Credit is based on trust as represented by confidence in the honesty and trustworthiness of another. Credit in the form of trust developed spontaneously among humans engaged in trading with each other from the earliest times in recorded history and even earlier according to the anthropological and archaeological record of humanity.
Trading circa 1521 Cebu, Philippines
The advent of electronic, digital computers has brought about an expansion of the credit mechanism. In the early 21st century buyers and sellers can make informed decisions about whether to deal with each other based on user and vendor ratings that enable buyers, sellers, lenders, and borrowers the world over to safely trust people they have never met.
This chapter highlights the emergence of services that realize Galambos’ ideas of an enhanced credit mechanism that serves and protects people. There are now companies operating and flourishing by using credit to protect people in their persons and property. These companies emerged as a spontaneous human development of digital electronic communications technology. Such companies are flourishing without involvement of the state and in some cases in spite of obstacles raised by the state.
Trust is the foundation of credit
J.P. Morgan (1837-1913) was the most prominent, powerful and successful American banker of his era. The following colloquy occurred between Morgan and legal counsel for a committee of the U.S. Congress at a hearing in December 1912. 5
John Pierpont Morgan I (1837-1913)
Legal counsel asked did not the big New York banks issue loans to certain men and institutions “because it is believed that they have the money back of them?”
A No sir. It is because people believe in the man.
Q And he might not be worth anything?
A He might not have anything. I have known a man to come into my office, and I have given him a check for a million dollars when I knew that they [sic] had not a cent in the world.
Q Is not commercial credit based primarily upon money or property?
A No sir, the first thing is character.
Q Before money or property?
A Before money or anything else. Money cannot buy it . . . Because a man I do not trust could not get money from me on all the bonds in Christendom. 6
As indicated by Morgan’s statement, trustworthiness is more than honesty. Trustworthiness includes reliability and integrity. A person with good character in dealings with others always acts honestly and responsibly, without any compulsion to do so. Integrity is exemplified by the occasional anecdotal news reports about individuals who pay off debts that have been legally discharged in an involuntary bankruptcy, or find a large sum of unattended cash and turn it over to the police if they cannot find the true owner.
Credit and Justice
The principal justification for what is commonly called government—which in this book is called the political state—is to protect property, including life itself. However, the state has failed to protect property. To the contrary, the political state is the foremost source of attacks on property.
Capitalism: the Liberal Revolution (CTLR) approaches the subject of justice via Andrew Galambos’ definition of justice and related definitions, as follows.
- Justice is the absence of injustice.
- Injustice is any crime for which there is no recourse.
- Crime is an act of coercion in the form of a successful, intentional interference with the property of another.
Galambos posited that an enhanced credit mechanism together with insurance would offer individuals and societies a significant degree of protection without the coercion of the state.
Civil, non-state justice has been operating for a long time already, without state involvement. For example, in a very small town, scoundrels, crooks and cheats are known to everyone. Beyond calling the sheriff when a crime is committed or threatened, there is the pressure of social disapproval, boycott and even ostracism for persons whose conduct in attacking property is incorrigible.
In the early 21st century, for purposes of communication, planet earth has become a virtual global village, where misconduct can be advertised far and wide. Imagine a large scale and growing usage of the remedy for contract violation used by a credit card issuer. The delinquent card holder is cut off from credit, not only with the one issuer, but perhaps with others. Denial of credit will become an instrument of justice.
Defense of reputation
Andrew Galambos foresaw the possibility of unjust damage to a person’s reputation, and suggested means for remedying such damage, again without any coercion. If reputation has been unfairly damaged there could be recourse of the injured party to a remedy for unjust damage to reputation through the institutions of insurance and private dispute resolution, subjects to be covered in a separate chapter of CTLR on justice. In the early 21st century specialized companies began to offer reputation protection service. For example, Reputation.com provides global online reputation products and services to users in more than 100 countries, helping customers protect their reputation and privacy. 14
Market justice: the electronic marketplace as an implement of non-coercive justice
A user requests a rider on the Uber app. Drivers and riders with poor ratings can ultimately blocked from the platform.
