About this Issue
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. Can organizations solve complex problems of coordination without government coercion? Can voluntary bands provide public goods? Are there conditions under which groups really are better off stateless? Leeson will be joined by three eminent commentators: Florida State economics professor Bruce Benson, author of the seminal The Enterprise of the Law: Justice without the State; Dani Rodrik, professor of international political economy at Harvard’s Kennedy School; and Randall Holcombe, another distinguished Seminole economist and current president of the Public Choice Society.
Anarchy Unbound, or: Why Self-Governance Works Better than You Think
No sane person believes that anarchy generates order. The idea that anarchy could be superior to government in some cases seems even more absurd.
Everyone from Thomas Hobbes to Adam Smith repeats the claim that societies need government to protect property and produce widespread cooperation. Even the most libertarian thinkers believe this is true. As Milton Friedman put it, “government is essential both as a forum for determining the ‘rules of the game’ and as an umpire to interpret and enforce the rules decided upon.”
Self-governance, however, might work better than you think. A small cadre of self-described “anarcho-capitalists” reject the anarchy-as-chaos “wisdom.” In the 20th century the most notable of these thinkers have been Murray Rothbard, who grounded his defense of anarchy in natural rights theory, and David Friedman, whose book, The Machinery of Freedom, provided the quintessential consequentialist defense of a purely private society.
Despite the important theoretical arguments in these and other anarcho-capitalist works, even among those familiar with them, most remain unconvinced. On the one hand, natural rights defenses of anarchy do not persuade consequentialists, such as economists, who see significant problems with anarchy’s ability to cope with cheating and violence.
On the other hand, most consequentialist defenses of anarchy are purely speculative. In forging responses to how a stateless society could cope with every conceivable contingency it might confront, anarchists often offer imaginative conjecture, in some cases bordering on science fiction.
Ironically, the case for anarchy derives its strength from empirical evidence, not theory.
Most of the world, for most of its history, has existed without effective governments. As noted economic historian Joel Mokyr points out, “In England,” for example, “there was not even a professional police force to protect private property” until the 19th century.
Large arenas of economic activity in the world remain anarchic, or nearly so, to this day. For example, there is no supranational sovereign with the authority to create formal international laws to regulate countries or to enforce such laws if they existed. Adding to international anarchy is the absence of state-made, supranational commercial law to enforce contracts between private international traders.
In large parts of the developing world governments are too weak or dysfunctional to perform even the most basic tasks, like securing the property rights of their citizens. According to the 2007 Failed States Index, governments in 129 countries are on or nearing the brink of collapse. Somalia has no central government at all.
Even in the developed world pockets of anarchy persist. The costliness of state enforcement, coupled with the fact that the state’s eye cannot be everywhere all the time, means that people cannot in many cases rely on government to protect their property or enforce their contracts even though, officially, a well-functioning state exists.
Despite these significant arenas of anarchy we do not observe perpetual world war in the absence of global government, shriveling international commerce in the absence of supranational commercial law, or even deteriorating standards of living in Somalia. On the contrary, peace overwhelmingly prevails between the world’s countries, international trade is flourishing, and Somali development has improved under statelessness.
If conventional wisdom is right then reality must be wrong. How can this be?
Empirical evidence, past and present, sheds light on how individuals under anarchy develop private institutional solutions to address the problems that statelessness presents. The guiding force behind these solutions is none other than Adam Smith’s “invisible hand.” Importantly, Smith’s principle applies not only to individuals’ activities in the context of well-functioning institutions, but also to their activities in the development of institutions themselves.
The Invisible Hook
One of the most striking examples of this comes from 17th and 18th-century pirates. In many ways pirate ships were like floating societies. And, like other societies, pirate ships confronted problems of theft of cheating. Since they were outlaws, pirates did not enjoy state protection. Government did not enforce employment agreements between pirates or other piratical “contracts,” nor did it prevent or punish theft between pirates, etc.
Notably, the anarchic environment that maritime bandits operated in did not lead them to simply throw up their hands and abandon the idea of their criminal enterprise. On the contrary, the prospect of mutual gains from organizing this enterprise provided pirates with the incentive to find private ways of securing cooperation and order.
Even by modern standards the institutions pirates devised for this purpose were remarkably sophisticated. Pirates created one of the earliest forms of written constitutions they called their “articles, which codified many of the rules that governed their ships, as well as punishments for rule breakers. These included rules specifying the division of booty, “laws” against theft, and even workman’s compensation insurance to support crew members injured in battle.
To apply punishments and resolve disputes between crew members, pirates created an office called the “quartermaster.” Crew members controlled quartermasters both through their articles, which prescribed the “laws” quartermasters could apply, and by democratically electing crew members to this office.
The office of the quartermaster allowed pirates to overcome another obstacle anarchy posed for their organization—restraining potentially abusive pirate captains. A captain endowed with unlimited authority would be able to prey on his crew, skimming booty, mistreating crew members, and so on. To check such abuse pirates initiated one of the earliest systems of divided power, which transferred authorities susceptible to captain abuse to the quartermaster instead. In conjunction with also democratically electing their captains, pirate checks and balances overcame the threat of captain predation.
This system of governance was entirely voluntary. Pirates drew up the articles governing their ships before taking voyage and required unanimous consent before sailing. Any prospective crew member who disliked the proposed rules was free to exit before sail was underway.
The pirates’ private system of governance worked extremely well. Inter-pirate conflict was rare, order was well maintained, and pirates regularly successfully cooperated, making them among the most effective organized criminal outfits in history.
Trading with Bandits
A common objection to anarchy is that without government the strong will plunder the weak. Indeed, perhaps the oldest, most well-accepted argument for the state is weaker individuals’ inability to prevent stronger ones from plundering them. How can self-governance alone prevent this?
Many mechanisms of self-governance rely on reputation to secure good conduct. It’s not difficult to see how reputation can in many cases prevent cheating even where government enforcement is not an option.
Imagine you go to a restaurant and order a $30 filet mignon. When your food arrives you take a bite and realize the restaurant has served you a $10 flank steak instead. The restaurant has defrauded you. You could take the owner to court; but then you realize that the simple time cost this will entail is not worth what you will recover even if you win. Although in principle government exists to adjudicate this matter, in practice it does not.
Your dining experience is a little slice of anarchy. Knowing this, restaurant owners should perpetually serve $10 flank steaks to customers who order filet mignon. Of course restaurants don’t do this. And the reason they don’t is because they realize that if they do, you’ll stop eating there and tell everyone you know to boycott the restaurant as well. Even without government, Smith’s “invisible hand” leads the restaurant to do the right thing.
Reputation-based mechanisms of self governance have a major hitch, however. They require the restaurant owner to not have the power to take your money from you against your will. If, for instance, you announce your boycott of the fraudulent restaurant, but the owner is sufficiently stronger than you and can use the threat of violence to extract “future business,” your threat of boycott is useless. Reputation breaks down.
In light of this problem many observers have concluded that anarchy is incapable of dealing with the problem of force. Fortunately, individuals under real conditions of anarchy who have actually faced such problems are more innovative than these observers.
A simple historical case from late pre-colonial Angola illustrates this well. In the late 19th century the coast of Angola was home to a flourishing export market that shipped African goods to Europe. On the one side of this market were European settlers who operated the export industry, and on the other side were African producers in the remote interior who harvested the goods required for export. Connecting these two groups were African middlemen who traveled to the interior to collect the goods and then carried them to the coast for export.
In the 19th century this region was for all intents and purposes anarchic. Although Europeans had settlements with European laws and interior African communities had their own, largely informal institutions of internal governance, there was no government to oversee the interactions between members of these groups or their interactions with the middlemen. The problem this created was that middlemen tended to be substantially stronger than interior producers, posing the threat of force described above. Why pay producers for goods if middlemen could use their superior strength to simply steal them instead?
Like with the pirates, instead of throwing in the towel and either accepting that they would be routinely plundered or stopping productive activities altogether, so that there would be nothing for middlemen to steal, African producers devised an institutional solution to the problem of force that allowed them to realize the benefits of trade with these bandits.
The institution they devised for this purpose was credit. The key to understanding how credit solved the problem of force and facilitated peaceful exchange is straightforward: you can’t steal goods that aren’t yet produced, but you can trade with them.
Here’s how the credit institution worked: Producers would not produce anything today but would instead wait for middlemen to arrive in their villages looking for goods to plunder. With nothing available to steal the middlemen had two options: return to the coast empty-handed after having made a trip to the interior, or make an agreement with producers to supply the goods they required on the basis of credit. In light of the costliness of their trip to the interior, middlemen frequently chose the latter
According to their credit arrangements, middlemen advanced payment to producers and agreed to return later to collect the goods they were owed. When they returned for this purpose all that was available for taking was what they were owed, so stealing was not an option. Instead, middlemen frequently renewed the credit agreement, which initiated a subsequent round of credit-based trade, and so on.
This simple arrangement performed two critical functions in allowing producers to overcome the threat of force that middlemen presented. First, it enabled them to avoid being plundered, as though they had not produced anything at all, but also to realize the gains from trade, as though middlemen did not pose a threat of violence. Second, it transformed producers in the eyes of middlemen from targets of banditry into valuable assets they had an interest in protecting. If middlemen wanted to be repaid they needed to ensure that their debtors remained alive and well enough to produce. This meant abstaining from violence against producers and protecting producers against the predation of others.
Better off Stateless
“Okay,” you might think. “So, historically there are some cases where anarchy seemed to work pretty well. But this doesn’t demonstrate that anarchy is ever actually superior to government.” True, but recent evidence from Somalia does.
From 1960, when Somalia gained its independence, until 1991, it was ruled by a socialist (though, officially, he later abandoned socialism) dictator named Mohamed Siad Barre. Barre’s policies and behavior looked a lot like the wealth-destroying, wildly corrupt, and highly predatory policies and behavior we observe in many other Sub-Saharan African countries today.
In 1991 a coup d’etat tumbled Barre’s regime. Unlike most coups, which replace one predatory government with another, this one replaced the old regime with nothing. Although there have been a few failed attempts at resurrecting government in Somalia, including the most recent one by the international community-backed “Transitional Federal Government,” for the last fifteen- plus years Somalia has been stateless.
This situation has caused a great deal of hand wringing among international observers who continually point to the severe poverty and other problems in the country. Somalia has thus become the “poster child” for government’s indispensability and evidence that anarchy leads to chaotic decline.
The great irony of these claims is that the data we have on anarchic Somalia point in exactly the opposite direction: namely, anarchy in Somalia has produced a higher level of welfare than government did.
In a recent study I compared Somali welfare under anarchy to welfare under government using all key development indicators for which data allowed comparison. According to the data, of the eighteen development indicators, fourteen show unambiguous improvement under anarchy. Life expectancy is higher today than was in the last years of government’s existence; infant mortality has improved twenty-four percent; maternal mortality has fallen over thirty percent; infants with low birth weight has fallen more than fifteen percentage points; access to health facilities has increased more than twenty-five percentage points; access to sanitation has risen eight percentage points; extreme poverty has plummeted nearly twenty percentage points; one year olds fully immunized for TB has grown nearly twenty percentage points, and for measles has increased ten; fatalities due to measles have dropped thirty percent; and the prevalence of TVs, radios, and telephones has jumped between three and twenty-five times.
