Grifters, or economic parasites, or rent-seekers, same shit

The Law of Collapse: Why the Informed Steal, the System Fails, and the Crowd Blames Rightly
Joseph Mark Haykov
Independent Scholar
Miami, Florida
joe@hh-research.com

Abstract
This paper identifies and formalizes a fundamental economic law: in any system where a subgroup possesses superior information relative to the broader population, a subset within that subgroup will predictably engage in rent extraction, strategic deception, or other forms of unearned wealth appropriation—collectively termed structural fraud—unless constrained by effective mitigation mechanisms. Such mechanisms include warranties, reputation-based repeated interactions¹, legally enforced transparency, trust-building institutions, and emergent technologies. Crucially, this law does not claim that all systems with information asymmetry inevitably collapse; rather, collapse—defined here as the loss of essential system functions such as enforceable exchange, public trust, or institutional legitimacy—occurs only when mitigation fails to contain opportunistic behavior below a critical threshold. Some degree of rent extraction or opportunism may persist in functioning systems, but systemic breakdown becomes structurally certain only in the absence of effective containment. The paper situates this dynamic within established principal-agent theory and information economics, illustrating its mechanisms and consequences with historical and contemporary evidence. The resulting framework offers a falsifiable, empirically grounded account of why systemic failure and scapegoating are recurrent features of systems with unchecked information asymmetry.

Keywords: information asymmetry, rent extraction, principal-agent problem, systemic collapse, institutional failure, market design, fraud, mitigation mechanisms

JEL Codes: D82 (Asymmetric and Private Information), D73 (Bureaucracy; Administrative Processes in Public Organizations; Corruption), K42 (Illegal Behavior and the Enforcement of Law), P16 (Political Economy), L14 (Transactional Relationships; Contracts and Reputation; Networks)

Introduction

This paper explicitly and structurally defines fraud as the deliberate failure of a counterparty to fully disclose or truthfully represent material information in an exchange, consistent with counterparty risk models² in finance and game theory. This definition encompasses not only legally actionable deception but also lawful, strategically exploitative behaviors that arise under unverifiable information asymmetry.

Under this operational model, fraud is not an anomaly but the default equilibrium outcome in systems characterized by persistent information asymmetry—unless adequate safeguards or mitigation mechanisms are in place. Such mechanisms may include enforceable warranties, reputation systems, legal frameworks, or other institutional constraints that contain opportunistic behavior below a critical threshold.

When safeguards are absent or fail, and opportunistic rent extraction surpasses this threshold, the result is not just inefficiency, but what we refer to as systemic collapse: the loss of essential system functions such as enforceable exchange, public trust, or institutional legitimacy. Importantly, some level of opportunism may persist in functioning systems without leading to collapse; it is only when rent extraction becomes uncontained that breakdown is structurally inevitable.

The resulting collective blame directed at the better-informed subgroup—when systemic extraction and eventual collapse are exposed—is therefore not simply a product of scapegoating or misunderstanding, but a predictable structural outcome. This is not because every member of the informed group acted unethically, but because the system guarantees that a guilty subset will emerge, and the majority will be unable to distinguish the innocent from the exploiters.

The presence of consistently ethical agents (“saints”) does not contradict this law; in fact, it highlights the law’s underlying mechanism. In any sufficiently large population, even a small proportion of opportunistic (“non-saint”) agents ensures that uncontained unearned wealth extraction will occur, ultimately driving the system toward breakdown if mitigation fails.

Thus, systemic collapse is not just a possible outcome; it is structurally inevitable in any system where asymmetric information persists and effective mitigation mechanisms fail. Only in the theoretically possible—but empirically unprecedented—case where all principals and agents behave with perfect, consistent ethics (“saints”) can such collapse be avoided.

Asymmetric Information Guarantees Systematic Fraud

This paper does not propose a hypothesis or conjectural scenario. Instead, it formally identifies a structural economic principle: In any transactional system characterized by persistent information asymmetry—where one party holds superior ex ante knowledge regarding the ex post utility or value of exchanged goods or services—rent extraction through fraud or opportunistic behavior is not a matter of chance or degree. It will arise in all systems with unchecked information asymmetry, and only those with effective mitigation mechanisms can avoid this fate. In short, systems either contain opportunism through effective mitigation and remain stable, or fail to do so and collapse becomes structurally inevitable.

The sole theoretical exception arises in the unlikely scenario where the better-informed party consistently abstains from exploiting informational advantages, even in the absence of cost or detection risk. Such ethical behavior—labeled "saintly conduct"—although logically conceivable, remains empirically rare and negligible within large-scale economic systems.

The prevalence of opportunistic behavior under asymmetric information is well established in foundational economic literature. Notable contributions include Akerlof’s (1970) analysis of adverse selection in markets with hidden quality; Spence’s (1973) signaling model that explores costly actions as mechanisms to reduce informational asymmetries; Stiglitz and Weiss’s (1981) elucidation of credit rationing resulting from hidden borrower risks; Williamson’s (1975) identification of opportunism within incomplete contractual arrangements; Holmström’s (1979) exploration of moral hazard within principal-agent dynamics; Becker’s (1968) analysis of rational crime under conditions of low detection probability; Buchanan and Tullock’s (1962) examination of rent-seeking behaviors within public sector contexts; and Jensen and Meckling’s (1976) foundational theory concerning agency costs stemming from informational asymmetry within firms.

BROSUMSI Axiom:
In practice, real-world representative agents—that is, human beings outside idealized models—are best described as Boundedly Rational, Opportunistic, Subjective Utility Maximizers Susceptible to Incentives (BROSUMSI).

This economic law has no documented theoretical or empirical exceptions, owing to two foundational behavioral axioms. First, all real-world BROSUMSI agents are utility maximizers, consistently responding to incentives, typically quantified in monetary or equivalent subjective gains, with deviations occurring infrequently and insignificantly at aggregate scales. Second, ethical conduct or honesty varies significantly both across individuals and within individuals over time, creating heterogeneous distributions of opportunism. Given these axioms, rent extraction through deception or asymmetric exploitation is not an anomaly, but the equilibrium outcome in any large-scale economic system lacking robust mitigation measures against informational asymmetry.

