Tag: Free markets

What I believe

I am a classical liberal fusionist. The following brief outline will hopefully explain what that means followed by a brief summary of where Trump stands relative to my beliefs of what is good for America.

I want to be free to make my own decisions about my life and for you to be similarly free as well. As we live together with 8.3 billion others, we must have understandings/rules/laws guiding our interactions if we are to live peacefully with each other. An efficient government limited to those purposes is essential. As a classical liberal I strongly support the limited, enumerated powers and structure (checks and balances) of government provided by the American constitution. Our constitution provides that our government will have limited powers sufficient to protect us from foreign and domestic threats of corruption, fraud and attack, secure our property rights, adjudicate disputes, provide public goods (e.g. roads, pollution regulations) and establish the rules (guardrails) for private enterprise. Our constitution specifically prohibits our government from infringing upon our freedom of speech, assembly, or religion.

Such limited government powers would leave use with substantial freedom to choose our own way of life. The quality of our lives will depend importantly on how wisely we use that freedom. While it would be ideal for those in need of help to receive it from family and friends and from private charities established for that purpose, I believe that the private provision of charity on any large scale has been so displaced by government welfare that I accept the government’s role in providing a social safety. But the current mix of programs restrict our freedoms and are inefficient. I propose a Universal Basic Income as the most efficient approach and the most consistent with individual freedom. https://wcoats.blog/2020/08/20/replacing-social-security-with-a-universal-basic-income/

America has flourished because the substantial freedom our government leaves us is generally used well. The vast majority of us use our freedom in ways that respect the freedoms of others. The three monotheistic religions—Christianity, Judaism and Islam (and no doubt others as well)—provide important guidance for virtuous behavior. These include honesty, charity, love, prudence, justice, fortitude, temperance, humility, forgiveness, etc. Virtue is the other leg of Fusionism, which is explored in the wonderful new book by Stephanie Slade: Fusionism: Liberty, Virtue, and the Future of the American Right.

While respecting the freedoms of others, I may choose (within my abilities) how I make my living, whom to buy from and sell to (free trade), and how to spend my free time and with whom. Much of our relationships with others will reflect the locally accepted norms of good behavior. This extends far beyond driving on the same side of the road. Some of these norms have been codified into laws, which we expect to be applied equally to all of us. Some are the norms of courteous behavior (good manners). Thus, freedom and rights have fostered the entrepreneurship that has made the U.S. the economic envy of the world.

But today, with the internet and jet planes, our world extends far beyond our own communities. Engaging with as much of the world as possible peacefully has benefits. It can enhance our safety by making agreements with other governments that reduce the occurrences of war. It can add joy to our lives by exposing us to the many wonder of other cultures and geographies. It has enormously lifted the average standard of living because of the extension of the benefits of specialization made possible by trade. Global average per capital real income has risen 13 to 15 times (1,200 to 1,400%) over the last two centuries. This after many, many centuries of virtually no change.      

But what is required to travel to or trade with other countries? How can our planes fly over and safely land in other countries? How do we prevent the signals from other countries’ satellites from interfering with the internet and other signals from our own as they fly over? Just as our Federal government can establish laws to protect our safety, liberties and property across state lines that benefit us all, they need to do so across country borders.  https://wcoats.blog/2020/12/01/the-rule-of-law-china-and-the-u-s/ Without such agreements we would not be free to trade and travel nearly as widely as now. https://wcoats.blog/2017/01/06/the-liberal-international-order/

We have failed to live up to these standards on many occasions, but they are the north star to which we strive. Or at least until now. On July 23, 2019, speaking to a Turning Point USA audience (and on other occasions as well) President Trump said: “I have an Article II, where I have the right to do whatever I want as president.” With that he threatened to throw away the limits on the power of our government and the checks and balances on its exercise. Some of his policies have been consistent with the principals I believe in, but many have not.

