WEBVTT NOTE Extensions of Rothbardian Anarchist Analytics 1 00:00:00.000 --> 00:00:10.340 So the question I'm interested in is, studying to what extent economists agree that markets are a good thing, 2 00:00:10.340 --> 00:00:16.260 but, there's always a but, often it's a really big but, 3 00:00:16.260 --> 00:00:21.660 most economists believe that markets require some degree of state intervention, 4 00:00:21.660 --> 00:00:29.660 Specifically, almost all economists believe that the state is necessary for the enforcement of contracts. 5 00:00:29.660 --> 00:00:32.660 And I'll just give you this typical position. 6 00:00:32.660 --> 00:00:36.660 Richard Epstein of Chicago, under its classical liberal formulation, 7 00:00:36.660 --> 00:00:46.660 the great social contract sacrifices liberty, but only to the extent that it is necessary to gain security against force and fraud. 8 00:00:46.660 --> 00:00:52.660 Perhaps we might go farther, but surely we go this far. 9 00:00:52.660 --> 00:01:00.660 Law, he says, becomes critical to offer a secure framework for these voluntary transactions to take place. 10 00:01:00.660 --> 00:01:12.660 He says, one would be a naive visionary to believe that markets could operate of their own volition without any kind of support from the state. 11 00:01:12.660 --> 00:01:24.660 Okay, so this is the classical liberal consensus. All of these people, Hayek, Mises, Rand, Stigler, Friedman, believe that law enforcement must be provided by the state. 12 00:01:24.660 --> 00:01:32.660 So that's even the biggest advocates of liberty are also advocates of the state. 13 00:01:32.660 --> 00:01:50.660 Now, since then, mainly in the last 40 years or so, there is an alternative which is becoming more popular and I'll call this the private property anarchism of Rothbard and many subsequent writers. 14 00:01:50.660 --> 00:01:56.660 Rothbard basically questioned the idea that markets depend on the state. 15 00:01:56.660 --> 00:02:11.660 He questioned the idea that private law enforcement cannot exist and he also questioned the idea that government is created to fix problems with the market. 16 00:02:11.660 --> 00:02:22.660 In Rothbard's writings, he gave some theoretical arguments about how markets could work privately without government law enforcement. 17 00:02:22.660 --> 00:02:35.660 Law Enforcement, so he described his vision, and he also pointed to some examples of markets that functioned without relying on public law enforcement. 18 00:02:35.660 --> 00:02:50.660 So private law enforcement, and there's really some great work on this, if you act now, you too can own a copy of Anarchy in the Law by Edward Stringham. 19 00:02:50.660 --> 00:02:59.660 And at no additional charge, you get this wonderful free picture of me. 20 00:02:59.660 --> 00:03:10.660 Okay, so there's some historical examples of private law enforcement. 21 00:03:10.660 --> 00:03:17.660 But many people, even if you tell them that, they say, well, these are just peculiar episodes from the past. 22 00:03:17.660 --> 00:03:22.660 It couldn't work today. Maybe it could work in Iceland 700 years ago. 23 00:03:22.660 --> 00:03:28.660 But you can't have a complicated market today without government law. 24 00:03:28.660 --> 00:03:38.660 So they can look at any one of these studies, many of which are included in this great book. 25 00:03:38.660 --> 00:03:45.660 And they might say, well, okay, yeah, there's some studies of trade without external enforcement, 26 00:03:45.660 --> 00:03:49.980 Enforcement, but a lot of them are from primitive societies, from the past, 27 00:03:49.980 --> 00:03:56.180 ethically homogenous societies. I don't know if it would work. They say, yeah, 28 00:03:56.180 --> 00:04:03.100 there's some theories of how markets can have self-enforcing contracts, but the 29 00:04:03.100 --> 00:04:08.980 conventional view is that sophisticated markets, such as stock markets, financial 30 00:04:08.980 --> 00:04:14.220 markets, all the things we have today cannot emerge unless there is government 31 00:04:14.220 --> 00:04:20.020 Supervision. I just want to give you a couple quick quotes to give you the 32 00:04:20.020 --> 00:04:26.340 standard view on this. Manker-Olson, most of the gains from transactions like 33 00:04:26.340 --> 00:04:31.940 those in capital market require impartial third-party enforcement. 34 00:04:31.940 --> 00:04:37.220 Gordon Tullock, my former professor, transactions in which large payments 35 00:04:37.220 --> 00:04:41.820 will be made in the future would be impossible if we depended solely on the 36 00:04:41.820 --> 00:04:47.820 The Discipline of Continuous Dealings, and Janet Landa, The Discipline of Continuous Dealings 37 00:04:47.820 --> 00:04:54.820 cannot be relied upon if credit transactions are important. 38 00:04:54.820 --> 00:05:03.820 So what I want to talk about today is, are the classical liberals correct that sophisticated markets require government? 39 00:05:03.820 --> 00:05:05.820 Or was Rothbard on to something? 40 00:05:05.820 --> 00:05:12.820 Maybe even advanced markets, including stock markets, do not require government. 41 00:05:12.820 --> 00:05:18.820 And whenever there's a debate, I view it as an opportunity as a scholar to say, 42 00:05:18.820 --> 00:05:20.820 well, let's start writing about this. 43 00:05:20.820 --> 00:05:25.820 If someone makes a strong claim, markets can never do something. 44 00:05:25.820 --> 00:05:32.820 This is a potential research opportunity that can help either disprove that position 45 00:05:32.820 --> 00:05:34.820 or corroborate it in the other position. 46 00:05:34.820 --> 00:05:44.820 So when people are going around saying, all swans are black, if we find some white swans, we can help disprove this claim. 47 00:05:44.820 --> 00:05:53.820 So our examples of stateless orders, only examples from small, simple, close-knit markets. 48 00:05:53.820 --> 00:06:00.820 There's many potential case studies that one could do, and I've done a few, 49 00:06:00.820 --> 00:06:11.820 There are a few, but I want to share with you just one that I've conducted just to indicate an example of some of the things I'm doing. 50 00:06:11.820 --> 00:06:21.820 Okay, so what I am going to talk about today is a case study of the world's first stock market, and does anyone know where this is? 51 00:06:21.820 --> 00:06:25.500 All right, okay, 17th century Amsterdam. 