Importantly, this law is fully and explicitly falsifiable: it would be disproven by a single documented instance of a persistently better-informed subgroup operating under durable information asymmetry, without any opportunistic behavior or rent extraction and in the absence of effective mitigation. To date, no such case has ever been found or reported in any economic, institutional, or historical context. The law remains not because it is a tautology, but because it has never been empirically falsified. It stands open to immediate revision should a counterexample arise. Like Arrow’s (1951) impossibility theorem or Becker’s (1968) crime model, it functions as a structural law—empirically validated by repeated observation and the absence of counterexamples.

For example, in George Akerlof's seminal article The Market for Lemons (1970), the mechanism of adverse selection is illustrated in markets where sellers have superior knowledge of product quality. Akerlof shows:

• Quality uncertainty: Buyers offer prices reflecting average expected quality, undervaluing high-quality goods.

• Market exit: Sellers of high-quality goods exit the market.

• Collapse: Over time, only low-quality goods remain, and the market fails.

Akerlof rigorously demonstrated that this is not an isolated failure, but a structural result: adverse selection leads to systematic misallocation and Pareto-inefficient outcomes.

Absent mitigating mechanisms—such as warranties, free-market solutions (e.g., CarFax), reputation systems, or regulatory oversight—the least ethical sellers systematically exploit their informational advantage, extracting unearned wealth. This is not outlier behavior; it is the expected, rational outcome of the incentive structure—and is formally classified as fraud under this paper’s operational model, even if not always recognized as such in legal terms.

U.S. Legal Mechanisms Mitigating Information Asymmetry

The United States has established several robust legal mechanisms specifically designed to counteract rent-seeking and fraud arising from information asymmetry. Key examples include:

1. Fraud and Misrepresentation Laws:
   Under state tort law, knowingly selling defective products while actively misrepresenting or concealing their true flawed condition constitutes actionable fraud. Both intentional misrepresentation and fraudulent omission can result in civil liability and, in certain cases, criminal prosecution.

2. Warranty Laws:
   Most states adhere to the Uniform Commercial Code (UCC), which enforces both express and implied warranties³—particularly the implied warranty of merchantability. Federal protections, such as those provided by the Magnuson-Moss Warranty Act, further strengthen consumer rights when written warranties accompany products.

3. Consumer Protection Statutes:
   All U.S. states implement statutes targeting unfair and deceptive trade practices. Prominent examples include California’s Consumer Legal Remedies Act⁴ and New York’s General Business Law §349⁵, which empower consumers to pursue legal action against deceptive commercial conduct. Available remedies commonly include treble (triple) damages, injunctive relief, and recovery of attorney’s fees.

4. State and Federal Lemon Laws:
   Lemon laws⁶, enacted by states such as Massachusetts, New Jersey, and California, provide recourse for consumers who unknowingly purchase defective vehicles. These laws typically mandate refunds or replacement vehicles following repeated, unsuccessful repair attempts. While originally intended for new vehicles, several states have expanded their lemon laws to cover used vehicles as well.

Collectively, these legal frameworks serve as practical embodiments of the theoretical mechanisms identified by Akerlof for fostering trust and reducing informational asymmetries, thereby mitigating market inefficiencies and forestalling systemic collapse.

While this paper does not assert empirical conclusions about the overall effectiveness of such laws, their intent is clear. For example, insider trading regulations are specifically designed to limit the ability of better-informed agents to extract unearned wealth from less-informed principals—such as ordinary shareholders—by trading on privileged information. In doing so, these regulations aim (at least in theory) to curtail economic rent-seeking behaviors that generate no corresponding increase in overall productivity.

Why Rent-Seeking Under Information Asymmetry Is a Structural Certainty

The outcome described by Akerlof (1970) is not merely a theory or hypothesis, but a mathematical certainty under conditions of asymmetric information. It is a logical consequence of foundational economic and game-theoretic principles, supported by rigorous modeling and extensive empirical observation. Within the framework of information economics, Akerlof’s proof is as structurally sound as is the Pythagorean theorem within Euclidean geometry.

However, while Akerlof’s paper was pioneering and influential, it only scratches the surface of a deeper and more general issue in economic design. His concept of “asymmetric information” is just one instance of a broader systemic problem in mathematical game theory: strategic uncertainty, driven by informational disparity among agents—or, more plainly, unmitigated counterparty risk.

If we set aside fettered (involuntary) exchanges—such as slavery, robbery, theft, and similar acts—and focus solely on free (fully unfettered) trade, the core problem is not just that buyers are uncertain as to whether a car is a lemon. Rather, the deeper issue is that agents (participants in any decentralized game or market) inherently lack reliable ex ante knowledge about whether their counterparties will honor the terms of a transaction ex post—a fundamental manifestation of classic counterparty risk. In other words, in free and unfettered trade, one cannot be certain whether a partner or counterparty will cheat, defraud, or otherwise breach trust by failing to fulfill the agreed-upon terms. This risk encompasses both formal obligations (contractual performance) and implicit expectations, such as the assumption that sellers will truthfully represent the ex post use value of a good or service.

This strategic uncertainty regarding the trustworthiness of the counterparty in trade—rooted in incomplete or asymmetric ex ante information about the counterparty’s intentions or type—is the fundamental cause of persistent Pareto inefficiency. Unless effective mitigating mechanisms (such as legal enforcement, warranties, signaling, or reputation systems) are introduced, these conditions inevitably lead to market unraveling and systemic inefficiency over time.

In this sense, Akerlof was not only correct—he was also fortunate. He illustrated this structural failure using a relatable example (the market for used cars). Yet the underlying mechanism is broader and more consequential: absent universally ethical behavior (“saintly” conduct), ex ante information asymmetry inevitably generates strategic uncertainty, undermining trust and rendering markets unsustainable without external intervention.

Indeed, there are no documented real-world examples of unfettered “lemon” markets, characterized by unaddressed information asymmetry, operating efficiently. Even in non-voluntary interactions—such as the Prisoner’s Dilemma—it is precisely this strategic uncertainty that prevents Pareto-optimal outcomes. Players, uncertain about whether their counterparts will defect, rationally adopt suboptimal strategies.