As Tatiana Nenova and Tim Harford discuss in their World Bank brief, “Anarchy and Invention,” much of this development can be attributed to improvements in public goods provided better by Somalia’s anarchic private sector than by its former government.
Should we conclude from Somalia’s stateless improvement that it is a nice place to live? Of course not. But Somalia’s pre- and post-government performance highlights an important point about the desirability of anarchy. Contrary to conventional wisdom, it is simply not true that any government is always superior to no government. If state predation goes unchecked, government may not only fail to add to social welfare, but can actually reduce welfare below its level under statelessness. Such was the case with Somalia’s government, which did more harm to its citizens than good.
Somalia is extremely poor and remains a country with incredible problems. But this does not demonstrate the desirability of government or the undesirability of anarchy, as many of those who advocate reintroducing government in Somalia pretend.
When thinking about the developing world we must be careful to avoid committing what economist Harold Demsetz called the “nirvana fallacy.” The nirvana fallacy involves ignoring real-world constraints that limit the menu of options (and thus outcomes) we have available to us. For instance, in a world in which I am as wealthy as Bill Gates, I might drive a Ferrari. Constrained by my actual income, however, I can only afford to drive a Subaru. Although I would of course prefer the Ferrari, it would be silly to conclude that I should drive a Ferrari because this is the better car. The fact that the Ferrari is superior is irrelevant; given the constraints I actually face, the Ferrari is not in my feasible choice set.
We can extend this example a step further. Imagine that I wrongly believe I should really be driving a Ferrari, and so I decide to try and do so. My budget constraints prevent me from buying a functional Ferrari. But I can afford a Ferrari with engine problems so severe it may explode when I drive it. So a Subaru and a “lemon” Ferrari are in my feasible choice set. If I purchase the “lemon” Ferrari, am I better off than if I had gone with the Subaru? Of course not. Given the choices actually allowed by my constraints I would be better off with the Subaru.
The same kind of reasoning applies to thinking about anarchy versus government in Somalia and the large part of the developing world that is teetering on state collapse. Although it is certainly reasonable to believe that a transparent, well-constrained, and highly-functional government, like the one we have in the United States, would improve Somali welfare beyond what it has experienced under anarchy, this does not mean that reintroducing government in Somalia would be better for Somalis.
Like all other choices, the choices we face in “selecting” governments are constrained. Unfortunately for most developing countries, the political choice set they face is far smaller than the political choice set more developed countries face. Historical features, such as clan tension, rampant corruption, territorial conflicts, and many others, which cannot be changed in the short run, severely restrict the kind of government countries like Somalia can reasonably expect to have if they have a government.
Sadly, well-functioning, well-constrained governments like the ones we observe in the U.S. and western Europe are not part of this choice set. Ultra-predatory, corrupt, and abusive governments, however, are. And so is anarchy. As Somalia’s experience illustrates, for many LDCs with these limited options anarchy may very well be the best feasible choice.
Anarchy, like all political-economic organizations, is riddled with problems. It is not clear that these problems are any more numerous or severe than those that plague governments, however. I have argued that anarchy works better than you think. In the face of obstacles that stand in the way of individuals’ ability to cooperate for mutual gain, individuals develop solutions to overcome these obstacles. This is as true in society ruled by government as one that exists without government. Where the state does not provide law, order, or the institutions required to produce these things, private institutions emerge to perform these roles instead.
My examples from above are not intended to suggest that these particular institutional solutions are generalizable or somehow suggest how other societies without government would evolve. On the contrary, there is no “blueprint” for how anarchy would or does 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. In a different time and a different place with different people, even the same problem situation may be met differently under anarchy.
The unifying feature of my examples is the incentive individuals have to solve their problems. In this sense, the empirical evidence from anarchy only demonstrates that as long as there are unrealized gains to realize, people will find ways to realize them. Fortunately for anarchists, this “only” is considerable.
 And yet, upon simple reflection must certainly be true under some circumstances. Peter T. Leeson, “Efficient Anarchy,” Public Choice, 130 no. 1-2 (2007): 41-53. Online: http://www.peterleeson.com/Efficient_Anarchy.pdf
 Milton Friedman, Capitalism and Freedom, (Chicago: University of Chicago Press, 1962), p. 15.
 Murray N. Rothbard, The Ethics of Liberty, (Atlantic Highlands: Humanities Press, 1982); Murray N. Rothbard, For a New Liberty: The Libertarian Manifesto, (New York: Collier Books, 1973); David D. Friedman, The Machinery of Freedom: Guide to a Radical Capitalism, (New York: Arlington House, 1971).
 Joel Mokyr, “Mercantilism, the Enlightenment, and the Industrial Revolution,” mimeo, 2003, p. 18.
 Kenneth A. Oye, “Explaining Cooperation Under Anarchy: Hypothesis and Strategies,” in Kenneth A. Oye, ed., Cooperation Under Anarchy (Princeton: Princeton University Press, 1986), pp. 1-24. On the informal institutional solutions countries under international anarchy develop to help cope with this problem, see, Peter T. Leeson, “The Laws of Lawlessness,” mimeo. Online: http://www.peterleeson.com/Laws_of_Lawlessness.pdf
 Alain Plantey, “International Arbitration in a Changing World,” in A.J. van den Berg, ed., International Arbitration in a Changing World, (Deventer: Kluwer Law and Taxation Publishers, 1993), pp. 67-84.
 Foreign Policy and the Fund for Peace, 2007 Failed States Index, 2007.
 Bruce Benson’s superlative research on the law merchant explains how private international commercial law and order support international trade. Bruce L. Benson, The Enterprise of Law: Justice without the State (San Francisco: Pacific Research Institute for Public Policy, 1990). See also, Peter T. Leeson, “One More Time with Feeling: The Law Merchant, Arbitration, and International Trade,” Indian Journal of Economics and Business, Special Issue, (2007): 29-34. Online: http://www.peterleeson.com/One_More_Time_with_Feeling.pdf
 Peter T. Leeson, “An-arrgh-chy: The Law and Economics of Pirate Organization,” mimeo, 2007. Online: http://www.peterleeson.com/An-arrgh-chy.pdf
 Marcus Rediker, Between the Devil and the Deep Blue Sea: Merchant Seamen, Pirates and the Anglo-Maritime World 1700-1750, (Cambridge: Cambridge University Press, 2005).
 Daniel B. Klein, ed., Reputation: Studies in the Voluntary Elicitation of Good Conduct, (Ann Arbor: University of Michigan Press, 1997).
 There are actually a few hitches. Another one is small, socially close populations. My research addresses anarchy’s ability to overcome this problem through alternative self-enforcing arrangements, such as social signaling, which people historically employed when confronted with this obstacle. Peter T. Leeson, “Social Distance and Self-Enforcing Exchange,” Journal of Legal Studies, forthcoming. Online: http://www.peterleeson.com/PSH.pdf; Peter T. Leeson, “Self-Enforcing Arrangements in African Political Economy,” Journal of Economic Behavior and Organization, 57, no. 2 (2005): 241-244; Peter T. Leeson, “Cooperation and Conflict: Evidence on Self-Enforcing Arrangements and Socially Heterogeneous Groups,” American Journal of Economics and Sociology, 65, no. 4 (2005): 891-907. Online: http://www.peterleeson.com/Coop_and_Conflict_Link.pdf
 Peter T. Leeson, “Anarchy, Monopoly, and Predation,” Journal of Institutional and Theoretical Economics, 163, no. 3 (2007): 467-482. Online : http://www.peterleeson.com/Anarchy_Monopoly_and_Predation.pdf
 Peter T. Leeson, “Trading with Bandits,” Journal of Law and Economics, 50, no. 2 (2007): 303-321. Online: http://www.peterleeson.com/Trading_with_Bandits.pdf
 Peter T. Leeson, “Better Off Stateless: Somalia Before and After Government Collapse,” mimeo, 2007. Online: http://www.peterleeson.com/Better_Off_Stateless.pdf
 Tatiana Nenova and Tim Harford, “Anarchy and Invention,” Public Policy for the Private Sector, World Bank, Note no. 280, 2004. Online:
http://rru.worldbank.org/Documents/publicpolicyjournal/280-nenova-harford.pdf; Christopher J. Coyne, “Reconstructing Weak and Failed States: Foreign Intervention and the Nirvana Fallacy,” Foreign Policy Analysis, 2 (2006): 343-361. Online: http://www.ccoyne.com/FPA_-_Final.PDF; Peter D. Little, Somalia: Economy without State (Bloomington: University of Indiana Press, 2003).
 Harold Demsetz, “Information and Efficiency: Another Viewpoint,” Journal of Law and Economics, 12, no. 1 (1969): 1-22; Coyne, “Reconstructing Weak and Failed States.”
 John Hasnas, “The Myth of the Rule of Law,” Wisconsin Law Review, (1995): 199-233.
Peter T. Leeson is the BB&T Professor for the Study of Capitalism at the Mercatus Center at George Mason University.
Anarchy Bound: Why Self-Government Is Less Widespread than It Should Be
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.
The Limits of Self-Enforcing Agreements
I agree with many of the stepping stones in Leeson’s argument, but his bottom line—that a regime of state-less self-organization can generate the institutional underpinnings of economic prosperity—represents a huge leap of faith. It is supported neither by theory, nor by any systematic empirical evidence that I am aware of.
Here is how I would restate Leeson’s conclusions (my additions are in bold):
I have argued that anarchy sometimes works better than you think. In the face of obstacles that stand in the way of individuals’ ability to cooperate for mutual gain, individuals have the incentive to develop solutions to overcome these obstacles. This is as true in society ruled by government as one that exists without government. Where the state does not provide law, order, or the institutions required to produce these things, there is a tendency for private institutions to emerge to perform these roles instead. The overwhelming balance of evidence suggests, however, that the large-scale division of labor on which modern economic prosperity depends can be sustained only with state-like institutions—i.e., public enforcement of laws and contracts.
I do not have any trouble with the idea that self-enforcing agreements (what Leeson calls “anarchy”) can sometimes substitute for third-party (i.e., government) enforcement. Such self-enforcing agreements are maintained through the force of repeated interaction (“if you cheat me now, I will cheat you in the future,”) through reputational mechanisms (“see, I am not the cheating kind of guy”), and collective punishment schemes (“if you cheat me, I will bring the wrath of my colleagues on you”). The literature is replete with examination of such informal institutions. See for example Avner Greif’s work on medieval merchant guilds, John McMillan and Chris Woodruff’s work on commercial dispute settlement in Vietnam, Marcel Fafchamps’ work on firms’ relations with their suppliers in Africa, and Elinor Ostrom’s work on the management of common property resources around the world. Leeson’s own account of how pirates have developed self-enforcing arrangements to elicit cooperation fits squarely in this larger literature.
