Courts and regulatory agencies as markets

For most of us every day folk, courts are places where we want a judgment that says, “We are right.” But courts are also “rules markets.” Rules markets are where frameworks for how we engage each other going forward are produced and depending on how broad the issue is defined, those rules may be forcibly consumed by others who were not a party to the conflict that brought the original rule producers together in the first place.

The recent U.S. Supreme Court ruling in Masterpiece Cakeshop v. Colorado Civil Rights Commission provides an example. While the issue in that case focused on whether Colorado’s equal rights agency applied its civil rights rules in a neutral manner where civil rights violations were alleged, some Americans questioned why the consequences of that case should spill outside of Colorado and impact citizens and businesses in other states. The short answer is that externalities, whether positive or negative, from a court ruling enter society because of the structure of our legal system. The legal structure is centralized and the ripple effect of legal decisions spreads out to more citizens the higher up the legal rule production hierarchy you go. The interpretation as to what the rule should be for governing a relationship or conflict becomes the “law of the land” where the highest court becomes the market for producing legal rules.

I heard some of this concern from every day folk during a CSPAN session the day after the Masterpiece Cakeshop ruling. “Why did this conflict have to escalate?” some asked. It escalated because a centralized legal system provides opportunities for individuals occupying a minority class to extend its views on how society should work to the rest of America by accessing and participating in the rule making process.

Conflict is a high cost for entering this “centralized rules” market, but a higher price is paid by the rest of society where we are subjected to rules produced by a small number of participants seeking to produce rules that favor their behavior and the detriment of limiting or modifying everyone else’s.

In my opinion, the limitation of the behavior of others as a result of rules produced in a centralized market is a negative externality or negative benefit. No matter the noble intent of the rule producers, where the rule produced impacts my behavior, it impacts my liberty.

One way to limit the negative externalities of centralized rulemaking is for parties to enter into voluntary agreements, agreements limited to the parties resolving the immediate conflict. It would be a lot cheaper for parties in actual conflict or anticipating conflict if the rules were produced as a result of voluntary engagement designed to head off conflict versus the other way around. It would also be less expensive for members of society who are not direct parties to the conflict since they would not be subject to rules that they did not produce.

Political intelligence that matters to markets

A business or an investment fund is simply a betting pool for people who have coin or credit. The bet represents all the information that the investor has acquired over some period and the dollar amount of her bet represents the minimum cost of the information acquired. This means that the actual cost of creating the investment fund, asset, or business means nothing to the investor.

All that matters is an outcome that recovers her cost for accumulating information that helps her determine whether her preferred outcome-a return of and on her capital-will be realized. Information on sunk costs mean nothing to her (much to the chagrin of the run-of-the-mill economist).

For information traders entering information markets what should matter is providing information that addresses existential threats to profits and revenues. The information trader must have awareness of the outcome the investor is interested in.

Investors watching political markets are interested in whether a decision poses an existential threat to a firm or a firm’s profits or revenues. Existential threats posed by government come in the form of a revocation of a license, denial of access to natural resources, or denial of access to financial capital. The investor wants to know the likelihood of the occurrence of these events.

In hind sight this is why the Trump Effect became vacuous. The expectations surrounding the Trump administration’s impact on investment never took into account government’s prime operational mandate which is to exploit the natural environment of a physical area. It does this by managing the extraction of resources from that physical area. In the case of American government, it has determined that extraction would best be carried out by a private sector driven by a profit motive.

Businesses provide efficient methods for extracting resources and converting the resources into “taxable events” i.e. goods and services for sale. Businesses convert human resources into taxable events by employing labor thus making humans available for taxation by government.

The subsequent uncertainty experienced by the financial markets post Mr Trump’s inauguration was the result of investors listening to the “emotional marketing” of the 2016 campaign. Rhetoric regarding bringing back manufacturing jobs into a political economy that favors information as its primary resource or building more bridges to nowhere via infrastructure knowing that the multiplier effect is limited by a project’s termination date was baseless but pulled on enough heartstrings of investors that they forgot or were forced to overlook even further government’s prime mission.

Also, the financial markets can’t risk forgetting that the U.S. is a federal system and states have to be considered when assessing the American economy. States have to be on board with any policies that address contraction or expansion of licensing or access to natural resources. For example, it is one thing for the federal government to increase access to radio frequencies by mobile telephone companies. But if the states do not put in place rights-of-way policies that allow mobile phone companies to deploy tower facilities, then having a license to transmit wireless signals is meaningless and the firm faces a scenario of less revenues.

When discerning what information matters, the focus should be on political information that threatens the continued existence of a firm or threats to its revenues and profits. Investors need to discern between the emotional or campaign marketing noise and substantive political intelligence that addresses a firm’s existence.