The Feasibility of Anarchy

I’m grateful to Bruce Benson, Dani Rodrik, and Randy Holcombe for responding to my initial essay and providing their insightful remarks. Here, I offer a brief response to some of the major comments from each. Like the arguments in my initial essay, owing to space constraints, these too are very much incomplete, but will hopefully stimulate further discussion.

Benson

I’m delighted to see Bruce chide me for being too reserved about the benefits of anarchy. My comments here are uncharacteristically short because, I must admit, I am in total agreement with him. As Bruce put it, “While life in the shadow of the state can be relatively good if the state can be sufficiently constrained, perhaps as the government of the United States used to be, the state remains a parasite on the voluntary productive activities of society. Thus, even when a relatively ‘good’ government exists, there still is way too much government and not nearly enough anarchy.” I share Bruce’s position entirely. I’ve never been criticized for being too moderate before, but there’s a first time for everything.

Rodrik

Rodrik’s reply took the opposite tactic of Benson’s and chided me for not being moderate enough in my initial essay. Its main point is that “self-enforcing agreements do not scale up.” This is a common criticism of self-enforcement, and one that I’ve devoted a considerable amount of my research to addressing.

At least some kinds of self-enforcing agreements can and have scaled up quite nicely. As my initial essay pointed out, purely Folk Theorem-based self-enforcing mechanisms, such as reputation, can have trouble scaling up. But reputation/repeated play coupled with ex post punishment is not the only self-enforcing mechanism that exists.

There are two basic categories of mechanisms for dealing with uncooperative members of society: those that punish cheaters ex post when they behave badly (reputation/repeated play is based on this) and those that exclude the “bad apples” ex ante so that ex post punishment is largely unnecessary. The first of these has trouble scaling up because it is difficult to communicate the identity of cheaters to the entire relevant population as society gets larger. The second, however, has no scale limit since it does not rely on ex post punishment to work. If traders can somehow credibly signal to potential trading partners that they are honest, and dishonest individuals cannot copy this signal, traders can exchange with the honest types without having to worry about dealing with the dishonest types. Economists call this “signaling.”

My paper, “Social Distance and Self-Enforcing Exchange” discusses why, on this basis, small numbers and fixed membership is not a requirement for effective self-enforcement. It illustrates this argument with examples from large-scale self-enforcement among socially diverse groups without fixed membership in precolonial Africa. Here, long-distance traders used social signaling to communicate their cooperative nature to strangers, facilitating exchange without government. The key was for honest individuals to adopt the customs and practices of outsiders they wanted to trade with, which dishonest individuals would not want to adopt. On the basis of these signals, individuals could identify and trade with the honest types and identify and stay away from the dishonest types. Religious practices, land practices, and voluntarily submitting oneself to the rules of others’ communities all served this purpose.[1]

Another example of this is found in the international arena where a combination of reputation and signaling are used to secure self-enforcement without government. The volume of international trade is staggering—approaching a quarter of world GDP—and rising. This seems to suggest that self-enforcing arrangements can be scaled up and enable massive volumes of trade. Rodrik, however, argues that we cannot conclude this because international trade takes place in “the shadow of the state.” Private arbitral decisions, which nominally enforce international trade contracts, can in the end be enforced in domestic state courts where they receive their “teeth.” Thus, state enforcement is really at the bottom of booming international commerce.

What Rodrik is presumably referring to here is the “New York Convention,” a multinational treaty between countries that makes it possible, at least on paper, for states that are signatories to the convention to enforce arbitral decisions brought to them by private international traders. Does the NYC undermine the argument that the high level of international trade we observe relies of self-enforcement? No, and here’s why: [2]

First, the NYC was not created until 1958. Before 1958 there was no such multinational treaty that enabled state courts to enforce international arbitral decisions. Despite this, pre-1958 international commerce was already sizeable and growing steadily. As early as 1948—a full decade before the introduction of the NYC—world merchandise exports alone were more than $300 billion (1990 $).[3] If state enforcement provided by the NYC is the reason for large and growing trade, then trade should have been paltry and sluggish pre-1958. But this is not what the data suggest. It is true, only more recently has trade astoundingly taken off, but there is no evidence to suggest that the NYC is responsible for this. In fact, the International Chamber of Commerce—the world’s largest international arbitration association—estimates that 90% of all its arbitral decisions are complied with voluntarily.[4] This suggests that state enforcement via the NYC, or any other avenue, plays almost no role in enforcing international commercial agreements.