The problem with self-enforcing agreements is that they do not scale up. One of the findings from Elinor Ostrom’s extensive case studies is that self-enforcing arrangements to manage the “commons” work well only when the geographic scope of the activity is clearly delimited and membership is fixed. It is easy to understand why. Cooperation under “anarchy” is based on reciprocity, which in turn requires observability. I need to be able to observe whether you are behaving according to the rules, and if not, I have to be able to sanction you. When the size of the in-group becomes large and mobility allows opportunistic behavior to go unpunished, it becomes difficult to maintain cooperation. Imagine that the pirates numbered in the millions and they could easily jump ship to join competing groups mid-voyage; would the arrangements Leeson describes have been sustainable?
Unlike in pirate societies or pre-colonial Angola, modern economies require an elaborate and ever-evolving division of labor—among owners of firms, managers, and their employees, among producers up and down the value chain, and between producers and providers of supporting services such as finance, accounting, and legal services. The complexity, fluidity, and geographic non-specificity of these activities leave too much room for opportunistic behavior for self-enforcing arrangements to work well. They require an external backstop in the form of government-enforced rules.
This point is underscored in the work of Avinash Dixit and J.S. Li, who have compared the mechanics behind informal, self-enforcing arrangements with those of formal institutions with external enforcement. Here is Dixit (2006):
A relation-based system of networks and norms has low fixed costs, but high and rising marginal costs. Trading on a small scale naturally starts among the most closely connected people who have sufficiently good communication and common understanding to sustain honesty. No fixed costs need be incurred to establish any formal rules or mechanisms of enforcement. But as trade expands, potential partners added at the margin are almost by definition less well-connected, making it harder to communicate information with them and to ensure their participation in any punishments. By contrast, formal or rule-based governance has high fixed costs of setting up the legal system and the information mechanism, but once these are incurred, marginal costs of dealing with strangers are low. Therefore relation-based governance is better for small groups and rule-based governance better for large groups.
A modern post-industrial economy requires rule-based governance because it needs to elicit cooperation within a large group—that of the nation-state.
Which is why the scatter plot below, showing the relationship between per-capita GDP and the size of the public sector, should not be a surprise. There is a strong, statistically highly significant, and positive association between countries’ income levels and the share of their economy that the government consumes. This highlights the complementarity between markets and the state. Those societies in which markets work best are the ones where the reach of the state is longer—not shorter. Prosperity is achieved when states are effective in setting and enforcing the rules of the game, not when they wither away. It is possible that the Somali people are better off under anarchy than under a predatory state. Certainly no one believes that “any government is always superior to no government.” But to think that the Somali can ever develop economically without an effective state apparatus is to commit the flip side of the Nirvana fallacy: to believe that a better state than what exists currently is not achievable just because a perfect state is not possible. There is no example of a society that has become prosperous without a state machinery.
The chart shows the relationship between (the logarithm of) per-capita GDP and the share of government consumption in GDP in 2003, for all countries for which data exist in the World Development Indicators of the World Bank. The estimated slope coefficient is 1.5, and is statistically significant at more than 99%.
It may be objected that the operation of the global economy is proof in itself that a high level of economic activity can be maintained without political institutions. After all, we do not have a global central bank, a global anti-trust authority, a global court, and so on—not to mention a global government. Leeson writes: “we do not observe perpetual world war in the absence of global government, [nor] shriveling international commerce in the absence of supranational commercial law…” But Leeson is overlooking several things. First, there is in fact a significant global institutional architecture that supports the international economy: globalization would not have reached this far in the absence of the WTO, IMF, World Bank and a host of regional supranational institutions. The global public sector is not non-existent. Second, it is often national legal and political institutions that provide the backstop where international institutions prove inadequate. International commercial arbitration often takes place and is enforced in third country legal jurisdictions. And third, precisely because the arrangements just mentioned in the preceding are inadequate, the world economy remains full of transaction costs and is subject to all kinds of syndromes that were banished long ago from national economies. Financial panics are a thing of the past at home thanks to the Fed; but they remain rampant in international finance because there is no international lender-of-last-resort.
Leeson writes: “Most of the world, for most of its history, has existed without effective governments.” Indeed. That is why most of the world for most of its history has remained poor, with lives that are nasty, brutish, and short.
Dixit, Avinash, “Economic Governance.” To appear in S. Durlauf and L. E. Blume eds., The New Palgrave Dictionary of Economics, forthcoming, Palgrave Macmillan, March 2006.
Dani Rodrik is professor of international political economy at the John F. Kennedy School of Government, Harvard University.
Anarchy From a Policy Perspective
Peter Leeson has written a really nice essay on anarchy that relies on real-world facts to illustrate that, as his title suggests, self-governance works better than you think. Not only do I like Leeson’s essay, I want to say up-front that I agree with everything he says. So, rather than looking back at what he has said, I want to look forward to the policy implications of his essay.
As Leeson knows, there are a number of libertarian anarchists who argue for the complete elimination of government. Their arguments are based on two complementary lines of reasoning. One is that anarchy would work better than government (Leeson’s essay is along those lines, although he doesn’t make claims quite that strong), and the other is that the coercion that underlies all government activity is immoral. I have no quarrel with people who make those arguments, but from a policy perspective they are irrelevant. Government will be with us for the foreseeable future, so the real policy issue is not whether government should be eliminated but how to make it better.
As much as anarchists would like to completely eliminate government, many people believe we need more government. Leeson’s arguments appeal to people who are predisposed to want smaller government, but Leeson doesn’t address the arguments of people who value the government safety net, who argue that government schools and government health care provide equality of opportunity that is absent from the market, and who argue that, unregulated, people with economic power abuse it to the detriment of the public interest. Thus, their argument goes, even if government does bring with it some inefficiency, it also brings benefits by mitigating the worst effects of the market system. Leeson doesn’t say what products African middlemen were buying from local producers in his example, but maybe it was products made from the tusks of endangered rhinos being hunted to extinction for the benefit of a greedy few. None of these are my personal beliefs, but they reflect the beliefs of many Americans, and American support for their government is the main reason why anarchy is completely infeasible from a policy perspective.
Americans have it pretty good today, and they are not going to give up a reasonably comfortable status quo in exchange for an experiment in statelessness. So, regardless of its merits, anarchy has no prospect as an actual policy option. The bottom line is: in developed nations, most people support their government.
Taxation may be theft, but if it is done skillfully (as, say, in the U.S.) a majority of the taxpayers who are being stolen from actually support the institution that is doing the stealing, and a not-insubstantial share of them argue that the government should be stealing even more.
Statelessness May Not Be a Stable Equilibrium
Leeson is quite right to note that large areas of economic activity remain anarchic today. When I was a boy, I recall my father taking me to see a Cincinnati Reds baseball game at Crosley Field. (This makes me feel old, because Crosley Field is long-gone and the Reds have had two new stadiums since then.) We parked on a street near the Field and a boy offered to watch our car and make sure nothing happened to it during the game for $1. When we returned to the car after the game, it was fine, but the boy was nowhere to be seen. So, there’s an example of protection services provided without the state. You may be thinking — as I am — that if we hadn’t paid the $1 the car would have been vandalized, and the likely vandal would have been the boy who didn’t get the dollar.
My suspicion is that without government, this type of protection service would be much more common. The Russian mafia provided similar protection services to Moscow businesses after the collapse of the Soviet Union left a weakened government. And my fear is that these little mafias would engage in turf wars, and as Leeson suggests, enter into agreements for their mutual benefit, until those little mafias evolved into full-fledged governments. To use economist jargon, statelessness may not be a stable equilibrium, and the government that emerges to fill that void may be much more oppressive than the government we currently have.
Leeson gives good examples of how people overcome obstacles to engage in mutually beneficial exchange, but in his examples if the exchange does not take place both sides lose. If the tough guys can establish themselves as territorial rulers, they can use force to continue to extract resources from those they rule. My concern is that if an orderly anarchy were to be established in a prosperous area, protection firms would evolve into mafias which would coalesce into governments — governments potentially more oppressive and more destructive than those we see in prosperous areas today.
Some Governments Are Better Than Others
One major point that Leeson makes is that bad government is worse than no government, using Somalia as a case-in-point. But he also refers to “well-functioning, well-constrained governments like ones we observe in the U.S. and Western Europe.” If I am correct that we are not going to completely eliminate government, then advocating anarchy is a non-starter from a policy perspective, and the best libertarian approach to policy is to better constrain and limit the scope of government. If government is inevitable, we can still make it smaller, less intrusive, and more libertarian.
Go ahead, take the moral high ground and argue for anarchy if you want. After all, taxation is theft, the use of force is immoral, and government always involves the threat of coercion to make people comply with the government’s demands. (If people would voluntarily do what the government wants, there would be no reason to even get the government involved.) But this approach to public policy will not get a serious hearing. If we really want a more libertarian society, we can work for tax cuts, for eliminating regulation, and for protecting people’s basic rights. Some governments are better than others, and from a policy perspective, the best way to further liberty is to attack those policies that are anti-libertarian, to give us better governments.
Whether government is inefficient or immoral is irrelevant to policy issues. If we attack unlibertarian policies, we can make our society more libertarian. We cannot simply eliminate government all at once. But because some governments are better than others, it makes sense to work to make ours better.
As I said at the outset, I agree with everything Leeson says. The essence of what he says is that (1) no government is better than bad government, and (2) when cooperation can lead to mutual gains, people will find ingenious ways to cooperate for their mutual benefit. But nothing Leeson said implies that no government is better than good government. Maybe it is, maybe not. But Leeson’s arguments don’t imply, for example, that citizens of the United States would be better off with no government than their current government. I’m not taking a side on this; I’m just saying Leeson’s arguments and examples do not address this case.
I have no quarrel whatsoever with libertarian anarchists, and their arguments are a valuable contribution to the libertarian policy debate, for two reasons. First, they illustrate how every function currently done by government could be more productively undertaken in the private sector. We do not need government to do anything. (I say this despite my concern that statelessness is not a stable equilibrium. But if I am correct that anarchy is not a policy option anyway, this is irrelevant.) Second, because anarchists extend the bounds of the political debate on the role of government, arguments to eliminate this tax or that regulation become more of a middle-of-the-road proposition; e.g., “I’m not arguing that we should completely eliminate government like those anarchists; I’m just saying we’d be better off if we shut down the federal Department of Education.” Even if libertarian anarchists are completely wrong (but, I don’t think they are), in the world of public policy they will do no harm, because their agenda is not feasible.
Most of my commentary has been about the implications that some people might read into Leeson’s essay, rather than on his essay itself, because I think the essay is very effectively written and I don’t have any disagreement with it. But, couched as it is in the rhetoric of anarchy, I think its implications for anarchy and government in the developed world are limited, because the essay does not address them.
Randall G. Holcombe is DeVoe Moore Professor of Economics at Florida State University.
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.
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’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.
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: 
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 $). 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. 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.
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.
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.
