The Fable of the Leeches, or: The Single Most Unrealistic Positive Assumption of Most Economists
19 Pages Posted: 5 Dec 2017 Last revised: 7 Dec 2017
Date Written: November 30, 2017
Most economists assume that markets depend on government to enforce contracts and rules against default or fraud. With small transactions, however, the cost to use the legal system far exceeds the value at stake in a contract, and even with large contracts, the legal system often cannot solve problems quickly enough to be helpful for companies. This article focuses on four real stories that illustrate how market participants solve problems privately rather than through law and then concludes with a fable to help illustrate that point.
Keywords: private governance, role of government, legal centralism
JEL Classification: P11, P16, B53
Suggested Citation: Suggested Citation