52 00:06:25.500 --> 00:06:28.340 What I'm gonna do is I'm gonna talk about the legal 53 00:06:28.340 --> 00:06:31.340 and regulatory climate, 54 00:06:31.340 --> 00:06:34.180 and then I'm gonna look at a primary source 55 00:06:34.180 --> 00:06:38.300 to see the de facto practices of the stock market. 56 00:06:39.140 --> 00:06:41.220 Maybe economists can learn something 57 00:06:41.220 --> 00:06:46.080 by studying the evolution of the world's stock markets. 58 00:06:46.080 --> 00:06:50.580 Was it the case that government created this legal system 59 00:06:50.580 --> 00:06:59.420 And only later did that enable the markets to emerge, or did things go in a different order. 60 00:06:59.420 --> 00:07:08.580 Okay, and before I talk about the specifics of Amsterdam, I just wanted to talk about some preliminary evidence by some people who've addressed this. 61 00:07:08.580 --> 00:07:15.620 The first one is by Adam Smith, actually did discuss this in lectures on jurisprudence. 62 00:07:15.620 --> 00:07:25.860 I know that Adam Smith is sometimes a statist, but he does say some good things from time to time, many times actually. 63 00:07:25.860 --> 00:07:32.900 He talked about how in England buying stocks by time is against the law. 64 00:07:32.900 --> 00:07:38.580 He says the law gives no redress for a sum above five pounds. 65 00:07:38.580 --> 00:07:48.180 But he goes on to discuss how people do engage in these forward contracts and he says that the law is not effective. 66 00:07:48.180 --> 00:07:53.660 He says, in the same manner, all laws against gaming never hinder it. 67 00:07:53.660 --> 00:07:56.500 People actually go on and make these trades. 68 00:07:56.500 --> 00:08:05.100 But even though they're not enforceable in courts of law, he says, yet all the great sums that are lost are punctually paid. 69 00:08:05.100 --> 00:08:12.260 So there are these contracts taking place even though they're not enforceable in courts of law. 70 00:08:12.260 --> 00:08:17.220 He says, what's the explanation? He says, persons who game must keep their credit, 71 00:08:17.220 --> 00:08:21.980 else nobody will deal with them. It is quite the same for stock-jobbing. 72 00:08:21.980 --> 00:08:29.900 They who do not keep their credit will be turned out and in the language of change alley be called a lame duck. 73 00:08:29.900 --> 00:08:40.900 So this is a picture from 18th century England of the, kind of hard to see, but it does say Change Alley and there's a duck there waddling out. 74 00:08:40.900 --> 00:08:50.900 If you don't follow through with your contracts, people say, get out of here, we're not going to deal with you, because you don't want to be cheated. 75 00:08:50.900 --> 00:08:57.900 He says, of all the nations in Europe, the Dutch, the most commercial, are the most faithful to their word. 76 00:08:57.900 --> 00:09:10.900 It is reducible to self-interest, that general principle which regulates the actions of every man and which leads men to act in a certain manner from the views of advantage. 77 00:09:10.900 --> 00:09:17.900 A dealer is afraid of losing his character and is scrupulous in observing every engagement. 78 00:09:17.900 --> 00:09:31.900 When a person makes 20 contracts in a day, he cannot so much gain so much by endeavoring to impose on his neighbors as the very appearance of a cheat would make him lose, okay? 79 00:09:31.900 --> 00:09:42.900 So when you're in business and you're looking to get customers, you're not going to be able to get a lot of customers and stay in business very long if everybody knows you're a cheat, okay? 80 00:09:42.900 --> 00:09:52.900 So if you want to attract lots of business, you've got to establish a reputation, whether or not the law is telling you to do something. 81 00:09:52.900 --> 00:10:01.900 And the next bit of preliminary evidence I want to discuss before I talk about Amsterdam is this statement here by Janet Landa. 82 00:10:01.900 --> 00:10:06.900 There's actually a linguistically problematic part of the statement. 83 00:10:06.900 --> 00:10:10.900 Does anybody see what's linguistically wrong with the statement? 84 00:10:10.900 --> 00:10:15.300 Does anyone know the origin of the word credit? 85 00:10:15.300 --> 00:10:18.500 Where does the word credit come from, from Latin? 86 00:10:18.500 --> 00:10:20.000 What does it mean? 87 00:10:20.000 --> 00:10:22.000 Okay, good, alright. 88 00:10:22.000 --> 00:10:27.100 Belief, trust or reputation, okay? 89 00:10:27.100 --> 00:10:30.300 So rather than credit transactions being called 90 00:10:30.300 --> 00:10:35.700 transactions that require external government enforcement for them to work, 91 00:10:35.700 --> 00:10:37.700 okay, that's not how they were named. 92 00:10:37.700 --> 00:10:44.020 And there were transactions that require reputation and trust. 93 00:10:44.020 --> 00:10:47.620 And this is different from the governmental view. 94 00:10:47.620 --> 00:10:48.620 Okay. 95 00:10:48.620 --> 00:10:49.620 All right. 96 00:10:49.620 --> 00:10:55.860 So let me just give you some background of Amsterdam and then I can talk about the market. 97 00:10:55.860 --> 00:11:01.020 Amsterdam in the 1600s, this was a long time ago, right? 98 00:11:01.020 --> 00:11:05.980 Pretty undeveloped compared to what we have today. 99 00:11:05.980 --> 00:11:08.620 It was right after the Protestant Reformation. 100 00:11:08.620 --> 00:11:09.980 Here's a picture. 101 00:11:09.980 --> 00:11:11.860 It's called Fishing for Souls. 102 00:11:11.860 --> 00:11:14.460 The Catholics are on the right. 103 00:11:14.460 --> 00:11:16.460 The Protestants are on the left. 104 00:11:16.460 --> 00:11:21.400 In Amsterdam, they seceded from the government of Spain. 105 00:11:21.400 --> 00:11:24.300 And so it was kind of this new country. 106 00:11:24.300 --> 00:11:26.860 And one of the things they decided to have 107 00:11:26.860 --> 00:11:32.540 was more tolerance than in Spain before them. 108 00:11:32.540 --> 00:11:35.180 Other things we think about during this time period 109 00:11:35.180 --> 00:11:40.860 is things like windmills or flowers, including tulips. 110 00:11:40.860 --> 00:11:45.580 The most important thing was in the 17th century Netherlands, 111 00:11:45.580 --> 00:11:49.580 they invented Dutch gin, which is really important. 