Tuesday, March 01, 2005

Invisible hand trumps dead hand

Low transactions costs and clear and credible property rights give us exchange, efficiency and the prospect of prosperity. Yet, we live in a world where transactions are often costly and property rights limited. In an open system, however, these problems are also opportunities. A dynamic analysis would highlight the fact that entrepreneurial activity, if given the chance, could develop remedies -- ways to lower transactions costs and/or make property rights enforcement feasible. This is how the ambit of the exchange economy expands.

The problem is that regulators and politicians, responding to "market failure" often rush in and preclude inventiveness. Eric Brousseau cites the internet as an example of success because technology moved too fast for the regulators.

The web, then, is rife with illustrations of how rights and costs were successfully managed bottom-up, creating exchange and welfare-enhancing possibilities. Ebay is just one of many examples.