Lack of access to financial services is a problem for many; worldwide, one in four adults does not have a checking or savings account. Financial institutions with active, low-balance accounts often face considerable challenges compared to larger financial institutions (Black, 1979 ). Adding a fixed regulatory cost of servicing accounts can affect relative costs and thus generate an Alchian-Allen effect (the third law of demand) that leads financial institutions to quit servicing these low-balance accounts. Regulators may prefer this outcome as it is easier to regulate and extract rents from large financial institutions. Data indicates more underbanking in countries with lower income and more regulation. This article looks at the barriers traditional financial intermediaries often face in less developed nations and then looks at how fintech and cryptocurrencies enable bank alternatives to lower barriers to entry and expand financial inclusion.

In Rules for a Flat World, Hadfield argues that although the world is becoming increasingly connected and faster paced due to leaps in technological innovation, the prevailing legal systems — established by governments and run almost exclusively by lawyers — have not kept pace. They are increasingly proving ill-suited for and counterproductive to the evolving economic environment. Although coming from a different perspective, Hadfield’s encouragement of market-based solutions is highly consonant with those of classical liberals who advocate privatizing all government.

How are markets possible under conditions of anonymity and lack of repeat dealing? Many scholars consider the problem of fraud as one that must be dealt with by law, but electronic commerce firms treat the problem of online fraud as a business problem, a problem of risk management. This article documents how merchants and financial intermediaries treat fraud as a cost that can be quantified and then minimized. Just as entrepreneurs earn profits by helping meet a previously unmet market demand, entrepreneurs earn profits by helping reduce what could have been considered an unsolved legal problem. Firms have profited by using predictive analytics and various if-then algorithms to help mitigate what might otherwise be an intractable problem and help vastly expand the scope of commerce.

F.A. Hayek focused on many traditional economic questions, and also made important contributions to law and economics. His framework differed from Kaldor Hicks efficiency and the wealth maximization norm common among neoclassical law and economics scholars. But he talked about how the common law evolves and helps shape economic outcomes. Underlying this approach was Hayek’s conviction that the essence of law is not created by the state, but rather preexists in the conventions and understandings within a community. Hayek argued that the role of the judge in a common-law system is to discover the law in the imminent consensus of norms and expectations. Hayek’s work has many implications for positive analysis and normative discussions of what judges should or should not do. To Hayek, the primary purpose of the law is not a wealth maximization problem, but to provide a stable institutional framework in a dynamic world that enables individuals to plan and coordinate.

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.

Even where governments are pervasive, so too is private governance, and it works behind the scenes to make advanced markets possible. Whether people notice or not, market exchange is governed by multiple layers of private governance. Order can be attributed to a combination of trust, reciprocity, reputation, due diligence, bonding, risk management, and various business relationships for profit. Most people are not aware that a potential problem even existed, whereas others simply misattribute the solution to government. Private governance works in simple markets with small numbers of homogeneous traders who have low discount rates, but it also works in large groups, among heterogeneous traders, with nonrepeat interaction, and for tremendously complex deals. Private governance facilitates cooperation between billions of people within and across political boundaries.

In addition to helping facilitate exchange, private governance protects physical property rights. During the early days of the Gold Rush, San Francisco lacked a public police force, and even after one was created in 1850, it was considered corrupt and as bad as the criminals. Rather than do nothing, merchants created a system of private police. San Francisco had 1,000 private police by 1900 and still has a network of independent firms now known as the Patrol Special Police. Other jurisdictions, including North Carolina, also allow fully deputized private police, and Duke University, for example, has 68 police officers, a force larger than 90 percent of American police departments. Similar to the bundling of software and hardware, private policing is often bundled with real estate and priced into rent or associated consumer goods. The provider of police thus has an incentive to provide police that treat customers well.

Mechanisms of private governance can align incentives and eliminate most of the need for third-party adjudication, but when trading partners consider third-party adjudication beneficial, they can designate private parties for that role. The precursors to modern commercial arbitration and mediation were used to settle advanced commercial disputes at Lloyd’s of London (formerly Lloyd’s Coffeehouse) two centuries ago. Because participants bear the costs and benefits of different types of external review, they agree only to dispute-resolution methods that are ex ante beneficial to both. In contrast to a coercively imposed dispute “resolution” system, parties that both agree to arbitrate will select an arbitration system whose rules and procedures they consider fair.

The automobile industry's high costs of entry, economies of scale, and network effects from distribution, fueling, and service lead many to conclude that new entrants have no chance. Tesla Motors has overcome many barriers to pioneer electric cars. Starting with partnerships and a minimum viable product, Tesla is working to innovate and scale up. Tesla now produces a top-selling luxury car and has a market capitalization twice that of Fiat Chrysler and half that of General Motors or Ford. Tesla has shown that a startup can enter and disrupt the status quo in one of the most established industries.

Public officials have blamed Wall Street and its complex financial products for causing the 2008 economic downturn. This article addresses three popular claims saying that complex financial markets are at fault and need more regulation. It argues that even in the midst of a major economic downturn, the much-maligned mortgage-backed securities, collateralized debt obligations, credit default swaps, and unregistered hedge funds functioned almost exactly as designed. When macroeconomic conditions worsened, firms and investors that were paid to assume certain risks had to assume them. Those that opted for safer investment vehicles with more levels of private protection faced fewer problems. Although many investment vehicles lost money, one must differentiate between problems that manifested themselves in markets and problems with the market itself. Even though government policies caused many of the problems, public officials always have an incentive to point the finger at Wall Street and to argue for more regulations when their policies negatively affect markets.