112 00:11:49.580 --> 00:11:54.620 If those of you haven't read it, I was in some national media 113 00:11:54.620 --> 00:11:57.700 recently for an article I had documenting 114 00:11:57.700 --> 00:12:02.580 how drinkers earn more money than non-drinkers. 115 00:12:02.580 --> 00:12:08.980 So, what the Dutch did is they started drinking, and they said, well, let's start making more money. 116 00:12:08.980 --> 00:12:14.380 I like that. 117 00:12:14.380 --> 00:12:19.480 They started looking to trade as a way of making more money, 118 00:12:19.480 --> 00:12:29.280 and they started to look to places that were traditionally monopolized by the Spanish and Portuguese as a way of making money. 119 00:12:29.280 --> 00:12:35.280 And this is a clavichord lid painting here that indicates Amsterdam. 120 00:12:35.280 --> 00:12:36.840 This is from 1606. 121 00:12:36.840 --> 00:12:46.520 They were already considering themselves the center for world trade, a society that relied heavily on commerce. 122 00:12:46.520 --> 00:12:50.200 So they started sending ships out around the globe. 123 00:12:50.200 --> 00:12:58.600 And one area was to the East Indies, which they viewed as a potentially lucrative trading area. 124 00:12:58.600 --> 00:13:02.360 One thing about this is it was very risky, okay? 125 00:13:02.360 --> 00:13:04.440 And the statistics from the late 1600s, 126 00:13:04.440 --> 00:13:06.560 but even in the late 1600s, 127 00:13:06.560 --> 00:13:10.360 5% of ships would not come home, okay? 128 00:13:10.360 --> 00:13:12.140 So if you're just one person 129 00:13:12.140 --> 00:13:14.340 and you put all your eggs in one basket 130 00:13:14.340 --> 00:13:17.640 and your ship sinks, you're in a lot of trouble. 131 00:13:17.640 --> 00:13:19.980 So what the Dutch people realized is, 132 00:13:19.980 --> 00:13:22.680 well, what if we pool our money, okay? 133 00:13:22.680 --> 00:13:25.400 Send out 100 ships, not all of them come back 134 00:13:25.400 --> 00:13:49.400 So they created, right around 1600, the Dutch East India Company, which raised money from 3,000 investors from all over Holland, different types of people, and they issued shares, okay? 135 00:13:49.400 --> 00:13:56.900 So you would own a fraction of this company rather than owning the entire thing. 136 00:13:56.900 --> 00:14:04.900 The interesting thing about this was it wasn't initially created to be a long-term venture. 137 00:14:04.900 --> 00:14:11.900 They were going to send out a bunch of ships, they were going to come back, cash in the profits, liquidate the assets and that was it. 138 00:14:11.900 --> 00:14:15.900 But when the ships started coming back and they were making so much profits, 139 00:14:15.900 --> 00:14:21.900 They said, well, let's start reinvesting the profits and make this an ongoing venture. 140 00:14:21.900 --> 00:14:23.900 So this is something that kind of just evolved. 141 00:14:23.900 --> 00:14:26.900 The government didn't really think of this or anything. 142 00:14:26.900 --> 00:14:28.900 It's just something that happened. 143 00:14:28.900 --> 00:14:31.900 And for the first 10 years, they paid no dividends. 144 00:14:31.900 --> 00:14:38.900 And on the 11th year, they paid dividends of roughly 100% of your initial investment. 145 00:14:38.900 --> 00:14:41.900 So it was a pretty good thing. 146 00:14:41.900 --> 00:14:44.900 The other thing, they didn't plan ahead of time. 147 00:14:44.900 --> 00:14:48.900 I didn't plan that there was going to be a secondary market in shares. 148 00:14:48.900 --> 00:14:56.900 So initially, when you wanted to trade your share, you'd have to go in with the other person who you want to trade the share in, 149 00:14:56.900 --> 00:15:04.900 go to the offices of the East India Company, meet with some fine-looking gentlemen like this, 150 00:15:04.900 --> 00:15:12.900 and they would open their books and have the shares traded, which worked, but it involved high transaction costs. 151 00:15:12.900 --> 00:15:33.900 People after a while said, well, there's lots of people who want to trade and so people started specializing in being stock brokers that said, alright, I've got a bunch of people who want to buy, a bunch of people who want to sell, I'll just keep records of this and then I'll go to the offices every so often to minimize those transaction costs. 152 00:15:33.900 --> 00:15:55.900 So the brokers started trading on the Amsterdam bourse, which is here, there's a commodities exchange, they traded things like grains, whale oil, herring, tulips, all a bunch of things, and the stockbrokers occupied a corner of the exchange. 153 00:15:55.900 --> 00:16:09.900 This building no longer exists. It was built by this guy, but I was in Amsterdam last summer walking around and I saw this building built in the 1600s and it says built by Hendrik de Keeser. 154 00:16:09.900 --> 00:16:17.900 So some of these buildings are still around. It's kind of amazing. You get to see some just amazing sights in Amsterdam. 155 00:16:17.900 --> 00:16:37.900 And the company and the stock market grew with popularity along with the good fortunes of the East India Company. 156 00:16:37.900 --> 00:16:42.900 So over this century, this is the stock price appreciation. 157 00:16:42.900 --> 00:16:53.900 It's pretty steady, and over this entire century they paid an average of dividends of 22.5% per year for an entire 100 years. 158 00:16:53.900 --> 00:16:58.900 So it was a significant amount of money. 159 00:16:58.900 --> 00:17:05.900 At the end of the century they had factories in East India. 160 00:17:05.900 --> 00:17:08.340 Here's a whale oil factory. 161 00:17:08.340 --> 00:17:13.380 Here's one of their plants in Indonesia. 162 00:17:13.380 --> 00:17:16.460 And it created a lot of wealth and made certain people 163 00:17:16.460 --> 00:17:19.940 like this gentleman very wealthy. 164 00:17:19.940 --> 00:17:22.580 At the end of the century, they had 300 ships 165 00:17:22.580 --> 00:17:24.080 traveling back and forth. 166 00:17:24.080 --> 00:17:27.180 And they had over 20,000 employees, 167 00:17:27.180 --> 00:17:29.340 which is really large considering the fact 168 00:17:29.340 --> 00:17:34.420 that Amsterdam's population was only 50 or 100,000 people. 169 00:17:34.420 --> 00:17:37.580 So it was a very large concern. 170 00:17:37.580 --> 00:17:41.620 There was also a publicly traded firm. 171 00:17:41.620 --> 00:17:44.100 The other one was the West India Company. 