A topic I’ve been meaning to address but got caught up elsewhere is the topic of fraud.

A complaint against markets is the potential for fraud.  It is a legitimate concern.  There are my con-men, shysters, and villains out there: Bernie Madoff, Charles Ponzi, and Steven Jay Russell, just to name a few.  Do the existence of these kinds of people prove markets are, in fact, immoral?

My answer, of course, is no.  A handful of bad apples does not ruin the whole orchard.

Markets foster trust between the exchanging parties, so what happens when that trust is broken?  The most immediate occurrence is that the two parties no longer do business with one another (if you found out your grocer was selling bad food, you’d no longer go there, right?).  Word can spread quickly in a market environment (especially now with the Internet) and the consumer can be extremely unforgiving; I’d argue no justice system on Earth has the wrath of a spurned consumer base.  The fraudster is quickly driven out of business and, in many cases, driven out of town, too.  Either that, or they are forced to change their behavior.  It is important to remember that, in a market transaction, no one person has all the power and can easily cancel the transaction.  This is true whether they are a large company or small.

Finally, there are also legal ramifications.  I talked about the role of government before and one such role was the enforcement of contracts.  Well, if a contract was entered into fraudulently, then the offended party has every right to invoke the power of the government in order for redress.

Markets remain moral even with the potential for immoral behavior because they have self-correcting mechanisms.  Other forms of coordination (for example, command and control), do not have these remedies and fraud, in those systems, very easily becomes systemic.

One thought on “Fraud

  1. Strong rule of law, tends to prevent fraud.

    In the Trail of tears for instance, one of the Indian tribes that was moved to Oklahoma was able to plan the trip, so that there wouldn’t be as much death as occurred in the previous trips. They arranged for food to be purchased and delivered at strategic locations.

    The found, more often than not that those they contracted with, did not follow through with their obligations – but then why should they – at the time the thinking was, it is just a bunch of no good Indians, who cares, may as well run away with the money – no police or judge or anyone will stop me, there are no consequences, other than my personal morals.


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