According to Pete Leeson, I am not “sane” since I believe that “anarchy generates order.” Pete then correctly points out that history provides strong evidence for the hypothesis that order arises in anarchy, and furthermore, that ordered anarchy also characterizes many aspects of modern life (I guess he is insane too). He provides three relatively detailed examples, in order to demonstrate that
there is no “blueprint” for how anarchy would or would not work. This, in fact, is the whole point. Private institutional responses reflect the specific problems, times, places, and other conditions that give rise to them.
I will quibble with this, contending instead that some institutional responses are in fact quite predictable. I will illustrate this only indirectly, however, as I consider another question: Does the fact that many historical examples of stateless communities have given way to states mean that the institutions of governance provided by states provide more effective (efficient) order when they replace self government? This question arises because, while Pete correctly notes that most of the governments are not effectively producing order (and also explains that Somalians are better off without a state), he seems to suggest that a “transparent, well-constrained, and highly-functional government, like the one we have in the United States” may be produce a superior order to that arising under anarchy.
The primary motivation for developing rules and institutions is that individuals are attempting to find ways to expand personal wealth in the face of scarcity, but there are two ways that an individual can expand personal wealth. One is through what Oppenheimer labels the “economic” means: cooperative voluntary interaction, including team production through the division of labor, and voluntary exchange.  The second involves taking wealth produced by others through the use of force and/or guile: what Oppenheimer calls the “political” means. Rules and institutions can be developed to facilitate the pursuit of wealth trough either of these means.
Because the underlying source of conflict is scarcity, the most important rules of behavior focus on property rights. Rules that arise through ordered anarchy create a system of evolving private property rights. Wealth is enhanced for everyone involved by making property relatively more private and relatively more secure. This provides a powerful motivation for the development of ordered anarchy.
As an ordered anarchy develops and property rights are increasingly privatized, some individuals are likely to gain considerable wealth while others, due to their lack of skills, mistakes, bad luck, or other factors may not enjoy such gains. Thus, a class of people can develop whose opportunity cost of living up to promises to respect others’ property rights will be relatively low. There are a number of reasons to expect that such events will not culminate in the internal rise to power of an extortionist, however. First, institutions develop within cooperative groups to sanction non-cooperative behavior. Indeed, a thief or extortionist known to the voluntary group will be accused of wrongdoing, tried before an arbitrator or mediator, and if found guilty, sentenced to pay restitution to cover damages. Refusal to accept a fair trial or to pay restitution will lead to ostracism. Therefore, long before an individual (or even a gang) would be able to amass sufficient power to call himself a “god-father” or “king” and develop institutions of governance that impose extortionary rules, he would be cast out of the group. Several other developments within voluntary groups could also be cited that tend to prevent the development of an extortionist system of governance. Mutual insurance arrangements encourage people to continue to recognize the cooperatively-produced property rights system even when their circumstances change, for instance. The fact is that the internal dynamics of an ordered anarchy appear to be quite stable. Indeed, as Hume explains, coercive institutions of government “arise from quarrels, not among men of the same society, but among men of different societies.”
If one group has accumulated a lot of wealth and/or is very productive, members of another group may decide to employ violence in order to take the wealth or to extort part of the stream of income from productive activity. One function of cooperative groups in maintaining secure private property rights is defense against invaders, of course, but if the invaders have a lower opportunity cost of violence, the defenders may choose to surrender and pay tribute rather than fight. Just like the merchant who is better off paying the mafia for “protection” than he is resisting, the relatively productive defenders of the fertile valleys ultimately appear to yield to the invaders from the mountains rather than investing all of their time and effort in defense. Tribute (called taxes if the protection racket becomes a state) is “extorted” as the payment for “protection” from the individual(s) receiving the payment, rather than from other threats.
Nonetheless, a subjugated individual chooses to yield to such extortion because it allows the creation of greater personal wealth than is expected through violent conflict against someone with a comparative advantage in violence (e.g., perhaps some retention of the wealth generated through economic means, since an extortionist must allow some, albeit relatively insecure, private property rights to create incentives for production of a steady stream of wealth). As an extortion racket evolves, the extortionist expands his organization, employing other specialists in violence (strong-arm enforcers, police, military personnel), buying off other potentially powerful rivals by directing some wealth transfers to them and by recognizing and protecting some of their property rights, and so on. Such organized extortion can evolve into a state if it gains sufficient control over a geographic area.
While Oppenheimer’s story is quite compelling as an explanation of the historical development of the state, it does require that the important productive assets are immobile. Historically, most wealth has been tied to land, so this requirement was met. While land certainly remains an important source of wealth in much of the world, wealth is increasingly tied to capital. If the owners of capital can escape and take much of their wealth with them, the expected gains from extortion are reduced. The institutions of the international business community that govern international trade remain relatively free from state controls, for instance. Indeed, one advantage that self-governance arrangements have over the state is that they may be functionally rather than geographically defined. Of course, this creates incentives to establish ever larger states and strong barriers to exit.
When a strong coercive power can limit exit, economic success requires that property rights be recognized and supported by that power — that is the essence of a protection racket. Thus, state recognition of property rights is required to achieve the most efficient use of resources, but only because the state is the primary threat to those rights. The existence of a state does not produce stable property rights, however. Property rights are subject to reallocation as the distribution of political power changes, so any rights claimed by those who have little political power will be extremely insecure. Therefore, individuals who do not have sufficient political power to induce the state to recognize their property claims, and whose wealth cannot be taken outside the geographic jurisdiction of a protection racket, have incentives to avoid detection by developing cooperative efforts “underground” in order to protect the wealth they create (and to produce less, of course). Since there really is no case in which the power of a sovereign has become truly absolute, pockets of ordered anarchy remain or evolve even within the state’s boundaries.
Numerous examples of centralized coercive governance can be cited where “parallel” predominately cooperative systems of norms and institutions actually dominating many interactions. De Soto’s analysis of the “informal” sector in Peru is particularly revealing in this regard, as he explains that the “squatter communities” are very well organized, members respect each others’ property claims and cooperate to enforce rules of behavior.  Nonetheless, the proximity of a coercive ruler raises transactions costs for such groups. Because property rights are relatively insecure, for instance, time horizons are short so both repeated-deal arrangements and reputations that underlie the trust arrangements of ordered anarchy are less valuable. Ostracism is less effective, so cooperative arrangements may have to employ “illegal vigilante” exactions of retribution as a substitute for ostracism. Naturally, incentives to pursue innovations (technological, institutional) that will allow exit and more widespread use of ordered– anarchical arrangements exist, but incentives to pursue innovations in extortion also arise, so a spiraling competition between the state and anarchy occurs.
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.
 Much of this discussion draws from Benson, B. L. (1999) “An Economic Theory of the Evolution of Governance and the Emergence of the State,” Review of Austrian Economics, 12: 131-160, where more details, evidence, and references are provided
 Oppenheimer, F. (1914 ) Gitterman, J. M. (Tr.) The State: Its History and Development Viewed Sociologically. Indianapolis: Bobbs-Merrill.
 Hume, D. (1957 ) Hendel, C. W. (Ed.) An Inquiry Concerning the Principles of Morals. Indianapolis: Bobbs-Merrill, page 540.
 Carneiro, R. L. (1970) “A Theory of the Origin of the State.” Science, 169: 733-738
 de Soto, H. (1989) The Other Path: The Invisible Revolution in the Third World. New York: Perennial Library.
Bruce L. Benson, DeVoe Moore and Distinguished Research Professor, is the Chair of the Department of Economics and a Courtesy Professor of Law at Florida State University.