The Fable of the Leeches

Or: The Single Most Unrealistic Positive Assumption of Most Economists

Originally published in Review of Austrian Economics

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.

To speak with a scholar or learn more on this topic, visit our contact page.