I would like to address few issues with this economics essay. Foremostly, integrity of law is of paramount importance, yet facing such hostility in at least two distinct ways. Secondly, insofar as integrity of law is intertwined with the proper concept of liberalism, the nature of the latter and its foes needs to be discussed. Needless to say, this topic can only be briefly touched upon. There is a proper meaning to liberalism, but that has been siphoned out of the window only to be replaced with versions of ever-increasing distance to the original intent, some of those being very susceptible to being used for all kinds of anti-liberal deeds. Of particular note is the group proceeding with the logic of inferring unsuitability from fallibility.
“The code is more what you would call guidelines than actual rules.” – Captain Barbossa
“We have to learn the lesson that intellectual honesty is fundamental for everything we cherish.” – Sir Karl Popper (1945)
Rules have come under some duress in recent times; liberals and conservatives of many persuasions despise them, each finding new ways to dethrone them for what can only result in our demise.
As far as can I see, there are two broad types of regulation: one that creates the free market and the other that impairs its function (in many instances there being a broad grey area in between). The government creates, if not the free market itself then its proper functioning through recognition of property rights; it does not exist without it in practical terms (note, however, that rights exist irrespective of the state and are simply recognized and lawfully enforced by the state, but not created by it). In addition to property rights, we need enforceable contracts (in court, not might is right), legitimate book-keeping, property records, ownership records, auditing, minority investor protections, creditor protections, enforcement of certain level of transparency in running a business in exchange for protection of the sanctity of the private property implied thereupon, and a whole lot more to even have something that resembles a market place. Popper (1945) argued the same: “Liberalism and state-interference are not opposed to each other. On the contrary, any kind of freedom is clearly impossible unless it is guaranteed by the state.” The thesis that has been put forth in opposition of Popper’s postulate by those insisting on state supremacy has been demolished in every possible way (that of course does not mean it won’t periodically re-emerge), but to claim that there is something incredibly eloquent and compelling said in advance of anarcho-capitalism and it being the path to some ultimate goal is not to be taken seriously; only a very confused person would infer worthlessness from mere fallibility, which continues to be an important part of understanding our behavior.
Popper (1945) extensively discussed of the two forms of interventionism by the state: one of erecting a legal framework of protective institutions and the other of more direct intervention in nature. On the basis of democracy, the former is greatly preferred. Furthermore, use of discretionary powers, the latter type, is liable to expand in its reach and frequency, if and when it becomes the accustomed way of proceeding with issues of any relevance. Much like the Antifederalists (1787) proclaiming that restrictions become nothing but clogs upon the wheels of the government that will necessarily be done away with where and when possible. Pertaining to this issue, the very instrument in question came under immense duress soon after its ratification followed by rather vocal expressions to redress grievances in favor of rules once agreed upon. Proceeding by the means of stable but alterable institutions bring “a factor of certainty and stability into the social life”, Popper wrote. Those subject to them can duly reflect upon their requirements and make due changes in their own domain, instead of being subjected to arbitrary enforcement that is bound to foster a counter-reaction of more conscious or subconscious nature.
Hayek (1944) discussed the same issue, namely that of stable rules as being of paramount importance to a functioning society. He made some succinct notes about the importance of rules in making governments act predictably: “Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than observance in the former of the great principles known as the Rule of Law. Stripped of all technicalities this means that government in all its actions is bound by rules fixed and announced beforehand – rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances, and to plan one’s individual affairs on the basis of this knowledge.” He notably did not wander to the realm of trying to disprove the role of government, and in fact he, as does everyone sharing the same approximate stance that government is to be limited and bound by laws, are the real pro-government people. It goes further than this though, because there is hardly such a decision to be made as to whether or not to have a state; those functions continue to exist irrespective of the supposed answer to this question, because the definition of the state itself is intimately involved with the kind of very basic functions of a society, so the only question remains whether or not those functions are something one sees preferably to be carried out by a republic or not. In this case it is not only the objection to it that becomes anti-state, but the rejection of the proper sphere and domain of its functioning.
