In the short time since President Obama was re-elected, government has issued hundreds of new regulations. The bureaucrats never stop. There are now more than 170,000 pages of federal regulations.
President Obama wants still more rules. Cheering on increased financial regulation, he said, “We’ve got to keep moving forward.” To the president, and probably most Americans, “forward” means passing more laws.
It is scary to think about a world without regulation. Intuition leads us to think that without government we'd be victims of fraud, as I explain in my latest book, “No, They Can't!” But our intuition is wrong.
Consider this: An entire sector of the economy operates almost entirely without government controls. Complete strangers exchange big money there every day.
It's the Internet. It does have regulation, just not government regulation.
On my next TV show, titled "Freedom 2.0" (which the Fox Business Network airs this Thursday at 9 p.m. EST), economics professor Ed Stringham explains that Paypal.com, which transfers billions of dollars for people, at first assumed they needed government help to prevent fraud.
"They faced fraudsters from all over the world. They turned to the FBI," says Stringham. "But the FBI had no idea who these people were."
So PayPal invented a new form of regulation. "They developed a private fraud detection system, where they used computers to say, 'This might be fraudulent,' and then it would send it to a human to investigate that." That dramatically reduced fraud, and PayPal thrived.
EBay's business model is also threatened by fraud. How can a buyer trust that, say, a seller will actually deliver a $25 pack of baseball cards and that the cards will be what he claims they are? In theory, you could sue; but in practice, our legal system is too slow and costly for that.
So eBay came up with self-regulation: The buyers rate the sellers.
"EBay and other groups developed private reputation mechanisms," says Stringham. "When you go onto eBay, you know there's a 99 percent chance that you're going to get the goods delivered."
Private companies found they could "crowd-source" enforcement against fraud and low-quality products, in much the same way that Wikipedia discovered an encyclopedia could be created without a central organizer. Wikipedia founder Jimmy Wales tells me that method "works far better than the top-down system that it replaced."
We almost always assume that top-down government regulation is necessary, even though history says otherwise. Did you know that stock markets began without government regulation?
Stringham researched how the first stock exchanges developed in London in the 1700s: "Government refused to enforce all but the most simple contracts. Nevertheless, brokers figured out how to do short sales, futures contracts, options contracts—even though none was enforceable by law."
They came up with private enforcement.