A market exists where we have defined property rights, i.e., an expectation that our rights of ownership will be respected and not subject to arbitrary taking by government, or by theft or force from another.
I think this is a fair definition of a market, because trading can’t occur and future valuations of property cannot be made in a state of nature, i.e., in the absence of a government that provides due process protections to property owners (before taking your shit), and otherwise protects you from theft and other forceful takings of property from those (other than the government) who would take your shit. Why would you buy something from somebody, like land, if you didn’t know whether they had title to the property, or the recognized right to transfer title by sale of the land?
Consider the Manhattan Indians. They sold their land – all of New York City – for 15 bags of Wampum and one bottle of fermented English sailor piss.
I wouldn’t say that the market determined the price of the property – rather, it was the threat of force that set the price, which is not a “market” valuation.
So before there were markets – meaningful markets that allow for speculation and investment – there was government.
And government defined the scope of property rights. As a student of law, common law examples defining the scope of property rights were always very entertaining, although almost totally irrelevant today.
Individual rights to real property are so obvious, in civil society, that we assume that markets are natural forces that have always existed, and that transactions in real property were always possible without government defining the scope of rights to real property; but this is false. The rights of individuals to property are oftentimes vague and need courts to provide clarity. Thus, property law is a part of first year curriculum in any law school – because it is essential. It is essential to have a developed body of property law before you can have markets, and to know that your title to real property will be respected, according to the definition above.
You also need a body of law for enforcing contracts, that governs exchanges between people of property rights. Without property law and contract law, you cannot have the stability required for parties to value real property beyond, say, food and simple shit like that that rots after a few days. Perhaps there were markets for food thousands of years ago, and government would not have been necessary to provide rules of exchange in that context. But this isn’t what we mean when we talk about capital markets, that require government and a body of law to define the scope of property rights – you wouldn’t say markets existed in a state of nature, because people sold fish at a primitive market along the riverbank. We’re talking about modern, capital markets, and the essential point here is this…
Prior to markets is the social contract.
All of us must agree not to use force before there can be capital markets.
And back to the case of the Manhattan Indians, there are questions of jurisdiction when you have trade occurring between sovereign states. Who decides whether the deal for New York, in exchange for Wampum and sailor piss, is legit?
Complex questions of the scope of property rights, contract rights and remedies, and jurisdiction must be settled for capital markets to develop.
Government is first, markets follow.
I’m gonna write a series of rants on insurance contracts, and show how the law is required to develop first, before markets can develop that allow for transactions to occur based upon market valuations…
Aetna opting out of ACA healthcare plans.