172 00:17:44.100 --> 00:17:48.180 It started out with the same, roughly, number of investors 173 00:17:48.180 --> 00:17:50.460 and same size. 174 00:17:50.460 --> 00:17:53.460 But this one, they went to the West Indies. 175 00:17:53.460 --> 00:17:56.300 Here's a sugar plantation in Brazil. 176 00:17:56.300 --> 00:17:59.240 This one, in contrast, didn't do so well. 177 00:17:59.240 --> 00:18:02.260 I did some econometric analysis on this, 178 00:18:02.260 --> 00:18:09.060 And I found that this company is tracking exactly my investments in dot-com stocks. 179 00:18:09.060 --> 00:18:18.620 All right, okay, so those are the companies. 180 00:18:18.620 --> 00:18:27.260 Now I want to talk a little bit about the legal and regulatory status climate during this time. 181 00:18:27.260 --> 00:18:42.340 During the first decade of the trading, it started actually catching on and people started applying some relatively sophisticated contracts to it. 182 00:18:42.340 --> 00:18:52.020 They started engaging in short sales and types of forward contracts, but the government viewed the stock market with suspicion. 183 00:18:52.020 --> 00:18:58.020 The government thought it was a form of gambling. 184 00:18:58.020 --> 00:19:01.020 They said that all these people who are trading all the time, 185 00:19:01.020 --> 00:19:05.700 they're just doing this to manipulate and suppress stock prices. 186 00:19:05.700 --> 00:19:14.020 In 1608, the shares fell by 35% and the government blamed short sellers. 187 00:19:14.020 --> 00:19:21.540 So in 1610, the government then outlawed short selling or selling in Blanca. 188 00:19:21.540 --> 00:19:28.100 In 1621, they outlawed other forward contracts, Windhandle, which is trading in wind. 189 00:19:28.100 --> 00:19:31.100 How can you trade something that you don't own? 190 00:19:31.100 --> 00:19:33.040 That's what they said. 191 00:19:33.040 --> 00:19:41.920 Other ordinances in 1623, 24, 30, 36 and 77 outlawed other types of stock market transactions 192 00:19:41.920 --> 00:19:48.580 that we have that are legal and commonplace today, but at the time, they just did not 193 00:19:48.580 --> 00:19:50.500 like them. 194 00:19:50.500 --> 00:19:57.660 I was in Amsterdam Museum last summer and I saw these plates. It's kind of interesting. 195 00:19:57.660 --> 00:20:03.460 And you can see they have these little sayings on them. Does anyone here speak Dutch? They've 196 00:20:03.460 --> 00:20:10.420 got these sayings on them. And if you translate them, it says things like, away with dandy 197 00:20:10.420 --> 00:20:16.260 speculators. So this guy is a speculator. He's got a tennis racket, whatever type of 198 00:20:16.260 --> 00:20:21.260 He's playing with money. He's a very whimsical guy. 199 00:20:21.260 --> 00:20:29.260 These things say, squeeze the speculators tight, down with speculators, away with actions and speculators. 200 00:20:29.260 --> 00:20:42.260 I don't know who buys plates like this. 201 00:20:42.260 --> 00:20:47.660 So the law was motivated by a moralistic attack against speculation, 202 00:20:47.660 --> 00:20:55.460 rather than some sophisticated Joseph Stiglitz argument about economics. 203 00:20:55.460 --> 00:21:00.460 The Dutch authorities did not know as much about stock markets, 204 00:21:00.460 --> 00:21:04.860 the benefits of things like short selling as modern economists. 205 00:21:04.860 --> 00:21:11.860 So the law basically said, unless you transfer the shares to the other party within 14 days, 206 00:21:11.860 --> 00:21:15.860 Then it's going to be against the law. So that's how that worked. 207 00:21:15.860 --> 00:21:19.860 Interestingly, they did not actively punish people. 208 00:21:19.860 --> 00:21:23.860 The only thing they did is they said, 209 00:21:23.860 --> 00:21:27.860 if you engage in these illegal transactions, they're not going to be enforced 210 00:21:27.860 --> 00:21:31.860 in courts of law. So they were 211 00:21:31.860 --> 00:21:35.860 de jure, very strict, but de facto 212 00:21:35.860 --> 00:21:39.860 very hands-off. Not too much involvement. 213 00:21:39.860 --> 00:21:54.860 The government had better things to do, like go to the horse fairs, or here, this is kind of a neat picture, the assembly of the state general, 1651, Holland simply refused to approve a new stat holder. 214 00:21:54.860 --> 00:22:05.860 So it was kind of like this tenuous situation, not as organized as they didn't have a George Bush at the time. 215 00:22:05.860 --> 00:22:13.220 all right okay so the next thing I want to do is look at a primary source to see 216 00:22:13.220 --> 00:22:18.140 actually what was going on in the stock market there's not a lot of data from the 217 00:22:18.140 --> 00:22:24.460 1600s but luckily I found an excellent account and there's this book published 218 00:22:24.460 --> 00:22:31.580 in 1688 Confusión de Confusiones by Joseph Penso de la Vega who was a stock 219 00:22:31.580 --> 00:22:38.580 And he wrote this book in the form of a dialogue between different characters where the different characters would say, 220 00:22:38.580 --> 00:22:44.580 Tell me, how does the stock market work? And the other characters say, Oh, it works like this, this and this. 221 00:22:44.580 --> 00:22:48.580 And the other one would say, And then how does this work? And the other one would explain it. 222 00:22:48.580 --> 00:22:57.580 So it's kind of written as a manual or frequently asked questions type of thing that you might see on the Internet. 223 00:23:01.580 --> 00:23:16.580 Okay, so the first thing he does is he talks about different types of transactions and whether or not they are legal or illegal. 224 00:23:16.580 --> 00:23:21.580 The first one he discusses is short sales and how they're against the law.ology. 225 00:23:21.580 --> 00:23:41.580 Frederick Henry promulgated an ordinance according to which he who sold shares for future delivery without putting them on a time account should be exposed to a danger that the buyer will not take the pieces at the time fixed upon. 226 00:23:41.580 --> 00:23:47.580 So when someone doesn't have the money to cover their position they might quote appeal to Frederick. 227 00:23:47.580 --> 00:23:53.580 So you sell something short, you're hoping it goes down, you can buy low and then give them the shares. 228 00:23:53.580 --> 00:23:56.580 But if it goes up, you've got to buy these shares at a higher price. 229 00:23:56.580 --> 00:24:01.580 Well, if that happened, people might say, oh, did we engage in this transaction? 