Is government enforcement necessary for financial markets?
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.