Second, even after 1958, many major (and minor) countries did not join the NYC. The United States and the United Kingdom, for example, did not join the NYC until 1970 and 1975 respectively (and a number of countries are still not signatories to this day). This left international commercial contracts involving traders from such places without recourse to state enforcement until these governments joined the convention much later. But again, trade was already large and growing when this occurred, so it does not seem reasonable to attribute the incredible success of international commerce to the NYC.

Third, the NYC, like all of the multinational conventions/associations Rodrik points to, such as the WTO, is purely voluntary. There is no supranational government or other agency of enforcement that can compel nations to join the NYC or any other multinational agreement, or to enforce its terms even for countries that do join. If multinational agreements are providing order to the international arena, as Rodrik suggests, there is a serious problem for the claim that government is required for this order, because these agreements themselves must rely on the very self-enforcing mechanisms that allegedly cannot be successfully scaled up to this level.

There are therefore two possibilities: (1) multinational agreements are incapable of producing order in the international sphere, in which case they cannot be credited for producing the order we observe here, meaning that private governance arrangements must be responsible, or (2) multinational agreements are effective, but since they are effective in the absence of a supranational sovereign to enforce them and must instead rely on self-enforcing mechanisms to work, self-enforcing mechanisms can be scaled up to facilitate large volumes of trade. In either case, self-enforcing agreements are ultimately responsible for the success we observe in the international arena and argument that they cannot be scaled up seems to be wrong.

I have focused here on the main multinational arrangement for the purposes of enforcing international commercial contracts. But there is also reason to be skeptical of Rodrik’s claim that “globalization would not have reached this far in the absence of the WTO, IMF, World Bank and a host of [other] regional supranational institutions.” Andrew Rose’s important research on the WTO, for example, finds that the WTO has had no discernable positive impact on international trade.[5]

Rodrik points to the positive correlation between average income and government consumption and argues that shows that larger, not smaller, governments lead to greater prosperity. But does this correlation really show this? Is it really reasonable to think that the key to solving the Congo’s poverty is a more active government? The positive relationship Rodrik depicts may be confusing cause and effect. Rather than larger governments leading to greater prosperity, it seems more probable that more prosperous countries can afford to have larger governments and the higher costs (such as more corruption, market distortion, rent seeking, etc.) that larger governments bring with them. In other words, the causation runs the other way.

A better way to see how the size and activeness of government is connected to prosperity is to examine the relationship between “economic freedom”—a measure of the overall extent of government intervention in an economy, and average income. Consider the figure below, taken from the Heritage Foundation/Wall Street Jounal’s economic freedom index. This figure plots nations’ 2007 economic freedom score against their (log) GDP per capita. A higher economic freedom score means less government intervention and vice versa.

The relationship is strongly positive. Countries that have less interventionist governments are wealthier than countries with more interventionist governments. Thus, it seems that less government, not more, leads to greater prosperity. This casts significant doubt on Rodrik’s claim that “Those societies in which markets work best are the ones where the reach of the state is longer—not shorter,” and in fact suggests precisely the opposite.

Holcombe

Randy’s responds to my essay by pointing out that even if anarchy is superior to government, we’re not going to get it, so it’s not very useful to consider anarchy from a policy perspective. Although my initial essay was not concerned with how we might go about implementing anarchy, I think the policy question is a good one. I am somewhat sympathetic to Randy’s main argument, but have a few reservations.

First, how far can we take this reasoning? It is unrealistic to think that the United States is going to repeal its minimum wage law, but this does not stop most free-market advocates, including Randy as far as I know, from railing against the minimum wage. Why can’t it be so with anarchy as well?

Second, although anarchy may not always be stable, it does not appear to be any less stable than the minimal government that “minarchists” advocate. Governments throughout the globe have grown dramatically over time. Although some have clearly grown less than others, all governments that began as “night watchman”-type states, including the one in the U.S., have grown considerably beyond this bound. So, while stability may be a problem for anarchy, it is also a problem for other political economic organizations.

