Endogenous legality

10/02/2012 § Leave a comment

The US robo-signing/bank fraud/mortgage fraud settlement announced today is very concerning.

A reassuring way to look at it is that there was fraud. Some of it is a lack of attention to details, not filling in the forms properly, etc. Some of it is simply theft. Banks took or tried to take houses that were not theirs, that they didn’t own. The difference between the two types of fraud is this: had the banks observed the correct procedure, would the same results have obtained? So, it’s criminal activity, which needs to be dealt with in the ordinary way.

The settlement deal changes all this. It is no longer fraud. It is now a legitimate business strategy.

I think economists should be outraged. For most economic theorising, legality is exogenous. Given the property rights that have been established, people use the resources they control in pursuit of their satisfaction. We can smugly talk of economic efficiency because we put the thorny issue of initial distribution of resources to one side.

The settlement deal endogenises legality.

You can now take property and make money from it, and then retroactively convince the government that your ownership is legal. Of course, the more money you make, the more influence you have, so the easier it is to convince the government. The next time you’re picked up for selling stolen property, just hand the officer a $100 bill, say sorry, and explain that it’s best for all concerned if we just look to the future.

The other part of it is that legal uncertainty is an economic drag. It’s one of those things development economists like to point to. If I’m a farmer, do I have security of tenure? Can I benefit over the medium term for an investment I make in my property? If not, if there’s a chance that someone mean or powerful will take away my improved farm, I won’t bother. The result: low economic development.

Proudhon said that property was theft. I always read that as more conceptual, as a Rousseauian assertion. A more literal, contemporary reading may be more appropriate.

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