The Economy: The government’s limited role of protecting property rights and promoting business transparency has unleashed the entrepreneurial energies that have led to our country’s flourishing. Like President Biden before him, Trump thinks his ideas of where to put our resources are often better than the market’s—thus projecting government activities beyond its proper functions. He was right, however, to think that many government agencies and their regulations were more burdensome than helpful to the private sector. A review and streamlining of the government’s oversight of the economy would be a good idea. Unfortunately the Department of Government Efficiency (DOGE) led by Elon Musk was a crude hatchet job that did more harm than good.  https://wcoats.blog/2020/11/04/saving-the-american-dream/

Immigrants: America would not exist without immigrants. https://wcoats.blog/2026/07/06/immigrants-2/ Currently they are important to provide the younger workers needed to pay the expenses (e.g. Social Security benefits) of our growing number of longer-living retirees. Rather than allowing more legal immigrants, Trump has reduced the number and promised to deport those here illegally. https://wcoats.blog/2026/02/08/immigrants/ . While I support efforts to prevent illegal immigration, Trump’s quickly recruited and improperly trained ICE agents have murdered innocent Americans and deported American citizens, along with illegal immigrants, without due process and in violation of court orders. The rule of law be damned. https://wcoats.blog/2025/08/29/immigration/

Free Speech: Our constitution specifically protects free speech for a good reason: https://wcoats.blog/2012/09/15/further-thoughts-on-free-speech/ It helps build public consensus and support for good public policies.

Trump goes ballistic when criticized and misuses executive power to punish critics. These have included suing critics, threating the licenses of their employers, etc. https://wcoats.blog/2026/08/21/our-first-amendment-freedom-of-speech/

“ABC late-night comedian Jimmy Kimmel said an interview he conducted with Texas Democratic Senate nominee James Talarico will not air on broadcast because of what he called threats issued to his network by President Trump’s Federal Communications Commission.” The Hill 9/10/2026

Our constitution provides checks and balances on the powers of government in an effort to prevent (or minimize) the overreaching of government. Donald Trump took major actions against agency inspectors general across both of his presidential terms: Between April and May 2020, he removed or replaced five agencies’ inspectors general in a series of late-Friday decisions: just days into his second term, he dismissed seventeen independent inspectors general at once across cabinet departments—including Defense, State, Transportation, Labor, and Energy. Subsequent individual firings followed throughout early 2025 (such as the USAID IG in February 2025).

The nonpartisan inspectors general review agency programs, financial statements, and operations, recommend changes to make government operations more economical and effective, manage hotlines and intake processes for employees to report wrongdoing safely, and report their findings to the heads of the agencies they monitor and to Congress. In September 2025, a federal judge ruled that the mass January 2025 firings violated federal law because the administration failed to provide the mandatory 30-day notice and substantive rationale to Congress, though the court did not order their reinstatement.

At least 20 high-ranking generals, admirals, and civilian defense leaders have been directly fired or pushed out of their roles by Defense Secretary Pete Hegseth and President Trump. When including behind-the-scenes actions—such as blocking promotion rosters, cancelling appointments, and forcing early retirements—over 80 generals and admirals have had their careers altered, blocked, or cut short as part of a sweeping restructuring aimed at downsizing senior military leadership and reshaping the Pentagon. According to my military friends, those removed were generally the best of the lot. Not bowing to Hegseth’s silly games proved fatal. Where might this be going?

Trade: The Trump administration has stifled the free market allocation of resources to the detriment of our growth in several ways. He has complained about offshoring manufacturing resulting in our trade deficits (which by the way help finance the government’s fiscal deficits thus keeping interest rates on government bonds lower than otherwise). In fact, however, manufacturing output in the US is greater than it has ever been. Domestic employment in manufacturing, however, has fallen because of increased labor productivity.

Trump claims that high tariffs are needed to reduce our trade deficit. But he has not imposed them in ways sanctioned by the World Trade Organization, i.e., to improve competitiveness with a level playing field. His tariffs often seem weapons to get countries to agree to other totally unrelated goals. Trump’s bullying has cost the U.S. more than trade. Often his threats require that foreign companies building plants in the US give shares to the Federal government. The US government now owns shares in some 40 or so such companies (https://wcoats.blog/2026/08/10/econ-101-capitalism-and-socialism/ ). And the courts have struck down some of his tariffs. https://wcoats.blog/2024/11/26/tariffs/

