“Credit is like a looking-glass, which when once sullied by a breath may be wiped clear again, but if once cracked can never be repaired.”
—Sir Walter Scott
Andrew J. Galambos, whose lectures are the inspiration for this book and related blog, taught that credit is vital to much more than commerce. Credit is essential to insurance and a non-coercive system of justice, both of which underpin the harmonious functioning of the natural republic.
A person or entity’s credit is determined by a variety of factors, including:
- Trustworthiness and reliability in fulfilling promises
- Reputation for competence in providing goods and services
- Acknowledgment of an accomplishment
Conduct determines credit. Those who honor their obligations consistently have good credit. Those who dishonor their obligations have bad credit.
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.
In the renaissance era, as commerce developed and flourished, merchants wanted to know whose credit was good and whose was not. Boycott—the refusal to deal with persons with a reputation for dishonesty—developed as a means to prevent loss and deter dishonest behavior. Boycott operates without coercive enforcement. Rather, boycott is defensive in nature, although it is also a powerful incentive for acceptable behavior.
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
All exchanges involve some degree of trust in the form of a subjective determination that what is to be received in an exchange has value comparable to what is being transferred to another in the exchange. According to geographer and anthropologist Jared Diamond, “the archaeological record demonstrates that our Ice Age ancestors were already trading tens of thousands of years ago.”1
Professor Diamond has examined what he calls “traditional societies” existing at present (in the 20th and 21st centuries), which he defines as “a few dozen to a few thousand people, subsisting by hunting-gathering or by farming or herding . . .” among whom barter trades are made on credit. Because such contemporary traditional societies have not yet developed money to be used as a medium of exchange, it is common to transfer an object in trade without simultaneously getting anything of value in return, trusting that the recipient will provide something of comparable value at a future time.2
A. P. Giannini (1870-1949), founder of the Bank of America, was legendary for judging loan applicants by their character, not by their wealth. Giannini founded his bank in San Francisco in 1904 when he observed an opportunity to serve the hardworking immigrants other banks were turning away. The 1906 San Francisco earthquake and fires leveled much of the city. In the face of widespread devastation, Giannini set up a temporary bank office, operating from a plank across two barrels in the street, collecting deposits, making loans, and proclaiming that San Francisco would rise from the ashes. Giannini made loans on a handshake to those interested in rebuilding. Years later, he would recount that every loan was repaid.3
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 1912.4
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.5
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.
Trust underlies all exchanges—trust by both parties that they will receive value for what they are transferring in an exchange. In the several decades beginning in the 1980s, people in Asian nations accumulated large amounts in U.S. dollars in trade with America. Ultimately, those dollars had to be spent in America, which is what Asians are doing when they buy American real estate and businesses. News media reported in the second decade of the 21st century that Chinese nationals are buying a significant number of golf courses in America and that previously South Korean and Japanese nationals purchased golf courses in America.6
Purchases of American golf courses by Asians are a tribute to the trust Asians have that Americans will respect the foreign buyers’ property rights in valuable American real estate. Foreign buyers of real estate in America must have trust of that kind in order to justify buying American real estate, because they cannot take the real estate back to their own countries.
Reputation, accreditation, certification and ratings
For corporate bonds, ratings of investment quality are available from bond rating companies. However, for equity securities (shares of corporate stock) there is no formal rating or accreditation for excellence in business management. Profitable business results are the informal measure of accreditation of a company. For companies with shares traded in the stock market, over the long term the market itself functions as a rating system.
For example, in 1990, Berkshire Hathaway, Inc., the investment vehicle of Warren Buffett, America’s most highly-respected investor, made a large commitment to shares of the San Francisco based bank, Wells Fargo & Co. At the time shares of Wells Fargo were in process of falling nearly 40% in market price over four months because of concerns that the company was exposed to large loan losses in California real estate.
