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The fable of the leeches, or: The single most unrealistic positive assumption of most economists

Author

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  • Edward Peter Stringham

    (Economic Organizations and Innovation, Trinity College
    American Institute for Economic Research)

Abstract

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.

Suggested Citation

  • Edward Peter Stringham, 2017. "The fable of the leeches, or: The single most unrealistic positive assumption of most economists," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 30(4), pages 401-413, December.
    • Handle: RePEc:kap:revaec:v:30:y:2017:i:4:d:10.1007_s11138-017-0402-3
    DOI: 10.1007/s11138-017-0402-3
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    References listed on IDEAS

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    1. Giuliana Palumbo & Giulia Giupponi & Luca Nunziata & Juan S. Mora-Sanguinetti, 2013. "Judicial Performance and its Determinants: A Cross-Country Perspective," OECD Economic Policy Papers 5, OECD Publishing.
    2. M. Martin Boyer, 2007. "Resistance (to Fraud) Is Futile," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(2), pages 461-492, June.
    3. Stringham, Edward Peter, 2015. "Private Governance: Creating Order in Economic and Social Life," OUP Catalogue, Oxford University Press, number 9780199365166.
    4. Bethany L. Peters & Edward Stringham, 2006. "No Booze? You May Lose: Why Drinkers Earn More Money Than Nondrinkers," Journal of Labor Research, Transaction Publishers, vol. 27(3), pages 411-421, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Private governance; Role of government; Legal centralism;
    All these keywords.

    JEL classification:

    • P11 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Planning, Coordination, and Reform
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • B53 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Austrian

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