Finally, as Randy points out, one of the main obstacles to anarchy is that most people simply like big government. First, it should be pointed out that this is also an obstacle to even more moderate arguments that advocate simply reducing the size of government. More importantly, however, the “big government bias” of many people may not be innate and therefore unalterable but instead be the result of mistakenly believing that the market is incapable of producing the ends they desire. As Milton Friedman stressed, the disagreement is primarily about means, not ends. If this is right, we need to show why purely private means are as capable, if not more capable, of producing the ends people desire than government. Part of the purpose in my initial essay was to suggest, however incompletely, how it might be that this is so, even for those activities such as the production of “law and order,” which most everyone thinks government is required for.

Notes

[1] Leeson, Peter T. (2007) “Social Distance and Self-Enforcing Exchange.” Journal of Legal Studies, forthcoming. Available at: http://www.peterleeson.com/PSH.pdf

[2] For more on the unimportance of state enforcement for international trade, see, Leeson, Peter T. (2006). “How Important is State Enforcement for Trade?” Mimeo. Available at: http://www.peterleeson.com/How_Important_is_State_Enforcement.pdf

[3] WTO (2001) “Data for Doha.” Available at: http://www.wto.org/English/thewto_e/minist_e/min01_e/brief_e/brief21_e.htm

[4] Craig, W.L., William Park and Ian Paulsson (2000). International Chamber of Commerce Arbitration. New York: Oceana Publications.

[5] Rose, Andrew K. (2004) “Do We Really Know that the WTO Increases Trade?” American Economic Review 94(1): 98-114.

Also from This Issue

Lead Essay

  • Anarchy Unbound, or: Why Self-Governance Works Better than You Think by Peter T. Leeson

    Everybody seems to know we need government … But pirates didn’t! How did they manage without the state? In this issue’s thought-provoking lead essay, Peter T. Leeson, the BB&T Professor for the Study of Capitalism at George Mason University, explores what pirate “constitutions,” credit institutions among 19th century African bandit traders, and the well-being of Somalians after the collapse of the Somalian state have to tell us about the possibility of practical anarchy. It works better than you think, Leeson concludes. “As long as there are unrealized gains to realize, people will find ways to realize them” – state or no state.

Response Essays

  • Anarchy Bound: Why Self-Government Is Less Widespread than It Should Be by Bruce L. Benson

    Bruce L. Benson, author of The Enterprise of Law: Justice Without the State, argues Peter Leeson’s defense of anarchy is too moderate. Governments in developed nations, Benson maintains, are not better than ordered anarchy. Drawing on Franz Oppenheimer’s classic account of the state as a protection racket, Benson argues that the state only seems necessary because it offers “solutions” to problems the state itself creates. Benson claims that even well-constrained states are essentially parasitic, leading him to conclude that “even when a relatively ‘good’ government exists, there still is way too much government and not nearly enough anarchy.”

  • The Limits of Self-Enforcing Agreements by Dani Rodrik

    Harvard economist Dani Rodrik is willing to accept a number of steps in Peter Leeson’s argument for anarchy, “but [Leeson’s] bottom line … represents a huge leap of faith.” Citing the work of several important thinkers, Rodrik argues that “the problem with self-enforcing agreements is that they do not scale up.” Both theory and data show that complex, well-functioning social and economic systems require the enforcement of rules by government. “Those societies in which markets work best are the ones where the reach of the state is longer, not shorter.”

  • Anarchy From a Policy Perspective by Randall G. Holcombe

    Florida State University economist Randall Holcombe argues that even if Leeson is right about anarchy, it doesn’t much matter. “Regardless of its merits,” Holcombe writes, “anarchy has no prospect as an actual policy option.” The bottom line is that government is popular in developed nations. Furthermore, anarchy may not be a “stable equilibrium,” in which case it might “coalesce into governments … potentially more oppressive and more destructive than those we see in prosperous areas today.” According to Holcombe, if we’re going to get a government anyway, the best approach to policy is to “make it smaller, less intrusive, and more libertarian,” not to make it go away.

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