In explaining this seemingly risky commitment Mr. Buffett said: “The banking business is no favorite of ours. Mistakes that involve only a small portion of assets can destroy a major portion of equity. And managerial mistakes have been the rule rather than the exception at many major banks. However, Wells Fargo is a superbly-managed, high-return banking operation. With Wells Fargo, we think we have obtained the best managers in the business.”7 Buffett’s investment decision was validated as it turned out that Wells Fargo’s loan portfolio was safe, after all, and the market price of the bank’s shares soon went to new high levels.
Formal accreditation and certification are well-established and well accepted in the case of colleges, universities, and in professions, for example medicine, dentistry, nursing, law, and accounting. For the most part, such accreditation is a market function, not a function of a political state.
Academic institutions are accredited by organizations of their peers. Individual professionals are accredited by peer groups. For example medical specialists are “board certified” in their specialty. An internal medicine physician may be certified by the American Board of Internal Medicine,8 one of twenty-four medical specialty certification boards (committees) that are part of the American Board of Medical Specialties.9
Word of mouth recommendation for businesses and professions is a common form of recognition of a reputation for quality goods and services. The word-of-mouth concept has been expanded by internet-based ratings, as will be explained further below.
Product ratings have long been available from publications such as Consumer Reports, Underwriters Laboratories, Good Housekeeping magazine and specialized periodicals and rating services for a variety of products such as automobiles, consumer electronics, and computers. Underwriters Laboratories (UL) pioneered product rating service. UL was established in 1894. It operates globally in 104 countries. UL is one of several companies approved by the Federal Occupational Safety and Health Administration to do safety testing.
Information that may seem surprising or even dubious can be validated or falsified by testing for credibility. Before the internet era checking for credibility required use of library facilities to find information relating to credibility of an assertion of a factual nature. With the advent of the internet, checking credibility can be done much more quickly than before. There are now internet websites that specialize in fact checking of reports that have received widespread attention. For example Snopes.com describes its service as a “. . . reference source for urban legends, folklore, myths, rumors, and misinformation.”10
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. In the chapter on Justice, CTLR will explain how the state in its attempt to provide justice actually commits great injustices; injustices that are more damaging to human society than the conduct the state seeks to prevent, deter, or remedy through its laws, police, prosecutors, judges, and prisons.
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.
In addition, insurance plays an important part in justice, in tandem with credit. The subject of insurance in accomplishing justice will be examined in some detail in later chapters on insurance, justice, and defense.
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. 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
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 suspicion was aroused. He went to the seller’s place of business and said to the seller that he wanted to return the computer and get a refund of the purchase price because IBM said the computer was never sold by them. When he confronted the seller the man 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.
This anecdote illustrates a powerful tool of non-coercive, market justice that is already in operation on the internet: That is the denial of participation in electronic commerce to those who use it for criminal or improper activities.
Another form of market justice has developed to deny spammers access to computer servers and internet service providers for the purpose of distributing unwanted messages. For anyone who sends out large numbers of group email to be identified as a spammer is like being consigned to the internet equivalent of a black hole in the cosmos. 15
The power of a rating
As far back as the era when most humans lived in tribes and small villages, humans made decisions about whether to trade with others based on reputation. A trader from another tribe, or a merchant in a village, with a reputation for honesty and integrity would find an ample number of other people to trade with, while a trader or merchant known to be untrustworthy would be shunned.
In the digital age of the 21st century, humans continue to make decisions about trade and commerce based on reputation. However, as Rachel Botsman explains, “The difference today is that network technologies are digitally enabling . . . interactions and exchanges [based on trust to take place] between total strangers.” 16
Ms. Botsman is the author of a book entitled What’s Mine is Yours: The Rise of Collaborative Consumption (2010). In her book Ms. Botsman explores the phenomenon of sharing, bartering, lending, trading, renting, gifting, and swapping between strangers. From enormous marketplaces such as Amazon, eBay and craigslist to emerging sectors such as peer-to-peer lending (Zopa) and car sharing (Zipcar), people are redefining how goods and services are exchanged, valued, and created—in areas as diverse as finance and travel, agriculture and technology, education and retail merchandising.