 Leeson, Peter T. (2007) “Social Distance and Self-Enforcing Exchange.” Journal of Legal Studies, forthcoming. Available at: http://www.peterleeson.com/PSH.pdf
 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
 WTO (2001) “Data for Doha.” Available at: http://www.wto.org/English/thewto_e/minist_e/min01_e/brief_e/brief21_e…
 Craig, W.L., William Park and Ian Paulsson (2000). International Chamber of Commerce Arbitration. New York: Oceana Publications.
 Rose, Andrew K. (2004) “Do We Really Know that the WTO Increases Trade?” American Economic Review 94(1): 98-114.
The Most Significant Market Failure
I do not like the term “market failure” in general since the underpinnings of virtually everything that is labeled as a market failure (e.g., monopoly) are really institutional problems created by government. David Friedman pointed out to me that there is one serious market failure, however: markets have failed to prevent the concentration of coercive power and the creation of states. Indeed, the state might be inevitable, as Randy Holcombe suggests, so I agree with him that a very important question for libertarians has to be, how can we make it as small as possible, in order to limit its intrusions and disruptions? That still does not mean that libertarians should not try to find ways to make it go away, however. Entrepreneurs are continually finding ways to get around state-made impediments. Perhaps someday someone will discover a way to eliminate the state altogether. I am not the kind of institutional entrepreneur that is likely to discover this ultimate innovation, however. Therefore, I see my agenda as something quite different. My goal, as a libertarian of the anarcho-capitalist persuasion, is to try to undermine the myths about the state. One way to do this is to show, both theoretically and empirically, that the kinds of things the state allegedly MUST do can be done by non-state institutions, and furthermore, that the state actually does relatively badly those things that it is allegedly suppose to do. Indeed, the typical “market failure” justifications for the state are, as Randy has explained elsewhere, ex post rationalizations for state actions that developed for very different reasons. My own focus has largely been in the area of law.
I cannot explain, in a relatively short blog post, the intricate mechanisms and processes that actually provide rules and order, or how the state tends to undermine and interfere with those mechanisms and processes. Instead, let me propose a simple (indeed, simplistic, since the true relationship is much more complex, and would require many pages to describe) alternative explanation for the correlation between per-capita GDP and government share of GDP that Dani Rodrik cites in support of his contention that “Prosperity is achieved when states are effective in setting and enforcing the rules of the game, not when they wither away.” After doing this, I will offer a very brief discussion to suggest how my explanation is consistent with both the data and history.
Assume that the state is a parasite living off its host — the economy. When the economy is small the state cannot extract much from it without destroying it. Therefore, the state must also be very small. If the economy grows and becomes stronger, the parasite also is able to grow. Indeed, the parasite can grow faster than the host once the host achieves a size that allows it to produce a surplus. Note that this simple “model” predicts the statistical relationship that Dani cites as evidence that the state and the economy are complements. Certainly, a growing economy can provide a surplus that can be extracted through the use of coercive power, allowing the state grows, but it does not follow that a growing state is the reason the economy grows. In fact, the economy could grow faster if the state could be more effectively controlled (e.g., as Randy suggests), or if the parasite could be eliminated all together, as I suggested. As I indicated above, this is a very simplistic story. We could add an assumption that the state parasite actually serves a desirable function, for instance, in that it may protect its host from even more deadly parasites (other states), and there is clearly something to this, at least in some cases. The point is, however, that the correlation between the size of the economy and the size of the state’s share of the economy does not prove that a relatively large state causes a relatively large the economy.
Now let’s consider this simplistic version of the state-economy relationship with history. Dani quotes Pete Leeson’s remark that “Most of the world, for most of its history, has existed without effective governments.” Then he contends, “Indeed. That is why most of the world for most of its history has remained poor, with lives that are nasty, brutish, and short.”
The implication is that the rise of the state was necessary to allow the world to escape the Hobbesian jungle. But this ignores the fact that life under most states, both historically and today, is nasty, brutish and short. Those of us who are lucky enough to live in North America have been sheltered from the reality of the parasitic state to a substantial degree for several reasons (e.g., until recently North Americans were free to move out of the states control into the frontier which remained anarchistic so the state could not effectively prevent exit; we have not faced the same degree of threats by other parasites [e.g., states or would-be-states] that most of the world has had to deal with, being surrounded by large oceans, so our state has not had the same kinds of excuses to expand, being surrounded by large oceans; after the rebellion against the state of England the rebels created constraints on their own parasite that did not exist anywhere else and while many of those constraints have broken down, it took a long time for that to happen).
Furthermore, this Hobbesian argument ignores that fact that the areas of the world that have enjoyed the greatest economic development and accumulated the greatest amount of wealth are those parts where, after centuries of warfare and revolution, the relevant states have been sufficiently constrained for long enough to allow the economic host to begin to flourish. This is the idea behind the economic freedom relationship with economic well being that Pete Leeson discusses in his blog post. Unfortunately, once an economy becomes strong, the opportunity costs of rebellion and other efforts to constrain the state become higher and the temptation to use the state as an internal wealth transfer mechanism get stronger, so resistance to the state can decline. When that happens, the state grows faster, and the economy can collapse under its weight unless the state is rolled back (New Zealand is a recent example that comes to mind).
Thus, while I agree with Randy that anarchy may not be a stable equilibrium, I would also stress that states do not create stable equilibria either. True, the United States has survived for well over two centuries now, but only by engaging in a very bloody civil war, many international wars and “police actions” and so on. This brings me to my final point in this blog comment (I will submit another one shortly to address Dani’s contention that states are necessary because voluntary associations are inefficiently small): one that has been best explained by Robert Higgs, I think.
My simple story about the state as a parasite clearly is an incomplete story, as states tend to grow as a result of crisis. The state thrives on threats to the host, real or perceived, because that justifies its growth. States are institutions of warfare (predation, plunder, protection rackets). As the technology and institutions of war change, state boundaries change, bringing changes in the internal institutions of the state. Those states that are successful in warfare grow as Higgs demonstrates. Under these conditions, Randy’s argument against trying to eliminate the state seems to turn back on itself. While one might imagine in theory that a constitutionally constrained state could be created that might be stable, states themselves do not exist in a stable equilibrium. In a world divided into states, a stable equilibrium appears to be at least as unlikely as a stable ordered anarchy.
Means and Ends in Our National Movement Toward Anarchy
The title I have used here is tongue-in-cheek, because we’re not moving toward anarchy. As any anarchist will tell you, the state is expanding, both in expenditures and in its regulatory powers. And, as I said in my first essay, many of our fellow citizens favor further state expansion. But, if Leeson and Benson want anarchy, how can they get there?
Dani Rodrik’s reaction to Leeson’s essay provides some interesting insights. He argues that no society can become prosperous without government, but even goes a step further to argue that there is a “complementarity between markets and the state. Those societies in which markets work best are the ones where the reach of the state is longer — not shorter.” He then provides some data showing a positive relationship between government consumption as a share of GDP and per capita GDP. For purposes of the present discussion, the most interesting thing here is that Rodrik is making that argument. This shows the challenge that Leeson and Benson are up against. Rodrik is not a “rationally ignorant” citizen who learns economics from watching the television news. He is one of the nation’s most prominent academic economists, and he already knows the theories and knows the relevant facts. So, it’s not a matter of just educating the public to the benefits of anarchy and then everyone will become anarchists. Rodrik’s response to Leeson shows that not all experts share his opinion on the virtues of anarchy.
I will take a paragraph to digress on the data Rodrik presented, because I don’t think it is very useful or relevant. For one thing, it measures the size of government by including only government consumption expenditures, but in prosperous economies most government expenditures are transfers and subsidies. The results would be similar if he looked at total government expenditures for all nations for the reasons Benson gives, but if one looks only at total government expenditures in developed economies, panel data shows that nations with higher government expenditures as a share of GDP have slower growth rates and lower incomes.  Furthermore, government consumption expenditures is not a good measure because there is substantial variation across countries in activities that are undertaken in the public versus private sectors. I don’t mean to pick too much on this example, because it is not presented as academic research, but rather as an illustration. I do want to say, however, that a closer look at the data would make that apparent relationship between larger government and prosperity disappear.
Now, back to anarchy. How are Leeson and Benson going to convince Rodrik that, despite the evidence he presents, anarchy is not only viable but would result in a more prosperous society than even a minimal government? Rodrik, after all, presents data to show that prosperity is associated with more government, not less. One way is to illustrate how market mechanisms can work better than government programs to do everything that government does. Then, present evidence, as Leeson does in his lead essay, to show that self-governance works better than you think. That gets Leeson and Benson part-way there, and Rodrick in his reaction to Leeson agrees that in the absence of government individuals have the incentive to develop institutions that allow them to interact for their mutual benefit.
The benefit of the libertarian-anarchist literature is that it knocks down the arguments that, in theory, government is necessary for an orderly society. Because I, personally, want less government, I am supportive of the work libertarian anarchists are doing. But whether they are right or wrong about anarchy is irrelevant from a policy perspective, because almost nobody living a comfortably prosperous life in a developed economy would be willing to give that up for an experiment in anarchy. And people who are struggling in prosperous economies want more government, to transfer resources from those who have more to those who have less. So, regardless of whether the anarchists are right, their ideas are irrelevant from a policy perspective.
In Leeson’s response to me, he asked how far we could take this reasoning. If it is unrealistic to think that the minimum wage would be repealed, should that stop us from arguing against it? In fact, I think those who favor smaller government can have the best success opposing specific programs like the minimum wage. We are more likely to succeed in scaling back government by showing why specific government programs, regulations, taxes, etc., are counter-productive than we are by arguing we should just eliminate government in total. We can actually succeed in cutting taxes, scaling back specific programs, and targeting specific regulations for elimination. Libertarian anarchist arguments are helpful in the abstract for moving in this direction, but not even anarchists themselves can view anarchy as a realistic policy option.
I am happy for Leeson to argue in support of a libertarian anarchy, and I am largely sympathetic to his arguments. But I don’t think those arguments are much of a threat to the status quo.
 James Gwartney, Randall Holcombe, and Robert Lawson, “The Size of Government and the Wealth of Nations,” Cato Journal 18, no. 2 (Fall 1988): 163-190.
Scaling Up, International Trade, and Demand for Government
Leeson makes three points in response to my critique.
- In theory, self-enforcing agreements can indeed scale up, if they rely not on punishment in repeated play, but on signaling, whereby “honest” types separate themselves from “dishonest” types.
- The large volume of international trade is evidence that self-enforcement without government is in fact possible.
- The correlation between income per head and size of government arises from the fact that more prosperous countries can afford to pay the higher costs that larger governments impose.
Let me say a few words about each of these points.
1. Although I have not studied the papers that Leeson refers to, I think I understand the theory that Leeson has in mind. I do not agree that this line of reasoning evades the scaling up problem. Successful signaling relies on separating, rather than pooling, equilibria. In other words, “honest” traders have to incur costs that “dishonest” traders would find too onerous to bear in order to effectively signal their type. That means some participants have to be shut out of the benefit from trade in order for the remaining to benefit.