Ironically, some of the most effective real-world solutions to mitigate strategic uncertainty are extralegal. For example, criminal organizations frequently employ brutal enforcement mechanisms to sustain internal trust. In these systems, strategic uncertainty is neutralized through credible, often violent threats (such as the Mexican Mafia’s retaliation against informants' families in Mexico). This enforces compliance not by legal or ethical standards but through the fear of severe and immediate consequences.

The Rent-Seeking Lemma of Opportunistic Utility Maximization

These insights lead to what we term the Rent-Seeking Lemma:

In any system where the costs of betrayal become sufficiently low and enforcement sufficiently weak, a subset of the least ethical (or most corrupt) agents will inevitably engage in criminality, rent extraction, or opportunistic deviation unless structurally constrained.

This principle applies not only to explicitly illegal activities but, even more importantly, to legalized rent extraction—such as crony capitalism, regulatory arbitrage, or institutional parasitism—where behavior, though formally permissible, is economically harmful.

Crucially, this lemma holds under both bounded and perfect rationality. Even fully rational agents—possessing infinite computational capability and perfect foresight—will predictably, systematically, and inevitably defect when incentive structures reward betrayal. Principals may also behave similarly, though in free trade they typically cannot defraud their agents due to the inherent informational advantage agents possess.

This outcome is neither a cultural phenomenon nor an ideological artifact. Rather, it is a predictable consequence of utility maximization by BROSUMSI agents with varying levels of honesty, operating under conditions of asymmetric information and weak institutional or free market constraints.

Consequently, the Rent-Seeking Lemma represents a fundamental behavioral theorem upon which robust models of political economy, institutional architecture, and enforcement regimes must be constructed.

To state the assertion clearly: betrayal becomes certain when the costs of betrayal are sufficiently low and the benefits sufficiently high—except in the rare instance of an entirely saintly or consistently trustworthy agent. In practice, however, honesty varies not only across individuals but also on the part of the same person over time. For example, a typically honest employee may resort to embezzlement when confronted with stressful personal circumstances, such as gambling addiction, an extramarital affair, or significant medical expenses. Individuals experiencing financial desperation are significantly more likely to extract unearned wealth—through economic rents or agency costs—when opportunities arise. Crucially, this variability in honesty also applies within the same agent, whose propensity for opportunism fluctuates with changing financial pressures.

Precisely under conditions of variable honesty—both across individuals and within the same individual over time—agency costs, rent-seeking, and related behaviors become structurally inevitable rather than merely probable. Whenever agents encounter opportunities for theft, fraud, or rent extraction, such behaviors reliably emerge if incentives align favorably. This inevitability is confirmed empirically as well as deontologically.

Illustrations of the Rent-Seeking Lemma in Practice:

• San Francisco’s Theft Decriminalization:
  Recent legislative changes⁷ that decriminalized theft under $950 led to increased shoplifting incidents and store closures. Consistent with public choice theory, lowering the perceived risk of dishonest behavior clearly incentivizes theft, illustrating predictable responses to changes in risk and reward.

• Haiti vs. the Dominican Republic:
  Despite sharing the same island, Haiti’s GDP per capita is roughly one-tenth that of the Dominican Republic. This disparity arises largely due to frequent violations of the conditions necessary for "unfettered" exchange—conditions essential to Pareto efficiency according to the First Welfare Theorem. Haiti’s more pervasive rent-seeking and lawlessness undermine economic activity. Public choice theory explains how systemic governance failures facilitate corruption, yielding persistently inefficient economic outcomes.

• Natural Disasters and Looting:
  Looting frequently occurs following hurricanes, wildfires, and other crises when law enforcement presence diminishes. Such behavior aligns precisely with rational utility maximization: when the risk of punishment approaches zero, opportunistic behavior becomes rational and prevalent. Everyday Evidence of the Rent-Seeking Lemma:

Additional everyday examples further underscore the lemma:

• Security Measures in Society:
  The extensive use of theft-prevention devices, surveillance, and private security services reflects society's constant efforts to deter opportunistic behaviors.

• Gated Communities and Elite Security:
  Wealthy individuals frequently choose gated communities with robust security, highlighting how stronger institutions reduce rent-seeking and opportunistic crimes.

• Personal Security Precautions:
  People lock their doors at night because rent-seeking behaviors are universally recognized as inherent human tendencies. The number of gun permits is further evidence in this regard⁸.

Conclusion: From Universal Opportunism to Specific Mechanism

These examples, from street-level crime to institutional decay, empirically validate the Rent-Seeking Lemma: opportunistic extraction is a universal human response to low-cost opportunities for gain. However, these coercive forms of extraction, while illustrative, are conceptually straightforward.

A more complex and insidious problem arises in markets defined by voluntary exchange. In a system where robbery and theft are barred, how can one party extract unearned wealth from another? The remainder of this paper establishes that under these conditions, the sole mechanism for non-coercive rent extraction is the exploitation of asymmetric information.

When a Group Holds Superior Information, It Inevitably Extracts Economic Rents⁹

Groups distinguished by above-average intelligence, strategic capability, high literacy, exclusive access to valuable data, or robust internal networks that facilitate rapid dissemination of information, are commonly positioned advantageously within fields such as finance, taxation, brokerage, algorithmic markets, law, consulting, data analytics, and intermediary roles. Due to this inherent positional advantage, these groups naturally possess decisive informational asymmetry relative to the broader population.

According to the Rent-Seeking Lemma, this informational advantage invariably translates into the systematic extraction of unearned wealth. This is not an intermittent or occasional phenomenon; rather, it consistently emerges wherever such disparities in information exist. The only theoretical exception occurs in cases involving consistently ethical agents, referred to herein as "saints," who abstain entirely from opportunistic exploitation. However, as previously emphasized, such ethically impeccable individuals constitute only a minor fraction within any sufficiently large group of human actors.