Wars and foreign policy:  During his Presidential campaign, Trump promised to end our forever wars. Then, with Israel, he ordered an invasion of Iran. One reason seemed to be to stop Iran from developing atomic bombs (correcting Trump’s first term error of withdrawing from the Joint Comprehensive Plan of Action with Iran which prevented such a development). https://wcoats.blog/2026/04/02/iran-and-the-bomb/. “Trump’s threats against countries trading with Iran expose the limits of US economic power, as allies resist Washington’s demands and the global economy moves towards a less American-dominated order.” “Trump is hastening the decline of American power,” by Joseph E. Stiglitz 9/12/2026. https://johnmenadue.com/post/2026/09/trump-is-hastening-the-decline-of-american-power/

Trump’s continue support of Israel’s ethnic cleansing of Gaza and increasingly the West Bank has further isolated the US, which stands alone with Israel in the UN in defense of these humanitarian atrocities. https://wcoats.blog/2026/03/31/fixing-palestine/

I agree with Trump’s insistence that others (in particular NATO members) pay their share of the cost of the defense they get with American help. But insulting our allis, often with tariff increases or threats, is not in America’s interest, nor in compliance with WTO rules.

In The New York Times (9/10/2026), Tom Friedman proclaimed that: “Trump is the most un-American president in my lifetime. No president has done more, and continues to do more, to unravel the post-World War II institutions and alliances that were built and sustained by his predecessors. We are talking about… our intimate relationships with Canada and Mexico and our military alliances with South Korea and Japan — to name but a few. These relationships and institutions together produced global and American prosperity and great power peace for generations….”

During his presidential terms, Donald Trump initiated U.S. withdrawals from or ceased participation in a wide range of prominent international treaties, agreements, and bodies:

  • Paris Climate Agreement: Withdrawn during his first term and formally pulled out of a second time in January 2025.
  • Iran Nuclear Deal (JCPOA): The U.S. withdrew in May 2018.
  • Trans-Pacific Partnership (TPP): Withdrawn via executive order in January 2017.
  • UN Framework Convention on Climate Change (UNFCCC): Trump ordered the U.S. withdrawal from the founding 1992 climate treaty.
  • Intermediate-Range Nuclear Forces (INF) Treaty: The U.S. exited this Cold War-era arms control treaty with Russia in August 2019.
  • Open Skies Treaty: Withdrawn in November 2020.
  • World Health Organization (WHO): Initiated withdrawal in 2020 and executed withdrawal actions again during his second term.
  • UN Human Rights Council (UNHRC) & UNESCO: Withdrawn during his first presidency.
  • Global Compact for Migration: Withdrawn in December 2017.

Standing alone we are much weaker than when standing together with friends.

Interest rates: While Trump’s threats to the Federal Reserve to lower interest rates reflects a complete misunderstanding of the forces in play and the Trump administration’s perverse impact on them, I have confidence in the integrity of Kevin Warsh and expect the Fed to raise its policy rate next week in keeping with its commitment to lower inflation to 2%. https://wcoats.blog/2026/08/29/inflation/

Corruption: Trump’s wealth increased $3 to $4 billion dollars during his second term so far. Corruption? No comment. “Trump has pledged a $5,000 dividend to every American adult if Republicans retain control of Congress in November’s midterm elections, prompting questions about how the benefit would work, whether it is legal and where the funds would come from.” Washington Post 9/10/2026. Amazingly Trump publicly proclaims this bribery.

The Washington Post reported on 9/12/2026:

“Democrats hope to retake control of the House, and to use that power to probe Trump’s business ventures, legal maneuvers and policies…. ‘There’s so much corruption and grift that it’s going to take the entire House on the Democratic side to do investigations appropriately,’ Rep. Robert Garcia (D-California), who would probably lead investigations as chair the Oversight Committee in a Democratic-held House….

“Trump family enrichment…

“Handouts to supporters…

“Construction projects…

“Immigration enforcement…

“Prosecutions of Trump’s political enemies…

“Institutional pressure campaigns.”

https://www.washingtonpost.com/politics/2026/09/12/house-democrats-plan-sweeping-trump-investigations-if-they-win-november

It goes without saying that Trump does not support many of the US Constitution based principles I support. If I am right, as I am sure I am, that adhering to the principles of our Constitution is an important part of the foundation of our flourishing, Trump’s abuses of those principles will have the opposite effect. His disregard for the rule of law, his expansion of the powers of government to coerce us, and his disregard and flaunting international agreements and relationships will turn the US into a society of uncertain rights heading in uncertain directions depending on who is leading it at the time.