230 00:24:01.580 --> 00:24:04.580 I'm sorry, that was illegal. I'm not going to pay you. 231 00:24:04.580 --> 00:24:08.580 So people could do that. And here's just some quotes. 232 00:24:08.580 --> 00:24:16.580 He says, if you act with unfair intentions, there is the ordinance of Frederic Henry in case of an unfavorable turn. 233 00:24:16.580 --> 00:24:22.580 So people could appeal to Frederic, but nevertheless, this was not common. 234 00:24:22.580 --> 00:24:26.580 The guy says, what do you do in these situations? 235 00:24:26.580 --> 00:24:28.580 He says, well, this is what you're supposed to do. 236 00:24:28.580 --> 00:24:36.580 He says, when a loss occurs, the losers are expected to pay at least what they have available at the moment. 237 00:24:36.580 --> 00:24:41.580 And it might be expected that when the wound is fresh, there would be no new injury. 238 00:24:41.580 --> 00:24:52.580 Other people gradually fulfill their obligations after having sold their last valuables, and thus meet with punctuality the reverses of misfortune. 239 00:24:52.580 --> 00:24:59.580 So despite people being able to call upon the law to get out of their contract, they actually didn't do that. 240 00:24:59.580 --> 00:25:05.580 People paid even though they didn't have to. So why is this? 241 00:25:05.580 --> 00:25:15.580 The real world is very different from the standard simple game theory prisoner's dilemma, which says people are always going to cheat, okay? 242 00:25:15.580 --> 00:25:21.580 It's always in your incentive to cheat. Well, there's not a lot of one-shot prisoner's dilemmas. 243 00:25:21.580 --> 00:25:28.580 If you're dealing with people every day, you cheat once, how many other times is that person going to deal with you? 244 00:25:28.580 --> 00:25:34.580 So markets have incentives. The discipline of continuous dealing says to people, 245 00:25:34.580 --> 00:25:40.580 you've got to be reliable otherwise you're not going to get any business. 246 00:25:40.580 --> 00:25:46.580 Other contracts he describes are different types of long-forward contracts. 247 00:25:46.580 --> 00:25:54.580 He describes how they have printed forms where they would then fill out the details of the amount of money, 248 00:25:54.580 --> 00:26:04.180 The dates, they would sign them, exchange them, and here, too, these were illegal. 249 00:26:04.180 --> 00:26:07.740 He says, the regulation applies in the case of time bargains, 250 00:26:07.740 --> 00:26:13.580 unless the seller has the shares transferred to the time account of the purchaser within a fortnight. 251 00:26:13.580 --> 00:26:19.100 The seller, as well as the buyer, is allowed to appeal to Frederic. 252 00:26:19.100 --> 00:26:21.620 If I have bought a share under these circumstances, 253 00:26:21.620 --> 00:26:28.120 I need neither declare myself bankrupt in order to free myself, nor disappear in order to shake loose. 254 00:26:28.120 --> 00:26:31.120 I can merely appeal to the edict. 255 00:26:31.120 --> 00:26:43.320 Okay, so this is something that's against the law, but nevertheless these forward contracts were very common throughout the entire century. 256 00:26:43.320 --> 00:26:46.520 All right, the next one, I just have a question. 257 00:26:46.520 --> 00:26:51.220 Does anyone know when options were invented? 258 00:26:51.220 --> 00:27:03.220 I was born in 1975, so if you were to ask me when options were invented, I'd say probably about 1975, right? Sound like a good one? 259 00:27:03.220 --> 00:27:15.220 Actually, do you know? The 1600s, they actually had very sophisticated options, markets, calls, puts, all of that stuff. 260 00:27:15.220 --> 00:27:25.220 He discusses this, how the contracts look, and he says, 261 00:27:25.220 --> 00:27:33.220 As to whether the regulation is applicable to options contracts, the opinions of experts diverge widely. 262 00:27:33.220 --> 00:27:38.220 With regard to the put premium, there are also great differences of opinion. 263 00:27:38.220 --> 00:27:55.220 For while the scholars assume that no legally valid claims can be made because of the regulation, there are contrary decisions by the courts, so that the law and legal opinion, the regulations and the decisions are contradictory. 264 00:27:55.220 --> 00:28:05.220 The theory remains uncertain, and one cannot tell which way adjudication tends. 265 00:28:05.220 --> 00:28:18.220 Okay, so government officials aren't always the most knowledgeable about modern finance theory, so the people could not rely on the courts of law. 266 00:28:18.220 --> 00:28:29.220 The next thing they had is called hypothecation, where you use an equity as collateral for a loan, if you pledge that as the collateral. 267 00:28:29.220 --> 00:28:35.020 However, if the price of the equity starts going down to below the value of the loan, 268 00:28:35.020 --> 00:28:40.980 your ability to pay might... it decreases, so people would have to actually sell the 269 00:28:40.980 --> 00:28:45.780 shares and repay the loan when this happened. 270 00:28:45.780 --> 00:28:52.100 But here too, he describes how you can raise the objection. 271 00:28:52.100 --> 00:28:57.760 The person who borrowed the money says, oh, actually this was illegal and so I don't really 272 00:28:57.760 --> 00:29:08.760 want to pay. However, this is not common. He says the mortgagee is obliged to pay the difference or declare himself insolvent. 273 00:29:08.760 --> 00:29:15.760 Okay, so these very sophisticated arrangements all against the law, right? 274 00:29:15.760 --> 00:29:23.760 If you're, you know, you're a banker and you need to have a reliable reputation to engage in business. 275 00:29:23.760 --> 00:29:34.760 The next thing they had was a type of securitization, which is basically creating new securities based on the existence of other securities. 276 00:29:34.760 --> 00:29:41.760 So back then they didn't have stock splits or stock dividends the way we have now. 277 00:29:41.760 --> 00:29:50.760 So the price of the shares had gone up to 15,000 guilders and daily wages for a laborer was roughly one gilder per day. 278 00:29:50.760 --> 00:30:00.760 So it would take a lifetime of earnings to buy one share, and that's obviously going to preclude lots of people from the market. 279 00:30:00.760 --> 00:30:06.760 And what people figured out is, well, let's create these new things called small shares. 