In the movie “The Big Short,” there is a moment when the character Mark Baum goes to a rating agency (RA) to ask “has there ever been a time in the past year where you (the RA) didn’t give the triple-A (AAA) rating requested by the banks?”. To which Georgia (an RA employee) responds: “If we don’t give them the rating, they’ll go to Moody’s (another RA) two blocks away.”
The RAs understand everything, but continue to violate their own rules for fear of losing clients to a competitor.
But what if a similar situation arises under conditions of private courts, where courts issue unlawful decisions or, say, decisions in favor of large clients for fear of the client leaving for another private court?
Armchair Hater
In the situation you are considering, we see how poor system design produces incorrect results. A bank pays for the rating agency to give it a high rating, and the rating agency fulfills this market order. Beyond that, anyone can simply disregard this information because it says nothing about the bank’s reliability.
There is a free market. Companies operating on it provide various services. The company’s task is to convince the consumer that it is a good choice. The consumer’s task is to find out which company is truly a good choice. Exactly what the company provides—food, scientific research, or, say, conflict resolution—is completely irrelevant.
A company has two possible strategies. First: by figuring out consumer preferences, deceiving the consumer into believing that the company meets those preferences. Second: by figuring out consumer preferences, bringing its services into alignment with those preferences. The consumer also has two possible strategies. First: thoroughly study the market and make an informed decision in favor of one of the companies. Second: choose the first company they come across, work with it, and if it turns out to be dishonest, make every effort to ensure its management regrets it. These are the extremes I have described. A real strategy will be a combination of the two.
Thus, the company creates a market demand for studying preferences and for information (whether true or false), and the consumer creates a market demand for studying offers and for sanctions against fraud.
This results in an eternal conflict between the shell and the armor (or, if you prefer, the prisoner’s dilemma). The consumer needs independent ratings; the producer is interested in buying a “tastier” rating. The consumer needs a court that will recover damages from the producer for poor quality; the producer needs a court that will acquit them. At the same time, the consumer is not obligated to be a saint either; they might use a product, break it, and then return it as if it were defective; they might receive a product and lie that it was never received; they might pay with counterfeit money…
If the market is regulated from above on an exclusive basis, then both consumers and producers direct their efforts toward corrupting the regulator and inducing it to act specifically in their interests. If there is no centralized regulation, then the most important factor influencing decision-making becomes the practice of successful interactions with a specific counterparty—in other words, their reputation. I have written before about what an ideal reputation system for me might look like. So far, the market mainly features very clumsy systems for analyzing consumer behavior, but these are not needed by me as a consumer, but rather by those who want to push their goods onto me. Systems that would track the behavior of producers just as thoroughly are still far less developed; they are replaced by makeshift solutions from various organizations with the word “oversight” in their names.
In the doctrine of anarcho-capitalism, it is assumed that insurance companies can perform all these oversight functions much more qualitatively. Whether this is actually true, or whether the market will offer us even more sophisticated tools, we will find out once we discard the makeshift solutions.