To give Tom Friedman the last word from his NYT article sited above:

“A year ago, I heard one of our former presidents privately observe that we can survive Trump’s second term as long as our institutions remain intact. Well, unfortunately, they have not. Who would argue today that the Justice Department, which has been turned into a personal legal weapon of the president, is intact, that the Department of Health and Human Services is intact, that the Pentagon is intact, that the Centers for Disease Control and Prevention is intact or that the Federal Communications Commission, which is now run by a Trump-appointed hack who acts as combined government censor and minister of propaganda, is intact?”

Serving Self Interest

If the goal of public policy is to maximize society’s wealth, in the broadest meaning of wealth (economic and cultural), what should that policy be? The invention and production of goods and services that enrich our lives (by providing food, shelter, safety, and entertainment) require a mix of cooperation and competition. How that mix is determined is the critical factor providing varied results in different societies. The Soviet Union represented one extreme of central determination and enforcement of the mix. The United States represents the other extreme encouraging individual determination of when and how to cooperate and when and how to compete based on each person’s self-interest.

What form of cooperation and competition maximizes society’s wealth and how should that optimal mix be determined? The exploitation of our self-interest to maximize wealth that has such extensive scope in the U.S. is guided by each person’s understanding of how their interests are best served.  Our moral code for how best to treat others and thus to be treated ourselves is a critical part of that understanding.

Alexis de Tocqueville, in his Democracy in America (1835), marveled at the extensive degree of voluntary cooperation in America. Americans joined together in church groups, civic clubs, charitable organizations, and sports clubs as part of their pursuit of their self-interests to a greater extent than in any other country in the world.

The tightest cooperative unit is the family, were trust between members is very high in dividing responsibilities while sharing its fruits, as they compete with other families for jobs and markets. Firms divide up tasks and cooperate in producing the best possible products and services with which to compete with other firms for market share (see Ronald Coase’s  The Nature of the Firm – Wikipedia). The Brooklyn Dodgers (now the Los Angeles Dodgers) cooperated within the club in order to better compete against other baseball clubs.

The wealth and success of America compared with the poverty and eventual failure of the Soviet Union reflects its better choices of the when and where and how much to cooperate vs compete. History has confirmed that those choices are best made by individuals pursuing their self-interest as they see and understand it. In Adam Smith’s foundational book: An Inquiry into the Nature and Causes of the Wealth of Nations (1776) Smith argues that when individuals pursue their own self-interest in a free market, they are led by an “invisible hand” to promote the general welfare of society. However, these invisible hands operate within and through a society’s legal, institutional, and moral environment. Well defined and secure property rights are particularly important.

The dramatic increase in material wealth for the average family and decline in poverty in relatively free market, capitalist economies over the past 250 years followed thousands of years of unchanging incomes and general poverty. https://humanprogress.org/trends/

I hope that our next generation of innovators and workers understand this.

Economics Lesson: Income Inequality

French economist Thomas Piketty’s bestselling book on wealth inequality, “Capital in the Twenty-First Century,” has become the focus of a debate over increasing income inequality in the US and many other countries. I have not read the book, which apparently presents lots of interesting data, the use and interpretation of which is also being debated. A recent paper on Piketty worth reading is by a young PhD candidate at MIT: http://www.washingtonpost.com/blogs/wonkblog/wp/2015/03/19/meet-the-26-year-old-whos-taking-on-thomas-pikettys-ominous-warnings-about-inequality/

The issue that interests me in this note is the great divide in attitudes toward inequality and thus the policies proposed to address it. Some people think income inequality, or at least too much of it, is bad per se. Thus taxing the rich and redistributing the proceeds to middle and lower income families is the solution. For me, and many others, the issue is whether the wealthy (to simplify) earned their income fair and square (to be explained below) and is thus a just reward for their contributions to the economy providing an important incentive for their efforts. To the extent that they have not (monopoly power, government favors, etc.) the solution is to attack and remove the policies and impediments to competitive markets that made their exorbitant incomes possible.