You might say that this is just as it should be: if there are honest and dishonest traders, it is only the former that deserve the benefits of economic exchange. But as soon as we put it this way, we understand what is wrong with the signaling argument in this context. People are not born honest or dishonest: enforcement problems arise in practice not because honesty is an attribute of some individuals and not of others, but because all individuals have the incentive to behave opportunistically when circumstances allow them to do so. Relying on signaling in these settings, even when it works, leaves many wasted opportunities for economic exchange.
2. On international trade, I had made the point that much of it still relied on the shadow of the state. What I meant by that is not the esoteric New York Convention at all. What I was thinking of is that traders can still sue each other in their respective legal jurisdictions, or in fact in third-country jurisdictions. Arbitration decisions too are typically enforceable in some legal jurisdiction. What keeps traders honest is not simply the fear that they will be excluded from future commerce, but also that their assets can be taken away through legal judgments.
The other point I had made is that because these legal and quasi-legal arrangements for contract enforcement work more poorly in the international arena than they do domestically, international exchanges are still subject to much higher transaction costs. Anderson and van Wincoop have estimated these transaction costs to be around 40 percent in ad valorem terms. And indeed there is a large literature on international trade that talks about “missing trade” and “border effects.” Trade volumes may be high, but not anywhere near as high as they would be without the transaction costs imposed by jurisdictional discontinuities at the national border.
3. On the correlation between size of government and level of incomes, I am happy to accept that there may be some reverse causation. But what exactly does that mean? It means that people in rich countries demand more government! Public services are a luxury good, to put it in economists’ language. Why would that be, if government came only with rent-seeking, corruption, and other costs?
I am also happy to accept that more government is not necessarily better government, although I would not rely on the Heritage Foundation index to make that point. There are some big governments that do a lot of bad things (North Korea) and some big governments that do mostly good things (Sweden). I just have a hard time with the doctrinaire view that identifies government with only the former model.
Rebuttal to Rodrik
At the risk of sounding “doctrinaire” again, I would like to respond to Rodrik’s criticisms. In order of his points:
1. I am willing to admit that signaling is not perfect. Gains from trade can be left unexploited through this mechanism. However, (a) this does not mean that self-enforcing mechanisms cannot be scaled up, and (b) unexploited gains from trade are also possible when government enforces contracts instead. One might argue that the magnitude of these losses are larger under self-enforcement than under government enforcement, but once again, this very much depends upon what kind of government we’re talking about. The fact that, in theory, a perfectly knowledgeable and benevolent state that is interested only in enforcing contracts to the utmost of its ability can enable the gains from trade to be maximized is irrelevant. Let’s look at what existing governments in many parts of the world actually do. For instance, is government more of a help or a hindrance to individuals’ abilities to realize the gains from exchange in, say, Africa, or Eastern Europe? This is an empirical question the answer to which does not provide us with as much reason to be sanguine about government enforcement as Rodrik seems to suggest.
2. As a large literature points out, the very reason private international arbitration associations emerged in the first place was because international traders could not in most cases use national courts to enforce international commercial agreements. This inability stems from several factors, which have been discussed by others at length elsewhere. I will recap a few here:
First, parties to international commercial agreements are interested in avoiding the home court of the other party. Parties fear being subjected to unknown laws, having a decision rendered in an unknown language via unknown procedure, being subjected to law or procedure they disagree with or feel is inappropriate for their case, or they fear that a state court will favor their adversary if he is a citizen of that nation.
Even where this fear does not exist, there is still the problem of figuring out how to render a legitimate and binding decision consistent with the law when parties from multiple countries, each with its own separate legal system and jurisdiction, are involved. Indeed, the whole problem is that when this is the case, there is no “the law.” Which party’s national law should apply to the case? Which party’s national legal procedure should be followed? There is no “correct” answer to these questions, which is precisely why judgments rendered in such cases have no formal force.
Second, and closely related, there is an important question as to which state court, if any, has jurisdiction in the matter of an international commercial dispute. Competing claims to jurisdiction are problematic. But equally troublesome is the unwillingness of either state court to decide the dispute because neither feels that it is equipped to adjudicate an international matter.
Third, the decisions of state courts regarding matters of international commerce are difficult to enforce. In many cases state courts do not recognize foreign judgments. Even when they do it is difficult to seize the assets of the loser if he is not from the country where the court’s decision is made. If I have an international commercial dispute with someone from China and I am somehow able to convince him to have the dispute decided in America (by the way, how might I do this?) and the American court decides he owes me $75,000, how am I to go about enforcing this award? My trading partner’s assets are in China, not America. And the American court’s jurisdiction and power to enforce its will extends no further than the borders of the United States. I could rely on the Chinese government’s goodwill to send me a check. But even in the unlikely case it displays this goodwill, notice that the legal judgment of the deciding national court (in my example, America), which Rodrik places great emphasis on, has no force and thus nothing to do with me getting paid.
Rodrik’s claim that private international arbitration decisions could be regularly enforced in national courts is equally mistaken. As I pointed out in my last comment, until 1958 this was simply not possible. This is precisely the reason why the New York Convention was created—to try and make it possible to enforce international arbitration decisions in national courts. If national courts were already doing this, it is strange that the NYC was created in 1958 with this purpose. As a side note, it is peculiar to describe the NYC, which has been dubbed the “cornerstone of current international arbitration” as “esoteric.”
3. I have not argued, nor do I know of anyone who suggests, that government is always concerned with rent-seeking, corruption, etc. My point is simply that pretending that government is not often concerned with these things is mistaken and will lead to mistaken policy conclusions. The alternative assumption one could make is that government is composed of individuals who are rarely concerned with these things and are usually altruistic and well-behaved. Unless we are to think that somehow the individuals who compose government have a different nature than those in the private sector, this would mean that private sector actors are also usually altruistic and well-behaved. But if this is so, we return, albeit in a different context, to the question posed in my initial essay: Why do we need government?
 van den Berg, Albert Jan (1981). The New York Arbitration Convention of 1958. Deventer: Kluwer Law, p. 1.
Dani Rodrik writes that “The problem with self-enforcing agreements is that they do not scale up.” I want to make a few interrelated points about this, as it often is the “market failure” argument given to justify a state when I confront people with evidence that what Pete Leeson has referred to as anarchy and Dani calls self-enforcing agreements actually can and do create order. Let me say that my own preferred terminology here is “customary law communities” (bottom-up development of rules and institutions as opposed to top-down imposition of rules and institutions under “authoritarian law”). These communities do not just rely on self-enforcement in the sense of unilateral (morality-driven) or bilateral (e.g. tit-for-tat) actions. They often establish third party dispute resolution mechanisms (arbitration, mediation) backed by ostracism threats, and other institutions.
The first point I want to make is that while these communities may be based on geographic proximity, they also may be based on kinship, functional proximity as in a trade association or the “business community,” religion, or any of a number of factors that create repeated dealings and/or reputation effects). Second, a group does not necessarily have to expand geographically to expand opportunities for beneficial interaction. Indeed, if individuals want to interact, but only on some dimensions, or if they want to maintain different sets of rules for different dimensions of interaction, then parallel “localized” mutual support groups may be maintained while a “second order of clustering” is established, facilitating a relatively limited scope for interaction.
A group whose members insist on strictly imposing their own morality and penalties on outsiders would probably be unable to initiate beneficial inter-group interaction. Thus, if people wish to simultaneously facilitate inter-group interaction and impose rules that differ substantially from the norm in other groups, they have strong incentives to inform outsiders of the differences in order to avoid conflict and minimize the difficulty of maintaining non-standard laws. Part of the reciprocal agreements with other groups may be the explicit recognition of differences in laws and procedures for treating conflicts. This in turn implies that as inter-group interactions expand, a hierarchical jurisdictional arrangement may arise. For example, each localized (geographically, functionally) group may have jurisdiction over rules for and disputes between its members. Rules for inter-group interactions can differ from both groups’ internal rules, although they certainly do not have to [members of customary legal systems have incentives to imitate desirable institutions and rules developed elsewhere, so competition and emulation lead to standardization of many rules and institutions across similarly functioning groups, although differences may remain, reflecting preferences of various groups’ members], and disputes between members of a confederation of different groups are settled by some “higher” confederation level adjudication process. Note that these are not “higher courts” where disputes can be appealed from within-group dispute resolution mechanisms (e.g., they are not a supreme authority). Rather, this is a jurisdictional hierarchy defining the role of each adjudication process and allowing for increasingly more distant interactions. This allows for differences between the law applied within groups and between groups; a monopoly in law is not required.
A judgment involving an inter-group dispute will have to be considered to be a fair one by members of both groups, of course. Thus, an equal number of individuals from each group might serve as an arbitration board, or a mutually acceptable third party (i.e., an arbitrator or mediator with a reputation for good judgment) might be chosen. This provides another reason for the tendency toward standardization of rules across parallel groups with similar functions, at least for those functions carried out in the process of inter-group interactions.
Some individual members of each group must recognize the potential benefits of inter-group interaction and be willing to bear the cost of initiating institutional innovations. Furthermore, the resulting innovations must involve more than just dispute resolution, because such interaction faces an assurance problem. Individuals must feel confident that someone from the other group will not be able to renege on a promise and then escape to the protection of that other group. After all, at least initially, repeated game and reputation affects are localized within each group, and there is limited potential for a boycott sanction. Thus, for second order clustering to develop, some sort of inter-group insurance or bonding arrangement becomes desirable, along with an apparatus for inter-group dispute resolution. For instance, as inter-group interaction develops the mutual support group can become a surety group as well. Membership in a group then serves as a signal of reputable behavior, and if a member of a group cannot or will not pay off a debt to someone from the other group, the debtor’s group will. The individual then owes his own group members so the boycott threat comes into play once again.
Limits to the extent of an inter-group network of cooperation are determined by the relative costs and benefits of information about other groups and their legal systems. The costs of establishing inter-group institutional arrangement depend in part on how “distant” the groups are from one another, where distance can be in terms of geographic space, or in terms of the behavioral norms that are relevant to the groups. Thus, extensive interaction between starkly different groups may not arise. However, these limits are stretched as individuals become members of several groups. After all, as Mises (1957: 257) explains, “Man is not the member of one group only and does not appear on the scene of human affairs solely in the role of a member of one definite group…. The conflict of groups is not a conflict between neatly integrated herds of men. It is a conflict between various concerns in the minds of individuals.” Thus, the relatively limited jurisdictions of some customary communities are not as constraining as they might appear to be.