280 00:30:06.760 --> 00:30:12.760 And we'll create 100 small shares will be equal to one large share. 281 00:30:12.760 --> 00:30:19.760 And he describes it as if it's like when you break a mirror and you've got a bunch of small mirrors, it's still the same size as the original. 282 00:30:19.760 --> 00:30:25.000 the original mirror and he talks about how popular this had become because it 283 00:30:25.000 --> 00:30:31.000 really allowed a lot more people to get into the market he says this and it was 284 00:30:31.000 --> 00:30:36.000 called it was called trading in Ducaton shares because this would be the rich 285 00:30:36.000 --> 00:30:39.840 people all the other people couldn't afford to buy it so it's called trading 286 00:30:39.840 --> 00:30:45.760 in Ducaton shares which is just a very small coin he says this branch of trade 287 00:30:45.760 --> 00:30:50.560 has been increasing during the last five years to such an extent and mainly with 288 00:30:50.560 --> 00:30:54.640 a certain group which is as boisterous as it is quick-witted that it is engaged 289 00:30:54.640 --> 00:31:01.320 in by both sexes, old men, women and children. He goes on he says, even 290 00:31:01.320 --> 00:31:07.280 children who hardly know the world and at best own a little pocket money agree 291 00:31:07.280 --> 00:31:13.000 that by that each point by which the large shares rise or fall will mean a 292 00:31:13.000 --> 00:31:31.000 In a certain amount of their pocket money for their small shares, if one were to lead a stranger through the streets of Amsterdam and ask him where he is, he would answer, among speculators, for there is no corner in the city where one does not talk shares. 293 00:31:31.000 --> 00:31:37.000 Okay, so this is a really just an amazing innovation, purely private. 294 00:31:37.000 --> 00:31:45.000 By the time government addressed trading in Ducaton shares, they declared it to be a form of gambling and a bet. 295 00:31:45.000 --> 00:31:54.000 So that too was not enforceable in courts of law, but they developed a very sophisticated system. 296 00:31:54.000 --> 00:31:58.000 People would hire a private party. They'd make the agreement with them. 297 00:31:58.000 --> 00:32:28.000 And then at the end of the month, this private party would go to the stock exchange, find out the price and then he would come out and there was this process called raising the stick where he'd raise the stick and say the price for these shares is this and there was like a big ruckus every time and they had to stop raising the stick but it worked really well and got a lot of people into the market and this is a purely private innovation rather than a government plant. 298 00:32:28.000 --> 00:32:32.000 Innovation. 299 00:32:32.000 --> 00:32:36.400 All right, so why did people follow through 300 00:32:36.400 --> 00:32:39.920 with their bargains? It obviously wasn't because of the law. 301 00:32:39.920 --> 00:32:43.520 There's a bunch of other potential hypotheses 302 00:32:43.520 --> 00:32:48.080 that people, critics of private ordered systems might say well 303 00:32:48.080 --> 00:32:51.920 it only worked because it's a small closed old boys network. 304 00:32:51.920 --> 00:32:55.920 This clearly was not the case. 305 00:32:55.920 --> 00:33:00.520 It was open to all different types of people. 306 00:33:00.520 --> 00:33:06.840 He describes how some live opulently, nevertheless, there are numerous people in the business 307 00:33:06.840 --> 00:33:13.040 simply for the reason of providing decently for the families, he says. 308 00:33:13.040 --> 00:33:21.120 Other dialogue, one of the characters says, how can I get involved? 309 00:33:21.120 --> 00:33:22.800 I have limited capital. 310 00:33:22.800 --> 00:33:27.600 I think that will preclude me from trading because there would be, quote, nobody to give 311 00:33:27.600 --> 00:33:35.720 me credit, but he's told to start with options, which is potentially lower risk, until he 312 00:33:35.720 --> 00:33:41.920 can, quote, gain in reputation for generosity as well as foresight, okay? 313 00:33:41.920 --> 00:33:46.840 So people could get into this market if they wanted to. 314 00:33:46.840 --> 00:33:52.320 A couple other hypotheses people have is they say, well, it can only work if everyone's 315 00:33:52.320 --> 00:34:19.320 In the book, my research indicates that traders followed through with their bargains not because of law or any of these other things, but simply because of market incentives. 316 00:34:19.320 --> 00:34:24.120 Okay? We see this in this market. We see this in markets today. Okay? 317 00:34:24.120 --> 00:34:28.760 Go on the internet and you see a website you've never heard of. 318 00:34:28.760 --> 00:34:31.880 Sometimes people will buy from that, but many times they won't. 319 00:34:31.880 --> 00:34:35.400 Say, I want to go to the established one. I'm willing to pay a premium. 320 00:34:35.400 --> 00:34:39.320 Or you go onto eBay and you see the person with the higher 321 00:34:39.320 --> 00:34:43.400 reputation score and you say, oh, this person is a reliable person. 322 00:34:43.400 --> 00:34:46.920 The market has created incentives for people 323 00:34:46.920 --> 00:34:55.880 to follow through with their bargains because, you know, obviously no one wants to get cheated. 324 00:34:55.880 --> 00:35:00.440 When you're dealing with someone a long time, you're not going to want to cheat each other. 325 00:35:00.440 --> 00:35:13.720 And when people are dealing with lots of other people, as long as they can share information about reputation and reliability of the other parties, then this can work. 326 00:35:13.720 --> 00:35:23.720 Alright, so let me just give you some, a couple more quotes to illustrate the importance of reputation in this market. 327 00:35:25.720 --> 00:35:32.720 He says, he says, the exchange business is comparable to a game. 328 00:35:32.720 --> 00:35:41.720 Some of the players behave like princes and can combine strength with tenderness, amiability with intelligence. 329 00:35:41.720 --> 00:35:45.720 I love reading about myself like that. 330 00:35:49.720 --> 00:36:02.720 But there are some participants who lose their reputation 331 00:36:02.720 --> 00:36:08.720 and others who lack devotion to their business even before the play begins. 332 00:36:08.720 --> 00:36:32.720 And as we would expect, the untrustworthy brokers are not going to get a lot of business compared to the trustworthy brokers. 