Anyone who has made online purchases has experienced the possibility of making an assessment of the reputation of an individual, organization, or product via customer ratings. Amazon, Barnes and Noble and other online booksellers offer books from independent booksellers, and provide a customer satisfaction rating.
On the internet there are customer ratings for businesses ranging from auto repair shops to florists, restaurants, and far more. There may be anywhere from just a few to one hundred or more customer ratings for businesses. It is up to customers to take the initiative to post a rating. Therefore, not surprisingly, many of the ratings are from customers who are very pleased or very dissatisfied, as apparently they have the most motivation to write and post a rating. This suggests that one ought to take extremely negative ratings with a grain of salt as they might have been authored by a competitor. This is especially so if the preponderance of customer ratings are favorable.
There are specialized ratings services for professional service providers, such as physicians and dentists.
In the early 21st century, 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.
A negative experience with Airbnb demonstrates the risk, and the growing pains involved in doing business with strangers on the internet. In the summer of 2011, there was an incident in San Francisco where a host’s apartment was ransacked by someone who rented the apartment through Airbnb. The guest took the host’s passport, cash, credit card and her grandmother’s jewelry hidden inside a closet, as wells as a camera, iPod, laptop, and an external backup drive filled with photos and journals. The host was also worried about identity theft because she suspected that her birth certificate and social security card were photocopied.
Airbnb CEO Brian Chesky stated subsequently, “as a response to this incident, we have begun development on improvements to increase the safety of Airbnb, including:
- Doubling the size of our customer support staff
- Creating a dedicated Trust & Safety department
- Creating a Host Education Center where hosts can find safety tips
- Designing enhanced tools to verify user profiles
- Facilitating richer communication between guests and hosts before booking, including experimentation with VOIP and video chat
- Offering insurance options to hosts
- Private messaging that lets users learn about each other prior to booking, without revealing private information
- Reservation system that allows hosts to accept or decline guests, giving them complete control over who books their space
- Transaction-based reviews that help users build trusted online reputations
- Over 50 million Social Connections that show mutual friends through users’ Facebook social graph
- Secure and reliable payment system that holds payment for 24 hours and facilitates security deposits
- Algorithms that identify suspicious behavior
- Flagging capabilities on every user profile, property listing, and message thread
- Verified, professional photographs of Airbnb listings” 18
These safety procedures focused on making more information available to hosts who are considering a possible guest. The risk to Airbnb hosts illustrates the need for insurance against damage caused by guests. The cost of that insurance is included in the charges to a guest, rather than requiring the host to buy insurance at his own expense.
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.
Airbnb no doubt will henceforth warn hosts not to leave valuables in their residence when renting through Airbnb, just as hotels warn guests not to leave valuables unattended in their rooms, and offer safekeeping for valuables in a hotel safe, either in the guest rooms or at the front desk.
Uber and Lyft are two companies that offer private rideshare services. And, like Airbnb, customers and drivers using these platforms can determine in advance of a ride request whether the other party seems trustworthy via a rating. Lyft and Uber have a variety of checks to ensure the safety of drivers and guests alike.
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 2019, 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.
Credit scores have become widely used as measures of someone’s past history of paying obligations in full and on time. However, credit scores measure only payment history. Management of credit and reputation in the 21st century has become more comprehensive. For example, on Stack Overflow (a question and answer website for computer programmers) a user’s reputation is based on the programmer’s level of competence as demonstrated by an ability to provide helpful answers to programing questions. Rachel Botsman explains:
“These multifaceted sources of reputation will not be a single algorithm: we will be able to perform a Google- or Facebook-like search and see a picture of a person’s behavior in many different contexts, over a length of time. Slivers of data that have until now lived in secluded isolation online will be available in one place. Answers on Quora, reviews on TripAdvisor, comments on Amazon, feedback on Airbnb, videos posted on YouTube, social groups joined, or presentations on SlideShare; as well as a history and real-time stream of who has trusted you, when, where and why. The whole package will come together in your personal reputation dashboard, painting a comprehensive, definitive picture of your intentions, capabilities and values. . .
