It is an amazing fact that every single one of us know we could create an eBay profile, take a picture of anything in our house, sell it on eBay, and then keep the cash and never send the product.
We also know that if we did that, the police would not come knocking on our door. There would be no men with guns sent by the government to take the money back. As far as the government is concerned, you and I both know that you would totally get away with it.
Once again, the free market solved this problem without any guns or any violence. It is the same reason that Yelp, Trip Advisor, Amazon, and your credit rating are so successful: the cost of a poor rating or track record, and the benefit of a great track record is so large that fraud becomes too costly.
It is true that some fraud may still occur, but the cost of fraud to the community is insignificant compared to the cost of fraud and the cost of the bureaucracy and police force in the alternate economy. The problem is, we are still forced to pay for the alternate economy even though we don’t use it.
Like in many instances in our life, the threat of ostracism is a far superior way, both in terms of cost and result, to encourage good behavior.
We don’t have the Body Odor police patrolling our parties, because if you smell bad no one will want to stand next to you.
However, it turns out that the threat of Ostracism is a useful tool only when certain conditions are met.
The primary ones are:
- Cheap communication – If the only communication at the consumer’s disposal to inform the rest of the community that someone is a dishonest person is to place a $10,000 add in the newspaper then unscrupulous people will feel confident ripping you off for $100. And…
- Repeat business – If repeat business is not expected, then the threat of ostracism is no threat at all.
- Time preference – If I have just been told I have 3 days to live, then my reputation and lack of opportunity to transact with the community in the future is no deterrent for behaving unscrupulously.
Thanks to the internet, cheap communication has effectively been solved for all instances in the modern world. It is this fact that gave rise to eBay, Yelp and all the rest.
1 down, 2 to go.
Repeat business. There are several free market solutions that jump to mind for this.
The first is escrow. If I am selling my house and moving to another country, I have no incentive to leave the house in good order once you have paid. That is why we use escrow services when closing large real estate transactions. There are many escrow services available for virtually every transaction. They are all based on reputation and the consequence of them screwing a client would be a bad reputation and ostracism.
It would be amazing to see just how competitive these industries would get if the government would get out of the way. I suspect as our need increased, so would competition, and price would drop even further and quality would increase.
The next solution that I think and hope the free market will create very soon is broader reputation measures.
For example, we have credit ratings that measure our ability to honor financial contracts. We have Yelp, which measures a person’s ability to satisfy his customers in one niche. Trip Advisor for another, eBay for another and so on.
I think a tremendous opportunity for the right entrepreneur is to create a reputation tracking system that combines all activities of our life. For example, if you behaved badly in a real estate deal, I want to know before I try to buy your car. Or if you stole from your last employer, I want to know before I hire you.
But think of how far this could develop. For example, I could own a local super market, at the door you could swipe a card and I could check your reputation. If you have stolen from someone before and not made it right, then I could refuse entry to my shop.
I am jumping over many steps, but what if at some point in the future, some activities normally reserved for the Sherriff or Police are just taken over by the free market?
Wevhave seen how the Court system is being taken over by the free market with great results, but the enforcement of those judgments was still left to Sheriffs. Perhaps the law enforcement could one day be managed by reputation. Crime could even be reduced by the threat of Ostracism and if that didn’t work, punished by Ostracism.
Lets take the extreme case of Murder. If the entire community simply would not let you interact with them socially or economically if you committed murder, would that reduce the murder rate more effectively than prison time? For the murders that did occur, rather than wasting 30 years in prison, would the murderer try as best they could to make restitution to the family and somewhat restore his reputation?
Perhaps ostracism would be so terrible that the murderer would enter into an agreement to voluntarily enter into a prison-like facility and work for 30 years to pay some form of restitution to the family. It seems that would be a better solution than the family having to pay taxes to imprison the murderer. That is adding insult to injury.
I know we have just touched on this topic lightly and it certainly has some limitations, but just how far the free markets’ method of ostracism could go is an interesting intellectual exercise.
Maybe the method could work, maybe it could not, but it is certainly true that the free market is playing an increasingly vital role and your reputation is at the heart of the matter.
If you are interested in doing a little follow up reading on this idea of Ostracism as a form of justice, the best book I have read on this topic is available for free at www.FreeDomainRadio.com the book is called “A practical guide to anarchy.” The author, Stefan Molyneux, makes an excellent case for how the free market might one day solve all of societies problems and make government completely redundant.
Even if you don’t agree with the whole book, there certainly is a lot of things that you will most likely agree with, and it might just open your eyes to a tremendous business opportunity, to make yet another part of government obsolete.