Resulting Unearned Wealth Extraction Constitutes Fraud by Definition

The unearned extraction of wealth can manifest in various forms:

• Legal fraud (exploiting loopholes, obfuscation)

• Structural fraud (designing systems explicitly to facilitate rent extraction)

• Behavioral fraud (concealing risk, front-running signals)

However, the particular label is secondary. Regardless of its form, the essential outcome remains classic rent-seeking: extracting wealth from others without contributing commensurately to overall productivity—precisely as defined by Anne Krueger (1974) over 50 years ago.

Whenever the less-informed party cannot independently verify transactional terms—and the informed party is aware of this limitation—value transfer through deception, asymmetry, or concealment is structurally guaranteed, unless every better-informed agent consistently behaves ethically ("saintly").

Whether lawful (de jure) or unlawful, the outcome remains effectively fraudulent (de facto). When a group sustains such behavior systematically over time, accusations of fraud inevitably arise—and these accusations are accurate, even if the rent extractors believe they legitimately earned their wealth. This phenomenon is neither conspiracy nor accident; rather, it is the predictable and inevitable outcome of the system’s design, guaranteed to occur unless every agent within the informed subgroup is ethically infallible.

Yet, since a subset of non-saints will inevitably engage in rent extraction, systemic fraud will occur. Even the genuinely ethical agents ("saints") become indistinguishable from the unethical ones, compounding the fundamental challenge.

Blame is Inevitable—Because the Behavior is Structurally Guaranteed

When historical narratives state that groups such as Jews¹⁰ or Indians were unfairly blamed or scapegoated, they overlook a critical structural point. Such accusations were not merely mythological or irrational; rather, they emerged from a predictable structural dynamic. Within any informed subgroup possessing asymmetric information, a subset—specifically, the non-saintly fraction—inevitably engaged in rent extraction, fraud, or opportunistic behavior. This outcome was not motivated primarily by animosity or prejudice, but rather arose predictably from systemic incentives that made such behavior profitable, concealed, and certain.

Indeed, historically, no informed group has operated within a system characterized by persistent informational asymmetry without at least some members—always those lacking consistently ethical conduct—engaging in fraudulent or opportunistic practices.

It is structurally impossible for agents not to defraud or exploit when presented with the opportunity and low associated costs—except for the minority of consistently ethical individuals ("saints"). And, as established, such ethically consistent individuals remain exceedingly rare.

Therefore, Collapse is not Merely Predictable—It is Structurally Engineered

From the moment a system permits one group to permanently possess superior information, restricts markets either legally or structurally, imposes limitations on transparency or enforcement mechanisms, and produces visibly unequal social outcomes, the system inevitably sets in motion a predictable sequence of consequences. These conditions guarantee the emergence of fraud, economic rent extraction, social resentment, collective accusations against the advantaged group, subsequent retaliation, and ultimately, systemic collapse. Such a configuration effectively acts as a self-terminating mechanism.

Barring effective countermeasures (such as legally enforced transparency, warranties, or robust reputation systems), unless every participant is a saint—which is impossible in reality—collapse is inevitable. Even the most trusted subgroups—doctors, academics, clergy, and yes, even your rabbi—contain plenty of non-saints¹¹. That’s not slander. It’s fact.

There has never been a real-world exception.
Not one.

Not outside of theoretical heaven, were all agents and principals are saints.
And this isn’t heaven.

Defining Collapse: A Functional Approach

In this framework, “collapse” is defined not by the specific nature or severity of its outcome, but by its systemic function. Collapse refers to the point at which a system’s mechanisms for peaceful exchange and dispute resolution fail, resulting in an abrupt, non-linear restructuring intended to purge a source of parasitic rent extraction.

Thus, a financial crisis that eliminates a class of financial instruments and their operators (as in 2008), a riot that expels a merchant class (such as the anti-Chinese riots), and even a genocide that annihilates a subgroup (e.g., the Holocaust) are all treated here as instances of the same functional category. It is crucial to emphasize that this classification is purely structural and analytic; it does not imply any moral, ethical, or political equivalence between such events. The term “collapse” in this context refers strictly to their shared role as phase transitions in the systemic order.

While the human cost and moral gravity of these events are vastly different, each represents a catastrophic failure of the existing order and a violent shift to a new, albeit temporary, equilibrium. All are points where the system turns on itself to excise a part it can no longer sustain, regardless of the specifics or magnitude of the event’s consequences.

Historical Evidence Confirms the Structural Inevitability of Collapse

The pattern outlined here is consistently confirmed by historical evidence. Consider the following illustrative examples:

1. Jews in Russia and Germany:
   Roles: Taxation, trade, finance
   Outcomes: Pogroms, ghettos, Holocaust

2. Indians in East Africa:
   Roles: Commerce, logistics
   Outcomes: Expulsion (e.g., Uganda under Idi Amin)

3. Chinese in Southeast Asia:
   Roles: Retail, banking
   Outcomes: Riots, targeted violence

4. Armenians in the Ottoman Empire:
   Roles: Finance, bureaucracy
   Outcomes: Genocide

5. Wall Street Quants in the U.S. (2008):
   Roles: Algorithmic trading, financial engineering
   Outcomes: Public outrage, regulatory reform, financial crisis

6. Global Tech Elites:
   Roles: Data control, platform management
   Outcomes: Populist backlash, regulatory scrutiny, systemic distrust

In each of these cases, a common structural pattern is evident:

1. A particular subgroup possessed a clear informational advantage.

2. A subset within this subgroup—specifically, the less ethical (“non-saint”) individuals—extracted economic rents or wealth unfairly.

3. The broader public was unable to independently verify transactional fairness, leading to collective blame directed at the entire informed group, since outsiders could not distinguish between the saint-like and non-saint-like members.

4. The predictable outcomes were widespread resentment, justified (at least with respect to the non-saints) blame, and eventual violent or systemic retaliation.

These outcomes were neither historical accidents nor mere cultural myths; rather, they are structural mechanics that consistently repeat across time and context.

The System Creates Fraud—and Then Punishes the Fraudster

This dynamic represents the ultimate systemic irony:

1. The system structurally creates and maintains informational asymmetry.

2. The better-informed minority inevitably engages in actions that any rational, non-saint agent would take—often without recognizing their behavior as fundamentally exploitative.