A person may simultaneously belong to many groups that have well established customs (and be subjects to the commands of several rule-making authorities, e.g., as in a formal federalist system of government), so being in one community does not preclude dealing with people in other communities. A person may belong to a trade association, a homeowners association, a religious group, a fraternal organization, and so on, for instance, each with its own rules and governance institutions. The membership of all of these communities can differ, although considerable overlap may also occur, so individuals may deal with other individuals on some dimensions but not on all dimensions. Indeed, in any complex society, there are many distinguishable systems of rules and institutions, and yet people from many of these different systems interact regularly without having to call upon any legal authority. Thus, inter-group cooperation appears to be the norm rather than the exception, and it appears to be quite widespread. And with good reason: as Gluckman suggests, “multiple membership of diverse groups and in diverse relationships is … the basis of internal cohesion in any society.” An all inclusive legal system would eliminate the benefits of competition and emulation and undermine the incentives for innovation, as Berman explains:
It is this plurality of jurisdictions and legal systems that makes the supremacy of law both necessary and possible…. The very complexity of a common legal order containing diverse legal systems contributes to legal sophistication. Which court has jurisdiction? Which law is applicable? How are legal differences to be reconciled? …. The pluralism of … law, … has been, or once was, a source of development, or growth — legal growth as well as political and economic growth. It also has been, or once was, a source of freedom. 
The competitive/cooperative relationship between consensual customary legal systems is driven by the desire to facilitate voluntary mutually-beneficial interactions rather than a desire for legal sovereignty. Thus, many different customary systems can co-exist and interact. An understanding of customary law requires that individuals and their organizations be the points of reference rather than “society” as a whole:
there may then be found utterly and radically different bodies of “law” prevailing among these small units, and generalization concerning what happens in `the’ family or in `this type of association’ made on the society’s level will have its dangers. The total picture of law-stuff in any society includes along with the Great Law-stuff of the Whole, the sublaw-stuff or bylaw-stuff of the lesser working units” (Llewellyn and Hoebel 1961: 28). 
Customary law can be geographically extensive and functionally decentralized (i.e., specialized), in contrast to the law of geographically defined states which tends to be functionally centralized and geographically constrained. Thus, customary law can have different sized jurisdictions for different functions. In some areas of law, economies may be considerably more limited than any state, for instance, so existing political entities are too large geographically [e.g., this applies for many aspects of criminal law] or functionally [e.g., many aspects of domestic commerce may be most effectively governed by diverse trade associations rather than by the state].
In other areas of law, such as international commerce, some of these economies appear to be greater in geographic scope than any existing nation can encompass, although many also are narrow in functional scope, as international trade associations may be the most efficient source of rules and governance for many groups of traders. A customary system of polycentric law would appear to be much more likely to generate efficient sized jurisdictions for the various communities involved — perhaps many smaller than most nations, with others encompassing many of today’s political jurisdictions (e.g., as international commercial law does today). The desire to “scale up” (i.e., existence of economies of standardization in some rules) really provides an argument against state provision of law then, in order to break away from the inefficient artificial political restrictions that exist. That is, unless the contention is that states achieve the efficient scale? But if that is the case, why is it that some of the smallest states (e.g., Iceland, Ireland, Luxemberg, Switzerland) are among the most prosperous, along with some of the largest (e.g., the U.S.), and visa versa. The fact is that I can buy a product from India or Argentina without being part of the same customary community (or ruled by the same state) as the producer (that is, we do not have a common source of recourse) because I buy it from someone I deal with regularly or because I am aware of her reputation, who in turn purchased it from someone she deals with regularly or who has a reputation she is aware of, who in turn bought it from someone he deals with regularly or who has a reputation he is aware of, who in turn … ! It is not one large legal system that matters, but the effective linking of large numbers of parallel customary law communities (or ordered anarchies) with overlapping memberships.
*The following arguments are made in more detail in various publications, including, Benson, B. L. “The Spontaneous Evolution of Cyber Law: Norms, Property Rights, Contracting, Dispute Resolution, and Enforcement without State Involvement,” Journal of Law, Economics and Policy, 1 (Winter 2005): 269-348. “To Arbitrate or to Litigate: That is the Question,” European Journal of Law and Economics, Vol. 8, No. 2, September 1999, pages 91-151; “Polycentric Law Versus Monopolized Law: Implications from International Trade for the Potential Success of Emerging Markets,” Journal of Private Enterprise, 15 (Fall 1999): 36-66; “An Economic Theory of the Evolution of Governance and the Emergence of the State,” Review of Austrian Economics, 12 (November 1999): 131-160; “Knowledge, Trust, and Recourse: Imperfect Substitutes as Sources of Assurance in Emerging Economies,” Economic Affairs 21 (March 2001): 12-17. Therefore, I have omitted references to supporting evidence and theory here, except for a few direct quotes.
 Gluckman, M. (1955) The Judicial Process Among the Barotse of Northern Rhodesia, Manchester: University Press of the Rhodes-Livingston Institute, page 20.
 Berman, H. J. (1983). Law and Revolution: The Formation of Western Legal Tradition, Cambridge, MA: Harvard University Press, page 10. Berman’s “or once was” phrase recognizes that diverse legal systems are increasingly being subjugated by authoritarian legal systems. Indeed, while consensual legal arrangements tend to be characterized by internal stability, they face a significant external threat to stability. The size of consensual groups and second order clusters are constrained by transactions costs, and in many cases such organizations have been unable to resist takeover by groups cooperating in the production of violence. This issue is explored below.
 Llewellyn, K. N. and Hoebel, E. A. (1961) The Cheyenne Way, Norman: University of Oklahoma Press, page 28.
The Crux of the Matter
I find Leeson’s latest response very encouraging, because it actually shows that we largely agree on the underlying issues—even though we remain very far apart in the conclusions we draw.
Thus, Leeson accepts that self-enforcing agreements are imperfect, while I accept that governments are imperfect. We agree that national courts are inadequate in enforcing international trade contracts (a fact that is reflected in the high transaction costs evident in international trade, as I mentioned in my earlier post). And Leeson does acknowledge that government is not always concerned with rent-seeing and corruption, which implies that he believes governments are capable of doing good things—at least on occasion.
So here is the crux of the matter. Suppose we are each called on to advise the current government of Somalia. What advice would we give? My instinct would be to look around and see what other countries in Africa have been doing well, and to recommend a strategy that is consistent with that experience. So I would notice that two long-standing high performers in the region are Botswana and Mauritius, and in both cases the government has played a strong role, both within the economy and in setting up a legal regime (of third-party enforcement). My recommended strategy would be based on strengthening the capacity of the Somali state to achieve these ends, while building safeguards (through democracy and civil liberties) against the abuse of its power. I know that this is not pie-in-the-sky, because others have done it, and I do not see why we should deny the Somalis the same benefits.
Of course, there are also risks that the strategy will fail, as it surely has in many settings. But the fact that it has also often worked—and I do not have in mind only a few European cases or European offshoots, as my African examples indicate—can give us hope.
I wonder what advice Leeson would give. Would he say: “Forget this state-building business. Let the state wither away, and let markets and private self-enforcing agreements take care of the economy.”
I don’t know if this is what he would say, but it would seem to be the logical implication of his argument. Would he then recognize that he is recommending a strategy that has never been observed to produce well-functioning, wealthy economies? And that my strategy has the virtue of at least having been successful in some instances?
The Relevance of Anarchy
One interesting thing about this entire exchange is that it was nominally organized as a discussion about anarchy, proclaiming “anarchy unbound,” and yet from the beginning anarchy has had little to do with the discussion. Leeson’s opening essay discussed actual stateless situations in a few poor countries, and Dani Rodrik responded by noting, “There is no example of a society that has become prosperous without a state machinery.”
The discussion following that revolved around how cooperative institutions can arise without government, and the role of government in the facilitation of international trade. As Rodrik noted in his most recent comment, he and Leeson don’t disagree on many specific points, but where does anarchy fit into all this?
Rodrik posed some interesting questions about policy recommendations in his last post. Let me throw in a few, too.
Pete, do you think that if Somalia remains in its stateless condition that it will emerge from poverty to prosperity? Do you think there is any practical way to eliminate governments in those areas that have bad governments, and actually leave them stateless? Governments are toppled all the time, but the bad governments that are toppled often are replaced by governments that are even worse.
And, with reference to anarchy we have been talking about poor countries with bad governments. If you had the option of completely eliminating government in the United States, relying entirely on voluntary agreements, would you do it? We live a pretty good life right now, so it would be a gamble, especially if my conjecture that anarchy is not a stable equilibrium has any merit.
The difficult thing about contemplating orderly anarchy in a prosperous society is that it is so far away from anything ever experienced. Economists are used to thinking about changes at the margin, and while a change from a bad government in a poor country to anarchy isn’t too big a change, the orderly anarchy that some libertarian anarchists have advocated is far from a marginal change. What do you think, Pete?
Anarchical Policy Analysis
I want to offer a response to Randy’s last post. It really follows on an earlier post where he stated “many of our fellow citizens favor further state expansion. But, if Leeson and Benson want anarchy, how can they get there?” Starting with this question, Randy ends up concluding that “regardless of whether the anarchists are right, their ideas are irrelevant from a policy perspective.”
Frankly, Randy is starting with the wrong question (in fact, the same initial question/implied-criticism about how do we get there applies to limited-government libertarians like Randy seems to be, as Tullock has discussed the problem of the transitional gap in explaining how it is very difficult to get rid of all sorts of inefficient government programs). I would contend that even though we cannot lay out a road map to anarchy, there is a very real and valuable policy-analysis role for anarchists. By knowing where you would like to end up, you are likely to be able to make better marginal decisions along the road, even if the destination is never reached.
For instance, consider the issue of contracting out for prison services. Many libertarians are likely to support this idea, assuming, probably correctly, that private contractors will produce higher “quality” services at lower costs than a public bureaucracy. I wrote a paper called “Do We Want the Production of Prison Services to be More “Efficient”?”, however, pointing out that prisons are used to do a lot of things that most libertarians do not like. For instance, over half the federal prison population and close to a quarter of state prison populations are being held for drug offenses (a major use of contract prisons by the federal government is to house illegal immigrants, another anti-libertarian policy). If the cost of imprisoning drug offenders falls through contracting out, the inclination of police, prosecutors, and legislators will be to imprison more of them. They will have less incentive to consider decriminalization or legalization. While achieving decriminalization or legalization are not immediately feasible, I do believe that there is growing recognition of the high cost of the drug war, and that a lot of policy experiments are moving some states in that direction. Therefore, perhaps libertarians should not support contracting out of prisons! If one only thinks at the margin, some things (e.g., contracting out) might appear attractive to a libertarian, but when one also has a destination in mind, even if unobtainable, it may become apparent that a different policy path is desirable.
Beyond that, Randy recognizes that a “benefit of the libertarian-anarchist literature is that it knocks down the arguments that, in theory, government is necessary for an orderly society.” But this point has direct implications for all policy analysis, not just the one policy question Randy demands that we address (how do we establish anarchy?). If we do not attack the basic premise that government is the only solution, and if we cannot point out that there are theoretical and empirical reasons to expect an alternative to arise spontaneously, policy analysis becomes “what should the government do?” instead of “should the government even be involved?” If we recognize that there are alternative sources of order, then whenever a government policy is proposed to “solve a problem” people like Randy can say, “but there is a non-government alternative to consider, and it may be better!”