333 00:36:32.720 --> 00:36:49.720 Since the status, the insignificant capital, the low reputation and the limited trustworthiness of such people are well known, they do not dare attempt to carry on any considerable business. 334 00:36:49.720 --> 00:36:57.720 So you've got to work to get your customers and people can talk, people can say don't deal with that person. 335 00:36:57.720 --> 00:37:27.720 and the people who can provide assurances that they're going to be more reliable are going to get more business and he describes this he says so great is the loyalty of some brokers to their principles whom they usually call their masters and so great is their industry their activity their zeal and their vigilance that the customers get their money's worth and I'll just finish up with one last nice quote he says to be sure there is 336 00:37:27.720 --> 00:37:31.720 with its wide-spread honesty and expedition on the exchange. 337 00:37:31.720 --> 00:37:40.720 For example, the business and stocks and the bustle of the sales which are made when unforeseen news occurs is wonderful to behold. 338 00:37:40.720 --> 00:37:50.720 Nobody changes the decisions which he makes in his momentary passion and his words are held sacred even in the case of a price difference of 50%. 339 00:37:50.720 --> 00:37:58.120 And although tremendous business is done by merchants without the mediation of brokers who could serve as witnesses, 340 00:37:58.120 --> 00:38:02.160 no confusion occurs and no quarrels take place. 341 00:38:02.160 --> 00:38:09.840 Such honesty, cooperation and accuracy are admirable and surprising. 342 00:38:09.840 --> 00:38:13.600 Okay, so some conclusions from this study. 343 00:38:13.600 --> 00:38:23.680 Government was not supportive of the world's first stock market. 344 00:38:23.680 --> 00:38:34.440 Nevertheless, traders developed very sophisticated contracts. 345 00:38:34.440 --> 00:38:39.720 The market, I find this case study interesting because the market was complex. 346 00:38:39.720 --> 00:38:47.720 It wasn't just a simple barter market, the market had lots of people, there were hundreds of brokers. 347 00:38:47.720 --> 00:38:53.720 The market had heterogeneous people, so lots of different people from different groups were interacting. 348 00:38:53.720 --> 00:39:01.720 And it worked even as some shares, you know, the shares were going up and down, some people were gaining, other people were losing. 349 00:39:01.720 --> 00:39:04.720 So it wasn't just the case where everyone was making money hand over fist. 350 00:39:04.720 --> 00:39:10.720 It worked over a hundred years throughout this entire swings in the market. 351 00:39:10.720 --> 00:39:17.720 So the stock market, in my opinion, developed not because of the law but in spite of the law. 352 00:39:17.720 --> 00:39:26.720 And the last thing that I find extremely interesting about this market is it worked basically without any formal enforcement. 353 00:39:26.720 --> 00:39:38.720 So often times private parties hire formal third party enforcement that is private, but here's an example of this working without that. 354 00:39:38.720 --> 00:39:52.720 So the idea that you have to have written contracts with formal arrangements for everything you do I think is overrated in the current world. 355 00:39:52.720 --> 00:40:02.720 So, to conclude, government is not necessary for the enforcement of contracts, even in sophisticated markets. 356 00:40:02.720 --> 00:40:13.720 And in my opinion, the more evidence we can amass of this, I think it's just a gold mine, we can just keep digging up more and more examples of this. 357 00:40:13.720 --> 00:40:29.720 The more evidence that we can amass of this, the less likely people like Mises, that statist Mises, Hayek, that statist Hayek, Wren, that statist Wren. 358 00:40:29.720 --> 00:40:38.720 I'm just kidding. I like these people. I like all of them. They're all my friends. 359 00:40:38.720 --> 00:40:46.720 Stigler and Friedman, the less likely they are to assume that private enforcement of contracts is impossible. 360 00:40:46.720 --> 00:40:49.720 It's just simply not true. 361 00:40:49.720 --> 00:40:58.720 Now, people might respond and they might say, well, okay, we grant that private law enforcement is possible. 362 00:40:58.720 --> 00:41:05.720 But they might say, well, socialized law enforcement is going to be better for these reasons. 363 00:41:05.720 --> 00:41:35.720 private law enforcement is going to be suboptimal and they can make that argument but that's a completely set separate set of arguments and I'd like to have people you know I'd like to have people having that debate compared to the position of 50 years ago where it's like no no no that's that's simply impossible I'd like to shift the debate I've talked about an example of contracts without external enforcement 364 00:41:35.720 --> 00:42:05.720 Management or an example of a private ordering. There's basically a million areas that we might study and I'm just one of the many people contributing to this very excellent field, but there's people like Bruce Benson and other people who are documenting examples of criminal law, alternatives to criminal law I should say, court law, property law, police, 365 00:42:05.720 --> 00:42:33.720 So what I would like to see is people just taking a subject and, okay, let's have 10 articles about each subject and then have 10 more people write 10 more articles and then, you know, at the end of the day, we're going to have this huge body of work that will document, look, the idea that government needs to do all this stuff is not exactly clear. 366 00:42:33.720 --> 00:42:44.720 So the more research we do, the more we can unravel what I consider the feeble case for socialized law enforcement. 367 00:42:44.720 --> 00:42:47.720 Markets work! Thank you. 368 00:42:47.720 --> 00:43:04.720 All right, so we've got some time for questions. Yeah. 369 00:43:04.720 --> 00:43:09.720 Thank you. I agree pretty much entirely with everything. 370 00:43:09.720 --> 00:43:12.720 Great. Excellent question. Okay, next one. 371 00:43:12.720 --> 00:43:39.720 The way you use the word law, you say people enforce their contracts even though there wasn't support from the law, and I think you're using law in the sense that, I don't use it that way anymore, I say government law, because in fact law is, as you prove in your book, law exists before government exists. 