Great rules are laid bare for everyone to observe, strict, easy to comprehend, predictable and long lasting. Rules provide us a factor of certainty; they let us provide for ourselves reasonable expectations of other people’s behavior. With rules, we can start building incrementally on top of them and we can assign almost unconditional trust on the spontaneous order.
It is of course not just some of the confused or dispirited followers of Rothbard that foster particularly peculiar antagonism to sensible rules; there is a long list of front line econ professors from whom dictums of ever-increasing oddness can be sourced. Romney and Bush advisor, Columbia professor Glenn Hubbard has been particularly active in giving out advice that does not always seem to adhere to any theory. MIT professor Holmström gladly advocates the view that we need to make everyone stupid for the economy to work because that is the best way to achieve information symmetry. There is also Mr. Mishkin, who is known for writing a puff piece about the greatness of Icelandic economy just before the collapse in 2006. The most interesting thing was that when inquired about it, he stated that the fact that he was paid to write a positive report did not materially impact the fact that the report was particularly positive on Icelandic economy. There are also quite a few Ivy League professors who are all too happy to speculate with ways to force people into spending their hard-earned money by arbitrarily invalidating it at certain time intervals (legal tender for all debts public and private unless government decides otherwise…).
Dewey (1935) wrote: “The historic tendency to conceive the whole question of liberty as a matter in which individual and government are opposed parties has borne bitter fruit.” As it happens, fast-forward 70+ years, and we witness as the new liberals cheer the demise of the rights old liberals died to achieve; the newly found tendency to conceive the whole question of liberty as a matter in which individuals and government are partners in crime, has borne bitter fruit.
In recent times we have come across a wide range of empirical evidence or breakdown of rules ranging from insider trading issues that are not necessarily even crimes per se (Mises Institute offers some interesting aspects on this) to Libor fixing, and from notable accounting frauds at securities houses to the most obscene crimes committed by HSBC in particular. Some of these instances have made Enron management look admirable. While following the Lieborgate scandal, I wasn’t exactly overly surprised by any of it. While some of the statements along the lines of “this shakes the great trust people have towards City banks” continued to show that the level of bullshit is still rather stiff, it cannot be ignored that there was some recognition that deterioration of rule of law is at the very core of our hopefully temporary demise. While Americans replaced the “no one committed any crimes” president with the “no one committed any crimes” president, there are still great strides of progress to be made. It was nonetheless amusing that Euromoney proceeded to pick Barclays of all banks as the best investment bank of the year.
There has been no uncertainty over guilt; the evidence is overwhelming and in many cases, the open admissions of crime leave little room for overt speculation. Peregrine CEO’s suicide letter was very instructive in terms of motives for such behavior. However, crime itself is not a threat to society in any form or fashion. The actions by the Obama administration, on the other hand, and his Department of Justice in particular, have done immeasurable damage; not one senior person from any financial institution has gone to prison over conduct in the last 10 years with regards to the financial crisis and its underpinnings. We have, of course, seen couple of scapegoats put in prison for much lesser violations, but when it comes to HSBC for example, openly financing worldwide terrorism is considered by Obama to be appropriate behavior all men of good-standing should apparently take part in, as not a single person involved in it will ever go to prison. Similar conduct is true with Wells Fargo and Pfizer cases as well. The reason for this is apparently that the share price might take a hit, so law will take a backseat for now. Moreover, important campaign finance considerations take precedence over law, as is to be expected. Unfortunately, this practice has become familiar to Europeans as well in recent times.
Part of the blame is often assigned to the caveat emptor principle, but crucially, it ought not to be our goal to prevent people from lapses but to have legitimate proceedings for those particular instances, so that the lapses of the latter kind would not foster general contempt for law. While it may come across as apropos to lay the blame on caveat emptor, said principle never asserted that there ought to be no prosecution nor did it condone commission of fraud. Simply because we proceed with the assumption that engaging in a trade removes certain obligations, as it is at your discretion whether or not you will engage in such a trade, never was it meant that such parties would be exempt from law. I hope we could re-discover the importance of recognizing the illegality of criminal fraud and proceed accordingly. Buyer beware is neither a removal of judicial protections nor an enabler of criminals. It is, however, rather ironic that the origin of this concept in US goes back to a person who believed in very broad interpretations of law, namely Chief Justice John Marshall.