The point is that the policy analyst’s question changes depending on the distant goal that the person is striving for and the marginal alternatives the person perceives. John Kennedy is famous for saying, “Ask not what your country can do for you; ask what you can do for your country.” I prefer, “Ask not what your country can do for you or what you can do for your country; ask what you can do for each other.” Anarchical policy analysts know where they want to go (even if they do not know how to get all the way), and look for non-government alternatives that are more likely to move us along the desired path.
Anarchy Q & A
Randy poses a few interesting questions for me, as does Rodrik in his last remarks. I’ll do my best to answer them:
Q: Pete, do you think that if Somalia remains in its stateless condition that it will emerge from poverty to prosperity?
A: I think that the greatest sources of instability and retrogression Somalia has experienced since going stateless in 1991 are the few exogenously-created attempts, backed by the international community, to reinstate government in the country. The first of these was the “Transitional National Government.” The second was the “Transitional Federal Government.” Despite these interjections, internally, Somalia has proved a remarkably stable anarchy, whereby the power of various groups that might be interested in asserting their overarching control of the country is checked by the power of competing groups. Instead of this leading to conflict, it has mostly led to peace. When the TNG, and later TFG, lodged itself in the picture, this power equilibrium was disturbed, which led to renewed conflict.
If Somali anarchy were “left alone” would it emerge from poverty to prosperity? I don’t know, but part of the main point in my original essay was that this is the wrong question to be asking.
I think that for the foreseeable future the question for Somalia is one of anarchy as we understand this anarchy to be in Somalia—not in an idealized form of perfect private order like we read in David Friedman’s Machinery of Freedom—vs. a highly-predatory and dysfunctional government like the one Somalia had before 1991—not an idealized form of property-protecting government like we see in the U.S. Neither of these particular states of the world generate lots of prosperity. But the evidence from Somalia suggests to me that the former generates more prosperity than the latter.
Just like there are different “kinds” of governments, I believe there are also different “kinds” of anarchies. Some will be more high-functioning than others and many factors, such as a society’s level of development, culture, history, etc., will constrain what kind of anarchy it might get if it were to go this route just like these features constrain what kind of government it can expect if it goes this route instead. The situation of Somalia suggests to me that even the “worse kinds” of anarchy are better than the “worse kinds” of government. Given the choice between the two, which is the choice I think Somalia has, the former is superior. I am not saying that Somalia is the “worst kind” of anarchy; I simply haven’t seen enough cases of anarchy to know if this is the case or not. But I do know it’s not the “best kind,” if for no other reason than the fact that I think the international arena, for example, shows a “better kind.”
Rodrik asks what my advice would be for Somalia. It would indeed be to leave Somalia alone because I think the alternative that Rodrik suggests—trying to construct a Botswana-like government in Somalia—will not only fail, but will likely produce worse outcomes that just letting Somalia be. The reason for this is the same one I pointed to in my initial essay. Somalia and Botswana face very different constraints, which in turn dramatically affects the types of government they could have.
Botswana has a long history of constraining rulers—going back to the precolonial period—which have carried forward to today. Botswana is also a veritable diamond mine, which has largely operated to preserve the historically-grounded good institutions it has enjoyed. Somalia, in contrast, has no such history of constraints, has experienced political corruption and predation from the time of its independence, and has no diamonds to speak of. If Botswana’s path is replicable, it’s not replicable in Somalia. An attempt to make Somalia look like Botswana won’t produce another Botswana. It will produce another Barre-ruled Somalia.
Q: Do you think there is any practical way to eliminate governments in those areas that have bad governments, and actually leave them stateless?
A: I don’t believe there is an effective way to exogenously “engineer” anarchy in foreign countries for the same reason I don’t believe there is an effective way to exogenously “engineer” good governments in developing countries. The track record for foreign aid looks pretty poor from where I sit, and there is no reason to think that attempts to “create anarchy” abroad would be any better. Incentive and information problems plague both efforts equally.
Q: If you had the option of completely eliminating government in the United States, relying entirely on voluntary agreements, would you do it?
A: If the readers of this exchange were not already fully prepared to have me committed, I will give them the reason to do so now: Yes, I would be in favor of what you propose.
I think that the “better kind” of anarchy is actually most likely to flourish in a highly-developed society with a history like the one the U.S. has. Randy and Rodrik have both pointed out, and I think rightly, that we do not have any examples of countries (if we exclude the international arena, which is of course not a country) that have become wealthy through anarchy. Although I agree with this, I do not think it demonstrates what those who invoke it usually think it does. It does not follow from this, for example, that anarchy is antithetical to prosperity and that government alone is capable of producing wealthy societies.
We often forget that until a good way into the 19th century, even England and the United States were very much reliant on private arrangements for traditional public functions, such as providing law and order. As we moved along, government grew stronger and bigger and largely supplanted these private arrangements. But this does not mean that these places could not have grown wealthy on the basis of private arrangements if they had been permitted to. Only someone who is fully committed to the “Pigouvian perspective,” who thinks about the evolution of government purely in terms of rectifying market inefficiencies and serving the “public interest,” could conclude as much. Students of public choice will be ready to point out that government’s growth and usurpation of private arrangements historically is not evidence that this was efficient or that government is responsible the growth we have observed since then.
In my mind, the “anarchy path,” which would have involved government shrinking at this critical junction in U.S. or British history, for example, is one of a few paths—including the one we did take—that could have been taken and generated prosperity. In fact, I would argue along with Bruce that the anarchy path would have generated greater prosperity than what we have today under government.
Q: The difficult thing about contemplating orderly anarchy in a prosperous society is that it is so far away from anything ever experienced … What do you think, Pete?
A: I think that it’s closer than we sometimes pretend. I live in Arlington, VA. There are quite a few police active around here and lots of government buildings. Nevertheless, not too long ago, right in front of the cigar shop I spend my copious free time in, no more than 15 feet from my face, in broad daylight, I saw a man walk up to a car parked in front of the shop, break out the window and walk away with a laptop computer.
Contrary to what you might be thinking right now, I am not raising this example to suggest that this theft means we’re not as far from anarchy as we think. I’m raising this example to suggest that this theft, despite the strong presence of government enforcement, means that we’re not as far from anarchy as we think.
Like it or not, most of the time, despite its hypothetical presence, government isn’t there to protect us. Yes, it’s true, you can call the police if your computer is stolen. But this did not prevent the theft, which, ostensibly, is the great benefit of state enforcement. Nor do I suspect that the poor fellow who was victimized, who did in fact file a report with the police, will ever see his computer again because of this.
I know, I know, shadow of the state and all that … We’d see more computers stolen if it weren’t for government police, and so on … But my point is that when you buy an alarm for your house, when you encrypt the password on your computer, when you hire a “rent-a-cop” or use private arbitration, when you so much as lock your door when you leave in the morning, you’re telling me something. And that something is that government is not as bullet-proof (or cost-effective) a remedy for protecting your property as we often pretend it is. People evidently feel the need to resort to private methods of property protection, which suggests the presence of a rather large “formal enforcement vacuum”—a sizeable arena of our daily lives in which government cannot be relied upon to protect us. Well, that’s anarchy.
Anarchy as a Policy Goal
Bruce supports the academic study of anarchy by saying, “By knowing where you would like to end up, you are likely to be able to make better marginal decisions along the road, even if the destination is never reached.” Then he presents a policy example that, as I see it, does not support that statement.
He talks about the efficiency gains from contracting out for prison services, but notes that if it’s cheaper to incarcerate people, we’re likely to put more people in prison — an anti-libertarian result from a seemingly libertarian policy of shifting production from the public to the private sector. This particular step toward anarchy (substituting private sector production for public sector production) actually results in a move away from the libertarian society Bruce would like.
It was unclear — especially in light of the sentence of Bruce’s I quoted above — whether Bruce was supporting the contracting out of prison services because it’s a move toward “where you would like to end up,” or whether he was against it because its immediate effect was anti-libertarian. But, Bruce’s office is right upstairs from mine, so I ran up the stairs and asked him! He’s against contracting out of prison services because of the anti-libertarian consequences.
In anarchy any prison services would be privately provided, so Bruce’s opposition to contracting them out appears to contradict what I quoted above. In fairness to Bruce, he made the clear distinction to me in conversation between privatizing prisons and government’s contracting out for prison services, but even with this distinction, purely private prisons in the current state-run legal system would still end up increasing incarceration rates. In addition to the cost argument Bruce made, private prison firms already lobby legislatures to increase prison sentences and require that a greater percentage of sentences are served. It increases the demand for their services.
So, Bruce’s example seems to contradict his point. If you’ll never reach your ultimate destination of anarchy, it’s really not that relevant to know what things would be like in that unreachable state of affairs. Academic research on anarchy is of limited policy relevance. Bruce and I both agree that a major benefit of the libertarian-anarchist literature is that it knocks down the argument that, in theory, government is necessary for an orderly society. Beyond that, advocates of smaller government can be more productive by examining programs and policies one at a time and suggesting concrete reforms, just as Bruce does with prisons.
The Road to Anarchy
Pete says if he could do it today, he’d completely eliminate government in the United States, and that we’d be better off stateless than we are today. Then, in answer to how we get there from here he talks about shrinking the size of government, presumably continuing until it shrinks all the way to nothing.
The path he advocates toward anarchy sounds like Reagan Republicanism to me. So Pete, you might want to elaborate on this. While Reagan didn’t set anarchy as an ultimate goal I don’t see that what you’re advocating is any different in terms of concrete policy than what Reagan advocated. He shrank government as much as he could in his eight years in office, which wasn’t as much as he would have liked. If there’s no way to do better than the conservative Republican strategy, it’s completely unthinkable that we could ever get to anarchy here in the U.S. So, anarchy seems like an abstract “ideal state of the world” that can never be attained, but we can move in that direction by shrinking government. Is that right?
If so, why dress up fiscal conservatism in the garb of anarchy? Economists are used to thinking at the margin. So why not just say: Government is too big, and we want to keep shrinking it as long as the reductions make us better off. If it happens that the end point is anarchy, fine. But both you and Bruce seem to think that anarchy isn’t really attainable in the United States anyway.
Privatization versus Contracting Out
It seems odd to be debating Randy in this way since, as he noted, his office is just one floor below mine. However, it is Saturday and we actually live a couple of miles from each other, making it costly to talk face-to-face. Furthermore, when we do talk face to face, I apparently do not communicate clearly, as it appears that even after our conversation, Randy did not understand the distinction I was making between contracting out and privatization. Let me try to clarify.
First, consider the idea of “government production” and recognize that the fact is that “the government” never actually “produces” anything, including force, without contracting with “private entities.” Even if a bureaucratic organization such as a Department of Corrections (or police force or army) produces coercion, the individuals who work within that bureaucracy are private entities working under contract, negotiated either as an individual or through a collective bargaining organization such a union. The individuals are not “owned” by the state unless they are slaves. They contract to provide their labor services because they expect to better off than they would be in an alternative job. The benefits of the bureaucratic job may take many forms, of course, including any pleasure received from helping to produce what a bureaucrat perceives to be the public interest (a perception that is likely to be colored by self interests), as well as a good living to support a family and/or attractive life style, job security, perhaps pleasure from being in a position of power and authority, and so on (some contracts to provide labor to produce a government service are entered into under duress, of course, as with a military draft, in which case, the relatively unattractive alternative is not a job but some sort of punishment).