3. Eventually, the system reaches a critical point and collapses.

4. At this stage, the same informed subgroup is publicly labeled as parasites, cheats, and betrayers, ultimately facing severe backlash or destruction.

This outcome is not merely tragic—it is structurally predetermined. It is an inevitable consequence of the system operating exactly as designed.

Clarification on Fraud (Extension of the Blackstone Principle):

Traditionally, under the Blackstone Principle¹², fraud strictly requires unlawful deception; unethical but legal actions do not qualify. The original purpose of the Blackstone Principle was to prevent unjust indictment of individuals. However, in our analysis, the intent differs. Our objective is to accurately identify behaviors that structurally guarantee Pareto inefficiency: specifically, fraud arising from asymmetric information, resulting inevitably in strategic uncertainty.

To accurately capture and model counterparty risk, we deliberately extend the definition of "fraud" beyond unlawful deception to include economic gains achieved through opaque, asymmetric structures—even when such structures are fully compliant with the law. Fraud, therefore, encompasses any situation in which the perpetrator (the rent-seeking economic parasite) extracts unearned wealth without providing reciprocal productivity contributions—aligning precisely with the definition of economic rents in public choice theory and with agency costs in agency theory. This expanded definition encompasses activities analogous to rats pilfering grain in a warehouse or locusts destroying crops: both exemplify deadweight losses and guaranteed Pareto-inefficient outcomes, consistent with the logic underlying the Blackstone Principle.

The Only Sustainable Solution: Structural Symmetry or Systemic Exit

There exist only three viable strategies to disrupt the structurally inevitable cycle of collapse:

1. Enforce Radical Transparency:
   Fully eliminate informational asymmetries while preserving unfettered exchange. This aligns with the idealized conditions described by Arrow–Debreu models of perfect markets, where Pareto efficiency is structurally guaranteed.

2. Restrict Access to Rent-Extraction Roles:
   Diversify power structures and widely distribute critical knowledge, thus structurally reducing information asymmetry and fostering systemic symmetry.

3. Separate Extractors from Producers Completely:
   Clearly distinguish and isolate roles that allow rent extraction from those responsible for productive economic activities, proactively dissolving structurally unstable mixed systems before collapse occurs.

Failure to adopt any of these approaches is not merely a potential risk—it guarantees systemic collapse. Such collapse is not probabilistic but structurally certain, an empirically validated and consistently observed outcome of human organizational behavior.

BROSUMSI: A Scientific (Empirical and Falsifiable) Axiom

Unlike mere philosophical tautologies, the core axiom underpinning this paper—that representative economic agents are boundedly rational subjective utility maximizers who behave opportunistically and are responsive (or susceptible) to incentives (BROSUMSI)—stands out as a rigorous scientific principle precisely because it is falsifiable. This axiom generates concrete, testable predictions. The lemma derived from this axiom—that rent-seeking behavior inevitably emerges absent mitigating constraints—rests on the fact that the least ethically constrained agents (“non-saints,” or those in desperate need of money) will consistently engage in opportunistic behavior when provided suitable incentives.

For instance, as demonstrated by Nobel laureate Gary Becker, the rent-seeking lemma anticipates that lowering the perceived costs of criminal acts—such as through the partial decriminalization of certain crimes—will reliably incentivize opportunistic agents to commit more crime. If empirical observations failed to confirm such an increase, the axiom of opportunistic subjective utility maximization would be invalidated.

However, real-world evidence consistently supports this axiom. Consider California’s Proposition 47¹³, which reduced criminal penalties for theft under $950. This policy provided a real-time, field-based falsification test—less controlled than a laboratory experiment, yet far more consequential than a thought experiment. If the rent-seeking lemma were false, one would expect no significant behavioral response to these altered incentives. Instead, empirical data following the policy’s enactment show significant increases in retail theft and widespread store closures—precisely the outcomes the axiom anticipates.

This empirical robustness positions BROSUMSI as the most reliable framework currently available for modeling actual human decision-making. Predictions derived from this framework consistently demonstrate greater accuracy in real-world settings than traditional theoretical alternatives—most notably, the Rational Utility Maximizer assumption, which repeatedly fails empirical tests.

Put plainly, the BROSUMSI axiom has never been falsified by behavioral evidence, despite extensive testing in economic, social, and experimental contexts involving incentive-driven decisions. It remains fully testable through controlled experimental approaches, akin to those pioneered by Kahneman and Tversky in the development of Prospect Theory. Consequently, the rent-seeking lemma is best viewed not merely as a convenient model but as a fundamental law of human behavior, comparable in reliability and explanatory power to conservation principles in physics, such as the first law of thermodynamics or quantum information preservation.

Our background is not academic theory, but proprietary trading in statistical arbitrage—a domain where flawed models are not harmless, but lethal. In this world, assumptions are battle-tested under pressure, and failure has consequences. Academic macroeconomics, by contrast, has repeatedly failed to predict real-world inflection points—not due to weak mathematics, but because its underlying axioms are rarely interrogated. As investors like Warren Buffett have noted, economic forecasts often lag reality, not lead it. By contrast, the natural sciences achieve predictive superiority because they operate in closed systems, where variables can be isolated and assumptions tested with precision.

Human behavior does not share this luxury. It is adversarial, culturally conditioned, and hyper-responsive to incentives. That is why, in our world, a formal audit of one’s axioms is not optional—it is a prerequisite for survival.

While some social scientists, especially economists, argue that human behavior is fundamentally less predictable than physical phenomena, this position does not withstand scrutiny. In quantum mechanics—the most precise model of physical reality—the evolution of a system is deterministic, governed by Schrödinger's equation. Heisenberg’s uncertainty principle does impose fundamental limits on the simultaneous precision of certain measurements, but crucially, this uncertainty arises only at the point of measurement. Even then, the distribution of possible outcomes is described by exact statistical laws. This is not mere randomness, but structured probabilism. By analogy, while individual human choices may be idiosyncratic, aggregate behavior under consistent incentives (as in BROSUMSI agent models) exhibits robust statistical regularities. Just as the laws of thermodynamics systematically emerge from quantum foundations, so too do large-scale social patterns follow from micro-incentives—a principle formalized by the rent-seeking lemma framework. Dismissing this predictability reflects not scientific humility, but a reluctance to engage with empirical evidence and formal models.

