Private Enforcement of Contracts versus Property Rights

Most people assume that government courts and police are needed for the enforcement of contracts and property rights. James Hanley, however, points out:

Arguments for the state tend to be arguments from incredulity. Just as creationists respond to evolutionary theory with “God of the gaps” arguments, social scientists respond to private governance theory with “government of the gaps” arguments. The problem with such arguments is that they are not based on evidence, but on a lack of evidence, and their weakness is revealed each time a gap gets filled in.

The assumption that contracts can only take place because of government blinds most people to evidence of private sector enforcement. Hanley also discusses how that assumption leads people to advocate state violence for enforcing contracts even though nonviolent private alternatives exist. He states, “Although the western political tradition has taught us to view government as a human achievement, we can also view it as evidence of failure to resolve problems of collective governance without resorting to the threat of violence.” I very much share Hanley’s perspective on political science here.

After agreeing with the importance of private governance, Hanley goes onto ask whether formal government is wholly unnecessary. He states, “There may in fact be gaps that can’t be filled by private governance, but we need to look at those perceived gaps as hypotheses, rather than as demonstrated proofs. And one gap that has not yet been filled is the one containing that class of activities we normally think of as criminal: personal violence and property crimes.”

Hanley correctly points out that interaction between a criminal and a victim has a different set of characteristics than two people choosing to do business. While interaction of members of a stock exchange can easily made to be among friends, thieves who invade a gated community explicitly disregard the fact that others do not want to deal with them.

I agree with Hanley that the analysis and potential remedies for mutually agreed to interaction versus coercive interaction are quite different.  I also agree that evidence that private governance can successfully handle sophisticated contracts does not prove that private governance can handle protecting property rights.

But if private governance is so effective and important for facilitating advanced contracts, something that legal centralists assumed was impossible, we should not underestimate its potential in other realms, such as physically protecting individuals and property.

As the Wall Street Journal points out, police tend to focus “on nuisance and vice—the cheap and easy, low-hanging fruit of the trade” rather than protecting persons and property. Many college campuses are located in cities with high crime rates, yet on campus, private security or private police do a great job keeping crime down. A recent study by my friend Jonathan Klick also found that increasing private policing around the University of Pennsylvania also reduced crime off campus too.

In Private Governance, I describe some of the reasons why San Francisco merchants pay for the Patrol Special Police instead of relying on free government police. One of the biggest reasons is that government police have limited resources and simply do not respond to what they consider low priority events. An unwanted drugged out guest may be a big problem to a restaurant or store, but government police prioritize it differently. Private police, on the other hand, respond right away. In other cases, simply having an unarmed security guard or a doorman suffices.

We can assume that order that exists only due to government police, or we can consider the possibility that the order comes about by other means.

Also from this issue

Lead Essay

  • Edward Peter Stringham argues that private governance isn’t a fiction. It’s a key, though unappreciated, aspect of modern life. Much political economy begins with the assumption that markets require external, nonmarket institutions to provide services of assurance and trust, without which markets cannot function. Stringham suggests that this is not necessarily so, and he uses evidence from real-world private governance to make the point. Private governance has existed and continues to exist in markets both simple and highly complex.

Response Essays

  • Aaron Ross Powell questions whether private governance is truly possible, and if so, what that would mean. Much of our current private governance would clearly never exist if it were not backed by the persuasive threat of force from some state-like entity. Both in his lead essay and in his book, Edward Stringham fails to draw a clear distinction between public and private, and as a result, it is unclear how these two terms should be deployed in many plausible situations, both hypothetical and in our own world. Powell questions whether these terms are not used in an ad hoc manner, robbing Stringham’s work of any significant normative force. The state we have may still be inefficient and cruel, and private institutions may commonly still be better, but the line between them isn’t so clear.

  • James E. Hanley argues that private institutions may be ill-suited to certain forms of governance. In particular, violent crime lacks the iterative nature that makes private governance work in many other situations. Moreover, as private institutions assume more and more of the duties of criminal punishment, they increasingly risk taking on the attributes of criminal enterprises themselves, particularly if their procedures lack legitimacy. Those who choose to say under their care will find themselves at the mercy, perhaps, of “stationary bandits” - and yet it is commonly observed exactly such organizations may have been the state’s progenitors.

  • Mark Lutter cites evidence that suggests that even in the realm of finance, private governance can’t always deliver. He questions Stringham: How far, exactly, does he think private governance should go? All the way to anarchy? If so, what does he think will happen to the problem of violent competition among agencies with varying degrees of legitimacy? Lutter also raises the problem of low-frequency preferences: One of the great things about the market is that, unlike in democratic decisionmaking, minority tastes in the market can commonly be satisfied. That’s a wonderful thing when it’s a matter of deodorant or sneakers. It’s not so great when a small minority has a taste for violence, as with, for example, the Ku Klux Klan: A market for violence might see much more of the Klan’s demand satisfied.