If it is not desirable (fair) for some people to be wealthy when others are not, the collateral damage from income redistribution may be a price worth paying. This collateral damage is well known. If the wealthy cannot keep the income they get from their efforts and/or from their investments in innovative technology, miracle drugs, or the companies that produce what we want and provide our jobs, they will reduce their efforts and investments, thus reducing the income available to us all and available to redistribute. At the other end—recipient—of the redistribution, if the programs through which middle and lower income families receive such income are not well designed they will reduce incentives to work and or misallocate resources further reducing the income available to redistribute. The policy issues become how to design such programs and what is the optimal balance between the “good” effect of more equal income distribution and the bad effects of lower income.

In my book of moral principles, disapproval of the higher incomes of others per se is due to envy, and envy is not a virtue and should be resisted. There is some evidence that many people care both about their absolute income and their income relative to others. Such envy should be discouraged in my view. My standard of morality in this area is that people deserve what they fairly earn but this requires an understanding and agreement on what income is fair. Economists have a straightforward definition of “fair” income. Profits (revenue in excess of costs) earned without artificial government help (subsidies, regulations that keep out or discourage competitors, or state sanctioned monopolies) are fair because they are the (ultimately) competitive return on providing something people value. With competition, profits will be normal, what economists call a normal rate of return on investment.

Unless the government interferes, excessive profits (those above a normal rate of return) will ultimately be competed away as others enter the field to grab some of the high return. While the inventor and developer of a new technology or product may enjoy a quasi monopoly return initially, as long as there are no artificial impediments to competition, i.e. as long as the monopoly is contestable, returns will ultimately become normal. George Will provides some relevant and interesting cases drawn from a new book by John Tamny. “With the iPod, iPhone and iPad, unique products when introduced, Jobs’ Apple created monopolies. But instead of raising their prices, Apple has cut them because ‘profits attract imitators and innovators.’ Which is one reason why monopolies come and go.” “Since 2000, the price of a 50-inch plasma TV has fallen from $20,000 to $550.” “Henry Ford doubled his employees’ basic wage in 1914, supposedly to enable them to buy Fords. Actually, he did it because in 1913 annual worker turnover was 370 percent. He lowered labor costs by reducing turnover and the expense of constantly training new hires.” http://www.washingtonpost.com/opinions/how-income-inequality-benefits-everybody/2015/03/25/1122ee02-d255-11e4-a62f-ee745911a4ff_story.html

There are many examples of profits that are not normal or contestable, which by definition are unfair. Those on my side of this issue would look for the government favors or interferences that made them possible and seek to remove them. There is no doubt, for example, that US monetary and regulatory policies have made possible lopsided returns from one-sided risk taking by Wall Street (the moral hazard of tax payer bail outs when excessive bank risk taking goes wrong). These policies need to be reformed in order to make the economy fairer and more efficient. See my Letter from the Editorial Board in the next issue of the Cayman Financial Review.

A very large political/policy battlefield in America today is between those who wish to redistribute income to make it more equal and those who want to make income distribution more equal by reducing or removing the economic rents generated by excessive and inappropriate government regulations and subsidies. They are each motivated by dramatically different philosophies and conceptions of what is fair and what is good. We might call these positions “egalitarianism” and “capitalism.” The motivation of an egalitarian to redistribute income from the rich to the poor is dramatically different than the desire of virtually all American’s to provide what Ronald Reagan called an adequate social safety net for the truly disadvantaged and those who have fallen off the ladder. I am on the side of capitalism.

FREE MARKETS UBER ALLES

World per capita income didn’t change much from the time of Christ to the founding of the United States ($444 to $650 in 1990 dollars), a period of 1,790 years. But in the following 320 years it jumped to $8,080. And about half of that jump came over the last 50 years. What explains this fairly recent explosion of well being? Many things, of course, but central to this explosion of wealth was trade. Only when people could specialize, which requires relying on others to produce part of what they need or want, i.e. to trade, was it possible to dramatically increase the productivity of individuals. The prospect of selling to others also carried the incentive to innovate and develop new technologies, etc.