While individual behavior may vary widely—from unwavering ethical conduct to chronic exploitation—aggregate opportunism is not merely probable; it is inevitable. This claim is empirically testable and consistently supported by extensive research, notably landmark psychological studies such as Milgram’s obedience experiments. In these trials, ordinary individuals—highly responsive to incentives, particularly authority bias and social pressure—were induced to commit actions classified as criminal offenses under current U.S. law, including acts tantamount to torture and assault. These findings underscore the capacity of predictable incentive structures to override personal morality, thus confirming their explanatory and predictive power at the population level.

Milgram’s subjects—fully aware they could freely withdraw—nonetheless chose to administer simulated almost lethal electric shocks. Why? Because variably opportunistic BROSUMSI agents rationally optimize subjective utility: the immediate psychological cost of defying authority (social discomfort, confrontation) outweighed the abstract moral cost of compliance. Their decision was not coerced by threats of physical harm but was engineered by corrupted axioms equating obedience with virtue. This represents opportunism in its clearest form: trading ethical integrity for social convenience.

Moreover, the Stanford Prison Experiment replicated these effects under distinct but equally potent incentive structures. Previously law-abiding participants systematically engaged in abusive and criminal behavior when placed in hierarchical, high-pressure contexts. These convergent results demonstrate that moral integrity is not a stable individual attribute but rather a conditional outcome, dependent upon context.

Although foundational experiments by Milgram and Zimbardo have faced ethical and methodological scrutiny (e.g., critiques regarding demand characteristics), subsequent replications—such as Burger’s partial replication of Milgram’s experiment (2009)—and neuroeconomic research on dopamine reward pathways continue to reaffirm a core insight: humans systematically respond to incentives, even under profound cognitive constraints.

The responsiveness of individuals to incentives—such as increased criminality when benefits surpass associated costs—has been thoroughly investigated by leading economists, including Becker (crime and punishment), Williamson (transaction cost economics), Tullock, Buchanan, and Krueger (public choice theory), and Jensen and Meckling (agency theory). Given this extensive intellectual foundation, further elaboration is unnecessary, particularly as opportunistic behavior consistently arises under both bounded rationality and perfectly rational decision-making frameworks.

Conclusion

Fraud is structurally universal—not an exception.

It occurs invariably whenever one group possesses superior information that another cannot independently verify.

This structural logic clarifies why historically:

• Jews have been blamed.

• Indians have been blamed.

• Financial quants have been blamed.

• Tech elites are currently facing blame.

Members of these groups extracted economic rents and engaged in opportunistic behavior—not primarily from malice, but because their roles inherently involved opportunities for exploitation resulting from asymmetric information.

Without consistently ethical agents ("saints") who universally renounce self-interest—individuals exceedingly rare in any large population—no group can avoid this structural outcome.

Until societies cease to build or maintain systems structurally ensuring asymmetric rent extraction, systemic collapse and subsequent societal blame will recur without exception. Every historical instance confirms this structural reality.

However, Akerlof’s "Lemons Model" specifically predicts market failure only in the absence of mitigating mechanisms (e.g., warranties, certifications). This paper does not disregard these countermeasures; instead, it highlights how real-world markets evolve institutional protections—such as vehicle history reports (e.g., Carfax) or financial regulatory oversight (e.g., SEC regulations)—to partially offset the inevitability of unearned wealth extraction. These protections reduce opportunities for exploitation by the least ethically constrained individuals, whether they act as better-informed agents or principals.

The Law of Asymmetric Collapse Is Falsifiable

1. Structure of the Law:

• Premise: Persistent asymmetric information + no mitigation → fraud (excluding "saints")

• Falsification Condition: Observe a single instance of asymmetric information without mitigation and without fraud (i.e., observe a “saint group”)

2. Key Distinction:

• The law does not define saints as “mythical” to rig the model. It explicitly states saints are theoretically possible but historically unobserved.

• This makes the law logically falsifiable, but empirically validated by the absence of counterexamples. We explicitly allow for saints, while noting they are historically absent.

• If saints had been observed, the law would collapse. Their absence supports the claim.

Empirical vs. Logical Status

Aspect

Law’s Status

Logical Falsifiability

Yes — Saints could exist and disprove the law

Empirical Validity

Yes — No saints observed in history → law remains intact

The Law’s Argument

1. Historical Pattern:

• Every documented case of unmitigated information asymmetry resulted in fraud.

• Examples: Medieval guilds, colonial monopolies, modern PFOF systems.

2. No Counterexamples:

• No society has ever sustained asymmetric information without fraud, unless saints intervened

• Saints are unrecorded, making the law a robust empirical generalization

Conclusion

The law of asymmetric collapse is thus falsifiable in principle and has, to date, never been contradicted by empirical or historical evidence. Its continued survival depends entirely on the ongoing absence of counterexamples.

Spontaneous Order: A Reduction to the Folk Theorem

Auditing the Invisible Hand

Opponents of structural economic laws, particularly Austrian economists, frequently invoke Friedrich Hayek’s concept of "spontaneous order," which posits that complex and efficient systems emerge organically from decentralized individual actions, guided as if by Adam Smith’s invisible hand, without central planning. They argue this spontaneous mechanism naturally counters the systemic decay described in our framework. While this perspective is insightful and captures a genuine phenomenon, it remains incomplete, as it lacks a precise explanatory mechanism.

When rigorously examined, the concept of spontaneous order as presented by Hayek reduces directly to a specific equilibrium already recognized in mathematical game theory—namely, the Folk Theorem. Hayek correctly identified the emergence of efficient outcomes in decentralized systems, yet did not possess the formal analytical tools to fully explain or evaluate the conditions and limitations underlying this phenomenon.

Hayekian Observations versus Game-Theoretic Mechanisms

Hayek’s essential insight—that the free-market price system acts as a decentralized informational network coordinating millions of independent agents—accurately captures the complexity and adaptability of markets beyond any central planner’s capability. However, many followers of Hayek infer that markets inherently possess a universal, self-correcting tendency toward efficiency. This inference is partially correct, but incomplete, because the spontaneous emergence of efficiency is not inherently guaranteed. Rather, such an order reflects a specific strategic equilibrium predicted by the Folk Theorem.