“By building a system based on ‘reputation API,’ 19 a combination of a user’s activity, ratings and reviews across sites is compiled. [A company named] Legit is working to build a service that gives users a score from zero to 100. In trying to create a universal metric for a person’s trustworthiness, they are trying to ‘become the credit system of the sharing economy,’ says Jeremy Barton, the 27-year-old San Francisco-based cofounder of Legit.” 20
Portents for the future
CTLR posits that in the fullness of time federal agencies will become defunct. Why? Because the U.S. federal state is operating by far the largest Ponzi scheme ever created and is for the time being getting away with it by assuming, wrongly, that future generations of Americans will be both willing and able to pay the ultimate liabilities of the improvident promises made by the U.S. If these liabilities cannot be paid by future generations, the U.S. is heading for the largest sovereign bankruptcy in world history.
Fortunately, 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.
- Quoted from Diamond’s book The World Until Yesterday: What Can We Learn from Traditional Societies? (2012), page 60. Jared Diamond is a professor of geography at the University of California, Los Angeles. However, his four books are more anthropological in nature than geographical.
- See Diamond, Jared, The World Until Yesterday (2012), page 6 defining “traditional societies,” and page 61 describing barter transactions founded on trust in a delayed exchange, page 61.
- See Wikipedia, Amadeo Giannini, http://en.wikipedia.org/wiki/Amadeo_Giannini
- The “Pujo Committee” of the House of Representatives, http://en.wikipedia.org/wiki/Pujo_Committee
- Quoted from Strouse, Jean, Morgan: American Financier (1999), p. 13
- See, e.g., “Chinese investors buying up U.S. golf courses,” by E. Scott Reckard, Los Angeles Times, June 15, 2014, http://www.latimes.com/business/la-fi-chinese-golf-investors-20140615-story.html#page=1
- Berkshire Hathaway, Inc., Chairman’s Letter, 1990 Annual Report.
- Quoted from the home page at http://www.snopes.com/
- Jack Ringwalt was the founder of National Indemnity, the first of a dozen insurance companies acquired by Warren Buffett’s Berkshire Hathaway. The quotation of Jack Ringwalt is from the best biography of Warren Buffett, Roger Lowenstein’s Buffett: the Making of an American Capitalist (1995), page 134.
- Someone who frequently makes parachute jumps out of an airplane
- The terms spam and spammer mean and include electronic junk mail and mass distribution of unsolicited and unwanted email messages.
- Quoted from “Welcome to the new reputation economy,” by Rachel Botsman, Wired, August 20, 2012, http://www.wired.co.uk/magazine/archive/2012/09/features/welcome-to-the-new-reputation-economy/page/2
- Stone, Brad, The Everything Store: Jeff Bezos and the Age of Amazon (2013)
- Quoted from “On Safety: A Word From Airbnb,” by Brian Chesky, July 27, 2011, Techcrunch.com, http://techcrunch.com/2011/07/27/on-safety-a-word-from-airbnb/
- The acronym API derives from the computer programming term “application programming interface”
- Quoted from “Welcome to the new reputation economy,” by Rachel Botsman, Wired.co.uk, August 20, 2012, http://www.wired.co.uk/magazine/archive/2012/09/features/welcome-to-the-new-reputation-economy?page=all
- One such web service in operation as of the first decade of the 21st century is The Rip-off Report, http://www.ripoffreport.com/
- In chapters eleven, eighteen, and twenty-one, entitled “Political Democracy in America,” “Kleptocracy,” and “Money,”