Andrew Galambos used the term “market justice” to describe the non-coercive process that exerts discipline in the marketplace to deter and even rectify violations of property rights whether by criminal acts or contractual default. An example of market justice is provided by the following anecdote related to the author of this website from the personal experience of an acquaintance.
A man named Tom searched on Amazon.com for a bargain on an IBM laptop computer. He found what he was looking for offered in his community, drove to the address provided by the seller and bought what appeared to be a new IBM laptop computer at a bargain price. Back at home Tom called IBM to check on the warranty. IBM said their records showed that the computer with the serial number Tom provided had been manufactured by IBM but never sold.
Tom’s returned to the seller’s place of business and said to the seller that he wanted to return the computer and get a refund since IBM indicated the computer was never sold by them. The seller appeared visibly shaken, even terrified. He said to Tom, “I will take it back and refund the entire amount you paid, but please don’t tell Amazon about this.”
From the seller’s behavior Tom decided that the seller knew he was dealing in stolen property and feared that he would be barred from future sales on Amazon, or worse, in case Amazon reported this incident to the police.
The power of a rating
In our digital age, reputation has become even more important as people use ratings not just to make small decisions, like which bookseller to patronize, but much bigger decisions as well. In the case of Airbnb, where individuals rent out extra bedrooms in their homes and apartments to complete strangers, both parties need to be able to make informed decisions about the reputation of the other via an online rating.
After reports of theft perpetrated by Airbnb guests, CEO Brian Chesky instituted a variety of measures to increase the safety of Airbnb. These measures included creating a dedicated Trust & Safety department, designing enhanced tools to verify user profiles, algorithms that identify suspicious behavior, and many more.
For those skeptical of the ability of proprietary services like Airbnb to protect their customers from each other, consider the following questions.
- When has a political state ever responded to crimes against persons and property by making changes that improve safety? To the contrary, the political state response is to enact more criminal laws and to increase the punishment under existing criminal laws.
- Does the political state ever partner with an insurance company to provide reimbursement for damages related to the failure of state and local police to stop crime?
- Has a political state any proprietary risk in performing property protection services? That is, does it cost the state anything in way of recompense to people injured by crime, other than municipal liability for criminal activities of police officers themselves?
- What is the remedy of the public for the failure of the police to protect people from crime? CTLR posits that the only remedy is for people to look for proprietary property protection services from companies that will be responsible for failure to perform and that are insured for damages caused by their failure to perform.
Reputation aggregators
In the 21st century the internet and digital computers have spawned what has been termed the “sharing economy” and the “reputation economy.” The next step in the evolution of the reputation economy is the emergence of reputation aggregators, services that aggregate a person’s reputation not just on one platform but across a variety of platforms.
For example, in the early stages of development of the reputation economy, a driver with an excellent rating on Uber could not use that good reputation when renting a room on Airbnb; he or she must start from the beginning and build a new positive reputation on Airbnb.
However, as of 2014, companies such as Connect.me, TrustCloud, TrustRank, Legit, Wonga, WhyTrusted, PeerIndex, Kred, and Klout are developing systems that aggregate reputation data across multiple websites. Wonga, a payday loan company, measures likelihood of paying, and Klout and PeerIndex measure online social influence.
Portents for the future
The digitization of credit and reputation as a tool that enables people to make decisions and connect in a digital world has monumental implications for society. If a site that enables users to trust their lives to complete strangers (e.g., Airbnb or Uber) can operate safely and successfully without state regulation, then market mechanisms could obviate and replace such U.S. federal agencies as the Federal Trade Commission, the Consumer Products Safety Commission, the Food and Drug Administration and the Occupational Safety and Health Administration.
In the 21st century the credit mechanism facilitates international commerce on a scale never before seen. Transporting merchandise by container cargo ship is just one step in commercial transactions that begin with electronic verification of the buyer’s credit.