The Folk Theorem states simply that in repeated games, where participants are patient enough and capable of observing past actions, cooperation can emerge as a stable equilibrium. Under these conditions, opportunistic agents choose cooperation—such as refraining from fraudulent behavior—not out of altruism, but rationally, since the long-term benefits of maintaining trust and reputation exceed the immediate gains from defection. Thus, the apparent high cost of fraud emerges endogenously through credible threats of exclusion from future beneficial interactions. Hayek’s spontaneous order can therefore be understood as an intuitive but formally unproven precursor to this game-theoretic equilibrium.

Spontaneous Order as a Fragile Mitigating Mechanism

Correctly interpreted, spontaneous order functions as one among several mitigating mechanisms that can temporarily suspend the Law of Collapse. This mechanism primarily relies on decentralized reputation enforcement, functioning effectively only under certain well-defined conditions: small, cohesive groups (such as tightly knit merchant communities or digital platforms with robust reputational systems), environments characterized by high visibility and traceability of actions, and contexts in which participants highly value future interactions (low discount rates).

Within such ideal conditions, the system self-regulates by collectively raising the cost of betrayal, making cooperation the optimal rational strategy for utility-maximizing agents, irrespective of whether their rationality is bounded or perfect (i.e., consistent with the BROSUMSI agent model).

Limits of Spontaneity and the Inevitability of Collapse

It is crucial to clarify that the Austrian interpretation of spontaneous order is not fundamentally incorrect; it simply lacks a formal, precise explanation of how spontaneous order mitigates inefficiencies. Our framework fills this gap by explicitly identifying the underlying conditions required—conditions which, when violated, result in collapse. These necessary conditions rarely hold in modern, large-scale economies.

As markets expand, interactions typically become anonymous and singular ("one-shot"), eliminating incentives for honest behavior. In complex industries such as finance, technology, or law, severe information asymmetry prevents outsiders from verifying insiders’ true actions, effectively nullifying the power of reputation. Even seemingly spontaneous reputational systems, such as vehicle-history services like CarFax, depend heavily on legal enforcement to ensure reporting accuracy. Without such supportive legal frameworks, spontaneous order dissipates completely, as demonstrated by less regulated environments like contemporary Russia.

Moreover, reputational mechanisms require repeated interactions to build meaningful trust, a condition frequently unmet, exemplified by classic examples like Akerlof’s market for lemons.

When these stringent conditions deteriorate—which often happens in extensive, anonymous, and highly complex systems—the fragile equilibrium identified by the Folk Theorem breaks down. At this point, the incentives shift, dramatically reducing the cost of defection, and the Law of Collapse inevitably reasserts itself. Consequently, rational, self-interested agents increasingly engage in rent-seeking and fraudulent behavior, as these actions become equilibrium strategies rather than irrational deviations.

Conclusion: A Special Case, Not a Universal Law

Thus, spontaneous order, though undeniably functional under certain conditions, does not constitute a universally applicable principle capable of disproving the Law of Collapse. Instead, spontaneous order represents a conditional equilibrium within our broader explanatory framework, offering temporary stability amidst a general environment governed by incentive-driven opportunism.

This reveals the key theoretical limitation of Austrian economics: while Austrians correctly identify spontaneous order phenomena, they offer no precise theoretical explanation for the conditions enabling this spontaneous order. Our framework addresses this gap explicitly, providing an exact theoretical explanation—based on the Folk Theorem—of when and why spontaneous order emerges or fails. Consequently, without providing an alternative detailed mechanism, Austrians mistake a localized equilibrium for a general principle.

Ultimately, reality is singularly harsh: absent either the strict conditions for the Folk Theorem’s reputational equilibrium or a strong external enforcement mechanism (such as stringent regulation or credible third-party verification), the default systemic trajectory is not spontaneous order but rather parasitic extraction, exploitation, and ultimately, structural collapse.

Full Transparency: Standard Complaints about Government

Which group, in every civilization and historical context, consistently possesses superior information relative to the general population and simultaneously holds the authority to enforce involuntary exchanges by force?
In simpler terms: Who extracts unearned wealth through legalized fraud or coercion with absolute impunity? Whom does absolute power allegedly corrupt absolutely?

The answer is clear: those who write and enforce the rules—government agents, judges, bureaucrats, and law enforcement officials. Only better-informed principals are able to defraud less-informed agents, barring involuntary trade.

This extraction is not primarily driven by malice; rather, it emerges structurally from the design of governmental authority itself. Government, therefore, is not a single entity but a complex, layered hierarchy composed of better-informed insiders, equipped with secrecy provisions, discretionary regulatory powers, and monopoly enforcement authority. Unless we assume these individuals to be mythically incorruptible saints, wealth extraction naturally becomes their default operational mode. This is not an ideological assertion—it is a mechanical inevitability, extensively documented by economists in the public choice tradition, including Tullock, Buchanan, Krueger, and others who prioritize incentive analysis over idealized theory.

Government, by design, is the ultimate extractor of economic rents. Deflecting blame away from systemic structures is not a failure but standard operating procedure. Similarly, collapse is not an anomaly—it is an expected structural outcome.

Case Study: Judicial Rent Extraction in the United States

Consider one of the most sanctified institutions: the judiciary.

Absolute judicial immunity—often presented as a noble safeguard ensuring “fearless adjudication”—operates, in practice, as a mechanism enabling unchecked rent extraction. It effectively creates a legal loophole capable of transforming theft into lawful procedure.

1. Immunity as a Shield for Rent-Seeking:

• Every ruling, irrespective of corruption or ethical violation, qualifies as a protected "judicial act."

• Absolute immunity thereby eliminates civil liability, malpractice claims, and tort-based recovery.

• The result is a complete lack of accountability, with no effective market or procedural checks on judicial corruption.

2. Mechanisms of Judicial Rent Extraction:

• Venue Steering: Courts may signal lax enforcement or procedural biases, attracting repeat litigants and effectively creating profit centers.