Trading requires some level of trust in the person you are trading with and mutual acceptance of the rules of the game (contracts). This is relatively easy when you trade with your neighbors and fellow villagers face to face. But as trade extended over longer distances—as it expanded from personal to impersonal dealings— the development of trust became more challenging but no less essential. Product standardization, for example, allowed even greater efficiency and productivity but also facilitated the development of trust in the quality of what we are buying. Companies invested in building and preserving their reputations, which became associated with brand names. As trade expanded, the need for trust was satisfied in more innovative ways.

In today’s rapidly expanding Internet world, where virtually anything under the sun (virtual or real) can be traded via the impersonal Internet, the old brand name reputation approach to establishing trust continues to be useful. Thus we trust the level of quality of products marketed by Sears, or Nieman Marcus on their website to match what we find in their physical locations. However, “the customer review” is rapidly becoming an important source of trust, whether looking for a plumber, a restaurant, a hotel room, or buying a new car.

Government’s have long facilitated trade via providing security (Feudal Lords providing Sheriffs to hunt down highway robbers) and enforcement of contracts. At some point governments began to think that they could establish (or replace) trust more effectively than did competitive markets by imposing regulations to inform or protect consumers. Standard product information, for example, the contents and their nutritional values on the labels of food products, help consumers decide which product best meets their needs. Licensing practitioners of various professions—from cab drivers to physicians—became a widespread form of vetting minimum professional competence or standards. In many if not most professions the regulators tended to be captured by the industry they regulated resulting in protection of the practitioners from competition rather than protection of the customers from poorly trained service providers. Medical doctors fought, often successfully for a long time, competition from providers of alternative medical services (chiropractors, acupuncturists, Internet medical service providers, etc.). Licensed taxi companies obtained exclusive rights to serve specific areas and limit their number in order to boost fares in the name of consumer protection.

The medallions required to operate a taxi in New York City are a famous example of a government created monopoly. The following is from the website of the New York City Taxi and Limousine Commission announcing the auction of 89 medallions on May 2, 2008:

New York City Taxi and Limousine Commission (TLC) Commissioner/Chairman Matthew W. Daus has determined that the Minimum Upset (Bid) Price for each of the 43 available lots of two Minifleet (Corporate) Accessible Medallions that will be auctioned on May 2, 2008 will be $700,000. One Individual Accessible Medallion will likewise be available for bid on that date at a Minimum Upset Price, also set by the Chairman, of $189.000, as will two Individual Alternative-Fuel Medallions at a Minimum Upset Price of $300,000.

The Minimum Upset Price is the minimum amount that will be considered valid. The highest valid bids will be named apparent winners.

Such systems of licensing are meant to insure minimum quality of service (both of the car and of the driver). They are meant to establish trust on the part of customers that when a yellow car pulls up, he will not over charge or rape or rob you. These issues are explored in an interesting paper by Christopher Koopman, Matthew Mitchell, and Adam Thierer: “The Sharing Economy and Consumer Protection Regulation: The Case for Policy Change” Mercatus Center, George Mason University

Click to access Koopman-Sharing-Economy.pdf

“Under the traditional ‘public interest theory’ of regulation, regulation is sought to protect consumers from externalities, inadequate competition, price gouging, asymmetric information, unequal bargaining power, and a host of other perceived ‘market failures’.”

Unfortunately, as economists Mark Steckbeck and Peter J. Boettke observe, regulators often ignore ‘the dynamism of markets and the incentive mechanism driving entrepreneurs to discover ways to ameliorate problems associated with market exchange.’” page 6

“Writing in 1920, Arthur C. Pigou cautioned against contrasting ‘the imperfect adjustments of unfettered private enterprise with the best adjustment that economists in their studies can imagine.’ Instead, he noted that in the real world, policymakers may not implement policy as scholars think they ought to: For we cannot expect that any public authority will attain, or will even whole-heartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressure and to personal corrup¬tion by private interest. A loud-voiced part of their constituents, if organised for votes, may easily outweigh the whole.” Page 7

“Because rent-seeking is used to contrive exclusive privileges rather than to create value for customers, these efforts cost society forgone productive opportunities. To compound the problem, rent-seeking changes the way people allocate their talents. Rather than keeping a focus on devising new and innovative ways to create value, entrepreneurs turn their efforts toward devising new ways to acquire these regulatory privileges.” Page 10

So how has NYC’s medallion system worked? Ask a New Yorker. In 2006 there were only 12,799 licensed taxicabs in New York City, compared with 21,000 in 1931, when the city had about 1 million fewer inhabitants.