372 00:43:39.720 --> 00:43:51.720 I'm moving away from, like Milton Friedman said, we shouldn't have let them steal our word, which is liberal. 373 00:43:51.720 --> 00:44:01.720 We shouldn't have let them steal that other L word, law, because in fact law grows privately, everywhere, wherever people meet and pray. 374 00:44:01.720 --> 00:44:20.720 I totally think you're making an excellent point. The question said law precedes government and I totally agree with that. 375 00:44:20.720 --> 00:44:24.720 So should I change my language when I say when it's against the law? 376 00:44:24.720 --> 00:44:31.720 I could have added, when it's against government laws, but my talk would have been too long. 377 00:44:31.720 --> 00:44:42.720 Have you sent this to Gordon Tulloch, and if so, what did he have to say back to that? 378 00:44:42.720 --> 00:44:49.720 Yeah, I actually presented this in front of Gordon Tulloch, and then afterwards he said, 379 00:44:49.720 --> 00:44:51.560 He said, what's your address? 380 00:44:51.560 --> 00:44:56.760 And I gave it to him, and then he sent me something. 381 00:44:56.760 --> 00:45:00.480 And it was on, it's called, The Non-Prisoners' Dilemma, 382 00:45:00.480 --> 00:45:02.320 where it's really not a big problem. 383 00:45:02.320 --> 00:45:04.520 And the next time I saw him, he said, see, 384 00:45:04.520 --> 00:45:05.860 I'm not really a statist. 385 00:45:05.860 --> 00:45:06.360 Yeah. 386 00:45:11.920 --> 00:45:15.720 I found it fascinating. 387 00:45:15.720 --> 00:45:18.880 I'm not sure it proves the point you're trying to make, 388 00:45:18.880 --> 00:45:34.880 That's the point you're trying to make. The fact that, let's call it a business model, developed spontaneously, in spite of the fact that there wasn't specific legislation on it. 389 00:45:34.880 --> 00:45:44.880 In fact, legislation is usually way behind, trying to regulate and control businesses and activities that are already there. 390 00:45:44.880 --> 00:46:05.880 So, you know, I find it interesting that this develops spontaneously, but it doesn't really say that this could develop in the total absence of authority, which I think would be more an anarchist argument. 391 00:46:05.880 --> 00:46:13.880 The question would be, could it have developed in the absence of authority, not in the absence of legislation? 392 00:46:13.880 --> 00:46:20.880 Given that it does develop in the absence of legislation, but can it develop in the absence of authority? 393 00:46:35.880 --> 00:47:05.880 and Property Rights. Interestingly, actually, the East India Company had their own private militaries with their boats, they protected their boats all over, and there were some problems, but you're certainly right, this is just addressing one aspect, but I think it does get at a bunch of people say, today markets, financial markets, you can't have them without legislation, and I think that's what I'm showing is not necessarily true. 394 00:47:05.880 --> 00:47:09.880 The question about authority, I think that's a good one. 395 00:47:09.880 --> 00:47:12.880 It's just a matter of what kind of authority. 396 00:47:12.880 --> 00:47:23.880 And the history of financial markets were self-governing authorities rather than publicly governed authorities. 397 00:47:23.880 --> 00:47:29.880 I didn't mean that. I just meant that under the umbrella of an authority. 398 00:47:29.880 --> 00:47:36.880 No, it's common law and judgmental law. I mean, this would exist without any legislation. 399 00:47:59.880 --> 00:48:17.880 I've done some other work. The question is, what forces people out of the market is ostracism. 400 00:48:17.880 --> 00:48:23.140 I have other work on the London Stock Exchange, and it's a very similar story. They transformed 401 00:48:23.140 --> 00:48:28.040 coffee houses into private clubs. If you didn't follow the rules, you would get kicked out 402 00:48:28.040 --> 00:48:38.040 Do you know of any case in which you didn't keep an aeroplane because of the fact that both his son and his dad's son are in it? 403 00:48:58.040 --> 00:49:18.040 I'm not wanting to answer and I kept pressing and pressing them and then finally said, number six, David Friedman, so, so, yeah, number seven was, was Ed Stringham, Dan. 404 00:49:28.040 --> 00:49:33.040 and also the complexity of the issues and whatnot. 405 00:49:33.040 --> 00:49:40.040 But I guess I'm kind of skeptical as to whether or not you're living up to the terms or the way they use them. 406 00:49:44.040 --> 00:49:47.040 So, they may say complex and heterogeneous, altruistic and very different things. 407 00:49:47.040 --> 00:49:54.040 You mentioned earlier that young and old men and women, but they were still all Dutch. 408 00:49:58.040 --> 00:50:04.160 Portuguese people who had fled at that time. So there was all 409 00:50:04.160 --> 00:50:08.680 different languages going on during the exchange. 410 00:50:28.040 --> 00:50:41.040 No, I think you're making a good point. There are some more modern, sophisticated arguments about how it can only work in certain cases. 411 00:50:41.040 --> 00:50:50.040 But at least some of the traditional classical liberals wouldn't even grant the possibility of private ordering at all. 412 00:50:50.040 --> 00:50:57.040 So yes, I agree with you that you could come up with a more complex market. 413 00:50:57.040 --> 00:51:22.040 The stock market in London 100 years later was more complex or markets today are more complex, there's more people, so I'm not saying this is the most complex market ever, but I think that it is showing that it's much more sophisticated than a barter market, which is what people like Manker-Olson say, well you can have barter but you can't have anything else, so good question, yeah. 414 00:51:52.040 --> 00:52:19.040 ... 415 00:52:19.040 --> 00:52:25.040 Wow. Wow. Thank you for the fascinating story. 416 00:52:27.040 --> 00:52:28.040 Walter. 417 00:52:41.040 --> 00:52:44.040 I want to put a wet blanket on you, Walter. 418 00:53:19.040 --> 00:53:34.040 I totally agree with you, Walter, and I think this is just one piece of evidence to say if you want to be intellectually honest about it, you can't make those claims. 419 00:53:34.040 --> 00:53:37.040 So thank you very much for being such a great professor to me. 420 00:53:49.040 --> 00:53:50.040 is another one.