accreditation agency or professional organization with a good reputation (checking out its trustworthiness, first), then find a business certified by that agency.

In our system, we try to make trust start at 100% and fix the problem later if something goes wrong. In the real world, the world that would exist without government pretending it can offer us perfect protection, trust would start at zero and build from there.

A new business trying to get established will have little trust. It will need to compete in some way: by offering services that cannot be provided elsewhere, by offering a lower price, etc., until it is established with a reputation for trustworthiness. If they want to last, they will not be able to afford to commit fraud.

Everyone will think of new businesses with no history and no reputation as having trustworthiness zero. Everyone will know not to contract with such businesses unless they are getting a deal so good it makes it worth the risk of finding out that the new business is untrustworthy. It will simply be common knowledge.

If you think this sounds very similar to ebay's feedback system, then you are right. On ebay, your feedback starts at zero. Check out auctions for a commonly available item on ebay sometime. Watch the prices these auctions close at. Observe that sellers with five-digit feedback scores sell their wares at higher prices than sellers with one-digit feedback scores. Sellers with a proven track record are considered more trustworthy. Sellers without this proven track record need to compete to build one, and one way they compete is by selling at lower prices, at prices so low that some buyers (not all) believe that transacting with them is worth the low amount of money risked. You'll also observe that new sellers have trouble selling, or have to sell at lower prices, if they don't accept credit cards (through paypal, or otherwise).

Ebay's feedback system is just one of many possible free market mechanisms that can arise to allow buyers on the market to swap information about sellers and make the trustworthiness of a seller visible. Entrepreneurs will be able to design thousands more, and can make a lot of money serving people in this fashion. But since the government claims to be the answer to all fraud, this market is stifled. These better mechanisms have no reason to come into being when we all think we don't need them.

In a free market, retailers will be an important line of defense against fraud. If you purchase Dr Pepper at Target, and Target provides an inferior product, you'll quit buying at Target. And some entrepreneur somewhere will be able to make a profit by serving you in your desire for quality Dr Pepper. In a free market, to make money long term you have to consistently serve people well. Untrustworthy or low quality sellers can start over and over again at feedback/trustworthiness zero, but they'll never be able to cater to those who want to spend more money with retailers who have a proven track record for quality and honesty.

Boycotts have been organized over and over again to try to influence the marketplace. Many of these have had wonderful effects, including winning liberty in some cases. But far, far more of these boycotts fizzle and die out, forgotten. It's hard to motivate people to quit purchasing a product or service that serves their needs or desires. BUT, if a seller is providing an inferior product, defrauding its customers, the response will be more powerful than any boycott. That fraudster will see demand for its service or product plummet as people go to someone else who can do the job honestly. He'll either go out of business entirely, or cater only to people who are willing to deal with cheap quality knockoffs or shoddy work in order to save a few bucks.

I mentioned credit cards in conjunction with ebay, above. Credit cards have given another great example of market-based protection against fraud. Most credit cards have an agreement with their cardholders whereby they guarantee purchases. Get ripped off online by someone who accepted your card, and your card company will often give you your money back and get it back from the fraudster themselves. They have an incentive to be honest in these matters: if they allow cardholders to get away with fake claims, there will be a market among merchants for a more honest service. On the other hand, if they allow merchants to get away with fraud, there will be a market for a more honest service to cardholders. This is a spectacular example of how justice (the service our courts claim to provide and our government monopolizes) can be provided on the free market!

It's nice to think that government can provide us a world where we can trust everybody, but it's a pipe dream. In case you haven't noticed, we can't even trust our government. When we swallow the lie involved here, we trust people more than we should. Maybe this means we buy Dr Pepper that isn't as good. Or maybe it means something more serious: maybe we trust that since the childcare provider we are contracting with is licensed by the state, they are trustworthy. If we're trusting them at unnaturally high levels, we're going to find more childcare providers that molest children than we would in the real world, where we know that government can't solve all our problems.

Should we agree when people say that because people are untrustworthy we must have government to protect us? No! The very opposite is true: because people are untrustworthy, we need to eliminate monopoly government and allow the free market to build better mechanisms of establishing trust and fighting fraud.

6 comments:

75th Trombone said...

It all works out to exactly the same thing, no matter what your form of government or worldview is.

The US government is huge and ungainly and corrupt. If you replace the US government with a privately held corporation you have exactly the same problems, exactly the same tendency to get huge and ungainly and corrupt, minus the illusion of democracy.

The real problem is that most people are apathetic idiots, and the average American is getting more apathetic and more stupid. The closest thing to a solution is for apathetic idiots to lose their right to influence the situation, i.e., in our current situation, their right to vote. But most of the non-apathetic non-idiots won't feel this is right, and most of the rest of them rely on the apathetic idiots to get their side more power.

It all boils down to the same thing, no matter what machinations you choose.

jdavidb said...

It's not the same thing if done privately instead of by government. The difference is that if the government fails to serve you, you can't go contract with an alternate provider. In a real-world system of freedom, you could go deal with someone else to take care of you. The difference is that government, as we know it, is a monopoly by definition. In a true free market, you make money and continue to exist by serving people. Not so in our monopoly system, where you continue to exist and make money no matter what.

The problem is not apathy. The problem is centralism. We're not supposed to force all of these decisions to be made for all people in one place. It does not and can not work. I agree that apathetic idiots should lose the right to vote, along with non-apathetic people, and people who are not idiots. Nobody should have the right to vote. Nobody should possess the power that government grants through democracy: the power to control your neighbor (other than the simple power to protect your rights from violation by your neighbor). This is immmoral, and what's more, it's damaging and causes all of the problems we see with the system.

jdavidb said...

To simplify: why would private entities that replace a government have a tendency to get huge and ungainly and corrupt, when anyone would have the right to start an honest competitor which would compete them into the dust?

A.B. Dada said...

One issue you missed that is currently either unavailable, or not financially viable, is the option to take fraud insurance on a transaction. It also makes sense to take negative outcome insurance (which I believe is illegal in the U.S.) against both fraud and mistakes.

If you feel you might be defrauded in a transaction, you can purchase insurance for the amount you're fearful of risking. The insurer would then rate the person/company you're buying from, and offer insurance at a certain price (or not at all, if the risk is too high).

This would work for any product or service, including medical operations.

Yes, we do have SOME negative outcome insurance in the form of extended warranties and certain insurances available, but they're limited in some ways. Some credit card companies also offer minimal "fraud" insurance, but again it isn't available at various levels of need versus risk. It's an all-or-nothing provision because many of us rely on government to tackle fraud, when in fact the market already does a better job.

I was defrauded once a few years ago in a service transaction, and I back-charged the transaction through my credit card company and they paid me back 80% of my costs. It wasn't the best solution, but it worked, and I didn't need to sue anyone. The person who defrauded me lost their merchant account because they defrauded many individuals, so the market solved it fairly efficiently.

ChristBringsLiberty02920 said...

jdavidb is correct.

This fallacy that private corporations will rule the world and make you their slave is bogus, to put it kindly. Only governments have that power to monopolize and COERCE cooperation with their system via force. In the society he describes, people will be free to negotiate with whomever they want and competition will ultimately provide a better service. Ultimately, corporations won't be able to have this 'power' you speak of unless private individuals voluntarily give them this power, which can be revoked at any time their needs are no longer satisfied; government coerces people into accepting their power, and is distinguished in being the only entity able to do so.

shannon said...
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