Koopman, et al, explore the implication of the choice (or mix) between market and government regulation for the area of what they call the “sharing economy.” The trading facilitated by Craigslist, Uber, and Airbnb has existed for centuries, but the use of the Internet by some clever entrepreneurs has transformed the business model.

Most of us in years past have taken advantage of a limousine driver between official jobs passing by slowly and offering a relatively cheap fare. Unauthorized drivers hang around airports and Theaters to pick up extra fares illegally. My favorite experiences were in the former Soviet Union in the first few years after its collapse. Most everyone wanted free markets but didn’t have a very clear idea how they were organized. We came to realize that virtually any car on the road was potentially an informal taxi. We could flag down almost any car and if we could communicate where we wanted to go and agree on a price, we had a ride. Uber has provided a high tech means of connecting such drivers with customers. “The company says it is not a transport or taxi service; it is a technology company whose product is not car rides but the phone application used to arrange them. Its UberX service relies on partnerships with thousands of independent contractors who use their own vehicles. Drivers find passengers using Uber’s phone app and then remit a percentage of the fare to the company.” uber-pressures-regulators-by-mobilizing-riders-and-hiring-vast-lobbying-network/2014/12/13/Washington Post

But what about trust? Those of you who have used Uber have probably experienced, as I have, an easier, faster, more polite, and cheaper ride. But how can we trust that the car will be safe and the driver competent and honest? The success of Uber and other web based services rests on their being able to satisfy these concerns. Will the dictates of market success do a better job than government regulation in satisfying these customer concerns?

“Reputation systems are arguably the unsung heroes of the social web. In some form or another, they are an integral part of most of today’s social web applications.” Chrysanthos Dellarocas, “Designing Reputation Systems for the Social Web,” in The Reputation Society: How Online Opinions Are Reshaping the Offline World, ed. Hassan Masum and Mark Tovey (Cambridge, MA: MIT Press, 2011), 3. To gain and keep the public’s trust, Uber has established internal standards for the private drivers and their cars that it signs up to connect with customers through Uber. The failure of any driver or car to live up to those standards (and they have several car types) hurts Uber’s reputation and thus its bottom line. It has a strong incentive to get it right. Uber also uses easy to provide customer reviews of each ride experience as do a growing number of web based trading serves.

But what about dishonest reviewers, perhaps working for a competitor (the world is a harsh and cynical place)? The presence of dishonest people lowers the standard of living in any society whatever its system of government or economy. Societies heavily dominated by honest people, are more prosperous. But some people will be dishonest and we need ways to deal with them and minimize their damage. Waze, the very popular GPS based car destination app, provides up to the minute information on traffic conditions on your route provided by users on the spot. It harnesses the desire of most people to be helpful. The information provided by users (their reviews, if you will) is rated for accuracy by other users (in the form of an easily delivered “thank you”). I have no doubt that services traded via the Internet will continue to explore better ways of establishing trust in the products and services traded there.

The recent alleged rape of a young woman in New Delhi, India by an Uber driver raises this issue in a dramatic way that the rape of a young woman in Fort Lauderdale two months earlier by a Yellow cab driver didn’t seem to. A foolish, careless comment by an Uber official about how he might use travel information on Uber’s customers, also raises questions about the safety and uses of such information. Are these problems better handled by regulation or by market competition?

The answer in my view is that the government should provide the foundation for trade provided by contract law and its enforcement, and minimal requirements that are generally applicable (a driver’s license and appropriate insurance). But the Uber’s of the world should be required by free competition to prove themselves and their service to the satisfaction of their potential customers rather than to regulators. If you want to know the standards of safety Uber has set for its self as it seeks customers, check its website, for example: http://blog.uber.com/driverscreening.