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Is government enforcement necessary for financial markets?

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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.

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Edward Stringham, Hackley Endowed Professor for the Study of Capitalism and Free Enterprise, Fayetteville State University

Edward Stringham is Davis Professor of Economic Organizations and Innovation at Trinity College in Hartford, Connecticut. He received his undergraduate degree from College of the Holy Cross in 1997 and his doctorate from George Mason University in 2002. As a student, Stringham first attended Mises University in 1996.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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