Most people argue that government enforcement of contracts is required otherwise a market cannot operate. For example, Douglass North argues that “complex contracting…in a world of impersonal exchange must be accompanied by some kind of third-party enforcement.” The growing list of financial regulations are often supported by people hold such a view.
But if you look back in history markets emerged without government support. In 17th century Amsterdam government officials refused to enforce all but the most simple financial contracts. Nevertheless traders developed sophisticated contracts including forward contracts, short sales, and stock options even though these contracts were officially against the law. The history of the world’s first stock markets is totally at odds with the predictions of academics who have a government centric view of markets and believe that markets only emerge after government creates the framework.
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The easiest way to answer these questions is ask the simple “chicken and egg” question. Did government create the financial market or did it just show up later to try and take a piece of the pie? The answer is almost always the latter.
The government should have no say in regulation but their should be 3rd party regulators, algo traders able to program millisecond trades hurt the market. Just look at any stock and see how the volume ramps up the last hour or two of trading.
http://blogs.marketwatch.com/thetell/2011/09/13/300-million-cable-to-speed-london-new-york-trades/
“each millisecond saved can boost hedge fund’s annual bottom line by $100 million”
Where’s the problem? That you don’t approve of hedge funds?
To plagiarize the late (great) Peter Bauer’s description of Foreign Aid – “It is neither necessary, nor is it sufficient”.
Someone else had a better description. Foreign Aid – taking money from poor people in rich countries and giving it to rich people in poor countries.
That was also Peter Bauer – I heard him use it in a BBC debate in 1972 on Foreign Aid. I don’t know if this was original or whether it was somebody else’s rhetoric. (Very effective at getting the point across.) In the same speech he had a very good “Broken Window” rebuttal to Foreign Aid. “Suppose thieves break into a neighborhood store and steal all the cash in the safe. Does the storekeeper benefit because the thieves will probably come back to his store and spend some of the money the stole?”
For example, Douglass North argues that “complex contracting…in a world of impersonal exchange must be accompanied by some kind of third-party enforcement.”
North isn’t entirely wrong–it’s just that third-party enforcement doesn’t have to come from government or government coercion.
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