• Fee Manipulation: Through inflated filing fees, expert witness fees, or opaque court assessments, judges facilitate financial extraction for themselves or their networks.

• Asset Transfers via Court Orders: Even a single unfounded injunction or asset freeze can transfer substantial wealth irreversibly, with no effective recourse provided that the order maintains the appearance of judicial legitimacy.

3. Lack of Genuine Oversight:

• Unlike virtually every other profession, judges uniquely face no meaningful personal liability.

• Judicial oversight mechanisms are primarily political rather than procedural, resulting in minimal effective accountability.

• Appeals processes are slow, infrequent, and often structurally compromised—acting as delays rather than true deterrents.

4. Suggested Reforms:

• Bad-Faith Exception: Eliminate judicial immunity in instances where judicial actions demonstrably benefit judges themselves or their political affiliates.

• Independent Audits: Implement subpoena-based reviews of judicial behavior, such as venue selection patterns, unusual fee increases, and favoritism toward litigants.

• Financial Transparency: Mandate disclosure of all payments ordered by courts, enabling public oversight and legal challenges to outliers.

• Civil “Writ of Review”: Establish procedures permitting tort claims against the court institution (rather than individual judges) in cases where judicial decisions are overturned due to gross misconduct.

Absolute immunity without exception is not protective—it represents a structural license for extraction.

A judge granted unrestricted power to extract wealth will inevitably do so.

This critique does not advocate revolution; instead, it highlights critical structural flaws—or "bugs"—in the institutional architecture.

The system is not malfunctioning. It is executing precisely as designed.

Beyond Complaints About Government

Having concluded our philosophical discussion, we now derive practical insights from the principles previously outlined—moving beyond standard critiques of government. While we do not assert universal applicability, it is observable that in most real-world economies—excluding regions characterized by notably weak law enforcement, such as Haiti—the principle of unfettered exchange prevails. By “unfettered exchange,” we mean conditions under which principals and agents do not fear robbery, extortion, kidnapping, or other coercive threats.

This principle applies with particular force in online commerce and cryptocurrency trading, domains in which unfettered exchange conditions hold almost absolutely: an individual can simply disconnect from the internet, ensuring freedom from coercion. With coercion (the threat or use of force or violence) thus excluded, the critical question arises: How can any agent, principal, or other party realistically extract unearned wealth—wealth obtained without a reciprocal productivity contribution, as defined in public choice theory—through entirely non-coercive means?

Excluding involuntary exchanges, the sole remaining means for rent extraction aligns perfectly with the established economic concept of counterparty risk. Once acts of coercion such as robbery or theft are ruled out, the remaining risk for principals or agents to experience unfair wealth extraction arises exclusively through counterparty deception. Even a boundedly rational individual would not voluntarily engage in an exchange perceived ex ante as detrimental. Thus, assuming fully unfettered exchange, the only scenario in which an exchange could turn out ex post to be non-mutually beneficial—excluding uncontrollable events such as accidents (e.g., dropping groceries)—is through the presence of asymmetric information.

If both counterparties possess exactly equal knowledge regarding the exchanged goods or services (not necessarily perfect information, merely symmetric information), and the exchange remains fully voluntary, it cannot result in a non-mutually beneficial outcome—excepting cases involving negative externalities (e.g., pollution) or unforeseeable events. Consequently, rent extraction or agency costs inherently require the presence of asymmetric information. Without asymmetric information, neither rent-seeking nor agency costs can emerge, since fraud becomes impossible when both parties share the same level of information and exchanges remain voluntary.

Clarification
To reiterate clearly: once involuntary exchanges are removed from consideration, the only remaining source of counterparty risk derives exclusively from asymmetric information. If asymmetric information were entirely eliminated, agency costs and rent-seeking behaviors would likewise disappear completely. This conclusion aligns precisely with Jensen and Meckling’s seminal "Theory of the Firm" (1976), which explicitly emphasizes that, within the real-world context we collectively inhabit, agents cannot impose agency costs or extract unearned wealth from principals in the absence of asymmetric information, unless through involuntary exchanges such as labor strikes.

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1The Folk Theorem is of great relevance here. See on this Abreu, et. Al. 1994; Aoyagi, 2007; Athey, et, al. 2004. Fudenberg and Maskin, 1986; Sugaya & Yamamoto, 2020

2See on this Arvanitis and Gregory, 2001; Canabarro and Duffie, 2003; Derman, 1996; Longstaff and Schwartz, 2001; Zhu and Pykhtin, 2007

3It is important to realize that no written contract can ever anticipate all eventualities. Hence, we have implicit contracts. You sit down at a restaurant and order a cup of coffee without looking at the menu. You decline to pay for this since the waitress “gave” you this drink. There is an implicit contract such that you may not do any such thing. Second scenario: they present you with a bill for one million dollars. May they do that, even if the menu stipulates exactly that amount? Certainly not. There is an implicit contract to the effect that that they must charge you a “reasonable” amount of money. What about $5? $10? $100 for this cup of coffee? Where do you draw the line? Short answer: the courts. For an analysis of this question, see Block and Barnett, 2008

4https://www.shouselaw.com/ca/personal-injury/consumer-legal-remedies-act/

5https://www.nysenate.gov/legislation/laws/GBS/A22-A

6https://www.findlaw.com/consumer/lemon-law/lemon-laws-state-specific-information.html

7https://www.kannlawoffice.com/california-penal-code-section-459-5-shoplifting

8The best estimate as of 2023 is that there are some 23 million concealed carry permit holders in the United States. But this is an underestimate of the number of citizens who go armed, since some states do not require a permit and many individuals own and carry pistols without permits. For more on this see Lott, et, al., 2024

9Economic rents refer to unearned wealth, akin to stolen goods, obtained without reciprocal contribution to productivity.

10https://en.wikipedia.org/wiki/Economic_antisemitism

11However, to be sure saintliness is not an all or none phenomenon. Within such trusted subgroups, where will be less chicanery than elsewhere.

12https://www.lawinfo.com/resources/criminal-defense/what-is-blackstone-s-formulation-in-criminal.html

13https://www.ppic.org/publication/the-impact-of-proposition-47-on-crime-and-recidivism/