Sun, 20 Jan 2008

Free Religion and Markets

Earlier, I wrote about Centralization vs. Distribution which said more about the freedom of religion and markets than its title would indicate. Bill writes to point out that a person in favor of regulation would say "because I have my retirement savings tied up in those markets - what the Episcopalians do doesn't affect me."

I guess I wrote badly if I gave him the impression that I mean only stock markets. I mean "Freedom of trade" -- which is the freedom to buy and sell anything you want. But let's assume that I hadn't misled him, because his point is still worth addressing. People are now more or less indifferent to the religious leadings of other people, but consider what people would have thought back when they thought that it was important for everyone to pursue the correct form of worship of the creator. They wouldn't have been indifferent about Episcopalians' beliefs. They would have felt that being forced to adopt the Episcopalian form of worship would put their immortal soul in harm's way. Yet today, with freedom of religion, we don't care. Their form of worship is their problem. We can live and let live.

Bill goes on to ask about how unregulated markets deal with market manipulation, insider trading, and such. Well, first, understand that there is no such thing as an unregulated market. The operations of markets are always regulated one way or another. There may be legislation that addresses markets, but there are also immutable laws which control markets. Nobody will trade in a market unless they think they stand to gain from it. So the people running the market (who take a portion of every trade) have every interest in running a fair market.

But let's say that the marketplace has no NYSE rules, or NASDAQ rules, or ASE rules that the participants have to obey. Let's just say it's a raw market in buying and selling paper shares for cash in hand. Even then, the buyers and sellers will take into account the possibility of market manipulation and insider trading. It's likely that such a market would be fairly inefficient in the sense that transaction costs would be high and people would demand a high risk premium. Eventually traders would reinvent market rules.

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