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In the book, Dan Davies cites numerous examples in which fraud became common in a particular community (whether that's a religious affinity group or a website for trading drugs), the community dutifully responded by implementing anti-fraud protections, but because these protections imposed some kind of cost (typically monetary, but potentially also an opportunity cost in terms of time and effort), some of the people in the community elected not to use the anti-fraud protections and instead take their chances without - and because most people in the community were trustworthy, this gamble paid off most of the time. There comes at a point at which the cost of protecting oneself against being defrauded exceeds the expected return.
Consider how much documentation you have to provide when applying for a mortgage. Now imagine if you had to go through that process every time you were buying or selling something through a webshop (e.g. eBay). With such a policy in place, it would be nearly impossible to defraud someone (or be defrauded) via this webshop: but because the process is so onerous, no one would use this website and it would go out of business, departing for competitors with less rigorous protections against fraud - which, inevitably, unavoidably means that some of the people who use the competitors' websites will get ripped off.
That's the point I'm trying to make. If you tolerate fraud, or even promulgate "well the chance of fraud is better than a world with no fraud" (which is different from "there will always be a risk of fraud"), then what is tolerated becomes commonplace. Once the water changes, the fish change too. Once the bedrock assumptions of "be honest not criminal" are weakened by lack of social reinforcement and no longer passed down, you'll get more and more people willing to be scammers, which in turns mean fewer people opting to put their trust in others, and the costs of protecting yourself against fraud rise because now you have to either spend time and effort on not being scammed, or risk being scammed and losing very badly what you can't afford to lose.
"There's always going to be fraud out there, just be careful and be aware" is not the same as "we need a certain amount of fraud to happen, otherwise it's the Panopticon and economic stagnation". That second message is an encouragement to be fraudulent - after all, everyone else would do it too if they could, and you are just filling your role in the ecosystem!
I think you really aren't understanding the argument I'm making. I'm not saying "we need a certain amount of fraud to happen, otherwise there would be economic stagnation"; I'm saying "a certain amount of fraud is unavoidable, and the price we pay for a functioning economy". Claiming that the latter is equivalent to the former, or that the latter is an encouragement to defraud people, seems to me tantamount to saying "a small number of car accidents every year is an unavoidable byproduct of widespread car ownership" or "carbon emissions are an unavoidable byproduct of an electrified society". No one would say that by acknowledging that you can't create electricity without producing carbon dioxide, you are therefore encouraging the production of additional carbon dioxide - likewise with the argument I'm making.
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