Now consider so called contracting-out. The contracting out for prison services (unfortunately called privatization by most policy makers and many academics) actually refers to a particular type of contract in which some part of the bureaucratic decision-making hierarchy is replaced by a decision-making hierarchy that operates under a different set of incentives than those faced within the bureaucracy. Profit maximizing firms under contract may produce the service at lower cost but that may not be efficient in an allocative efficient sense (that is why I put quote marks around “efficient” in my previous remark – I probably should have used something like “cost-effective”). Other differences in incentives also may arise (e.g., abuses of power may be less likely if the private firm can be sued and the bureau cannot). Importantly, however, the service is still purchased (financed) by a government organization dominated by individuals with their own objectives (a dictator, elected representatives, or bureaucrats with discretionary power, all of whom are subject to political pressures from powerful special interests). That is, the service is still paid for by coercively collected taxes, after all, and allocated to uses determined through political processes with all of their public choice problems. Indeed, one of those public choice problems is that contacting firms become lobbyists who have incentives to demand more spending on prisons and perhaps more criminalization, as I have noted elsewhere. Of course, corrections unions have similar incentives, but as Randy said in conversation, for-profit firms may be more efficient at lobbying too.
The point is that production of prison services by for-profit firms providing those services to the state is not what I mean by privatization. Indeed, in the context of our interchange, Randy’s statement that “purely private prisons in the current state-run legal system would still end up increasing incarceration rates” does not make sense. These firms are not “purely private” when they operate in our current, state-run legal system. They still provide services to the state and are financed through taxes, because, under the incentives that currently exist (e.g., the focus on punishment rather than restitution) there is very little private demands for such services. I would argue that “privatization” should refer to situations characterized by private supply AND demand. Privatizing supply alone (which, as suggested above, always occurs, except that the incentive structure changes when the contract is with a for-profit firm rather than a union or individual laborers) can make things worse rather than better. As I suggested to Randy, if Hitler had contracted out the extermination of the Jews, I expect that more Jews would have been killed at lower costs, but surely this contracting out does not move us in the direction of a libertarian society. Therefore, I really do not see how my opposition to contracting out for prisons is in any way contradicts my statement that “By knowing where you would like to end up, you are likely to be able to make better marginal decisions along the road, even if the destination is never reached.”
Libertarians who support contracting out presumably do so because they want a more cost effective (and/or less abusive) government, presumably so the government will become smaller. If I was a limited-government libertarian I might agree (in fact, I once did ). I am not convinced that they get the smaller government that they want, at least in the long run (e.g., as Randy points out, contracting out creates incentives for a new and perhaps more effective group to lobby for more government taxation and control in order to increase their own demand; and as I noted, making government more cost effective reduces the incentives to look for alternative solutions to perceived problems), but more importantly, as someone who hopes to see government wither away in the long run, I do not want to make it more cost effective at delivering “services” that themselves should be eliminated. Randy is correct when he states that “in anarchy any prison services would be privately provided,”  but he is wrong when he continues “so Bruce’s opposition to contracting them out appears to contradict what I [Randy] quoted above.” In anarchy (and indeed, any private market) the good or service is being supplied in response to the demands of private individuals. If the demand is privatized so expenditures are voluntary, then the services provided are likely to be quite different than the services provided to the government and financed by coercively collected taxes, even if the service is supplied by a for-profit firm.
 For more discussion of this point, see Benson, B. L. “The Market for Force,” The Independent Review: A Journal of Political Economy, 11 (Winter 2007): 451-458.
 See Benson, B. L. “Do We Want the Production of Prison Services to be More “Efficient”?” in Changing the Guard: Private Prisons and the Control of Crime, Alexander Tabarrok ed., (Oakland, CA: Independent Institute, 2003), pages 163-216.
 See Benson, B. L. “Third Thoughts on Contracting Out,” Journal of Libertarian Studies 11 (Fall 1994): 44-78.
 The idea of prisons in an anarchical society may suggest to some that a coercive state must then exist, but to the degree that prisons might arise, they would be very different than modern prisons. See the last chapter of Benson, B. L. To Serve and Protect: Privatization and Community in Criminal Justice, New York: New York University Press, 1998.
Randy says that “that path” I “advocate toward anarchy sounds like Reagan Republicanism.” I must admit, I’m completely befuddled by this remark.
On the one hand, I don’t know what is “Reagan Republican” about saying that government should not exist. And on the other, I have not, at least to my knowledge, suggested any “path toward anarchy” whatsoever. I have said that where anarchy already exists (Somalia) that it should be left alone. But this is hardly a proactive policy guide to achieving statelessness.
The only comment in my last post related to the question of how we might achieve anarchy where it does not exist was a purely negative one—to point out that I do not believe foreign governments could successfully “impose” anarchy on the developing world.
Incidentally, even if one were to mistakenly interpret this statement as policy guide to proactively achieving anarchy where it does not exist, there would be nothing “Reagan Republican” about it. Regan’s foreign policy was predicated on the use of military intervention to achieve the political and economic outcomes his administration was after in foreign countries. I am advocating precisely the opposite—that no such intervention would be desirable.
With regard to the U.S., I have only argued that: (a) I believe anarchy would be desirable for the U.S. (my last post), (b) that we are not as far from anarchy as many people think (my last post), and (c) that I am in agreement with Randy that one of the big stumbling blocks to “implementing” anarchy is that people tend to think that only the government is capable of supplying particular goods (a previous post.)
Outside of suggesting with respect to (c) that it may be useful to present arguments that demonstrate the effectiveness of markets in supplying such goods I have not said anything that could be construed as identifying steps we could take to achieving anarchy in the U.S. Nor will I attempt to suggest how we might do this here. This is not because I do not think it is an important question. It is because I am not a political strategist, and this question of the political expediency of anarchy is really a question of political strategy.
The only comment I made about “government shrinking” was in the context of talking about potential paths the U.S. might have taken in the early 19th century that would have generated prosperity. My point here was not about identifying a practical path to achieving anarchy. It was simply that had America gone the way of anarchy (which would have required government to shrink eventually to zero, rather than growing as it did), America easily could have turned out no worse off, and very likely better off, than it did. I was using this example simply to say that government in the U.S. is one, but not the only, political-economic arrangement consistent with American prosperity. I did not have in mind, nor was I trying to suggest, anything like a politically-expedient “path to anarchy.”
I hope that helps to clarify my (essentially non-)stance on this issue of the political expediency of anarchy.
The Relevance of Anarchy, Again
I’ve read through Bruce’s and Pete’s responses to my comments — I admit I was trying to be provocative when I wrote them — and I agree with everything both of them had to say. But, here’s what I was getting at when I made those comments, and I think my points remain valid.
Bruce notes that if we contract out for prison services under a state-run legal system, (1) the effect is likely to be a less-libertarian legal system, and (2) that because those private firms are paid with tax dollars, the force of government ultimately stands behind those private contractors. In anarchy, goods and services are supplied only in response to the demands of private individuals. I completely agree with everything Bruce said.
So, what is the relevance of anarchy? Pete and Bruce hold it up as an ideal end point, and at that point all prison services would be provided by private firms, but if the government runs the legal system we may be better off with prison services provided by government rather than private firms. So in this example what things would be like at the ultimate destination of anarchy is not the relevant factor determining whether we want prison services provided by private firms; it’s whether the legal system is private or run by government. Whether Bruce wants to call himself an anarchist is pretty much irrelevant to his opinion on this particular policy matter, and if this example generalizes, when looking at ways to limit the scope of government, we should be looking at the marginal effects (will this change increase or decrease liberty) regardless of what things might look like in anarchy.
I knew when I wrote it that Pete wouldn’t like my associating his views on anarchy with Reagan Republicanism, so, sorry for that cheap shot Pete! But, I was responding to your comment that your recommended path to anarchy “would have involved shrinking government…” and this is what sounds like Reagan Republicanism. But, I realize you were talking about a missed opportunity more than a century ago. You clarified in your latest
post that you don’t have in mind, and weren’t trying to suggest, any politically feasible path to anarchy for the present United States, even though you would like to see it.
What I was looking for was any relevance of this discussion on anarchy to the prospects for a libertarian anarchy in the United States today, and in all this discussion, I don’t see it. But perhaps I shouldn’t be expecting it either, because that wasn’t what Pete’s opening essay was discussing. I do see the relevance directly to the present state of affairs in Somalia, and by extension, to our government’s attempts to support governments in other poorer areas with histories of bad government. And Pete, I think the points you made about “self-governance working better than you think” are good ones, and valuable lessons for economists in general.
I agreed to join this conversation before I saw your opening essay, Pete, and as I said at the start of my first comment, I agreed with everything you said. So, I could have just said that, and all my participation would have been over in a sentence! Instead, I pushed a line of questioning that essentially was asking, what’s the relevance of this research on anarchy for prosperous societies like the United States? From a policy perspective, I still don’t see that it has much relevance but, as I’ve said previously, I do think it is valuable because it knocks the legs out from under the market failure argument that we need government to perform those functions the market can’t do. Going back to your title, self-governance does work better than you think, and that idea is not well-recognized by most people inside or outside of academia. So, despite my carping on some minor points, I am delighted to see you pushing the idea.
One More Try: Anarchical Policy Analysis
It seems that Randy is more confused than ever (and I have known him for over 30 years!). He writes: “I completely agree with everything Bruce said. So, what is the relevance of anarchy? Pete and Bruce hold it up as an ideal end point, and at that point all prison services would be provided by private firms, but if the government runs the legal system we may be better off with prison services provided by government rather than private firms. So in this example what things would be like at the ultimate destination of anarchy is not the relevant factor determining whether we want prison services provided by private firms; it’s whether the legal system is private or run by government.”
First, Randy clearly does not agree with everything I wrote since he still sees a key distinction between “prison services provided by government” and prison services provided to government by private firms. This ignores the second paragraph of my post. I see relatively minor incentive effects between prison services provided to government by firms under contract or private individuals under contract (whether collectively bargained or individually bargained), emphasizing that it is the source of demand (including the means of financing) that really determines what these prisons do. Second, he says it is not the destination of anarchy that matters in my policy analysis but “whether the legal system is private or run by government.” But it seems to me that the essential characteristic of anarchy that Pete and I have been discussing all along is that it has a “legal system that is private”! While there are probably other important aspects of anarchy, the legal system certainly is the element that I have been focusing on, and it is the clearly is element that matters when we are thinking about the various uses of prisons. Private production of various legal services (e.g., prison services) arises under both state law (whether by a private firm, or a bunch of private individuals working under contracts as I explained in my earlier post) and private law. The key difference between the two is how demand decisions are made and how those decisions are financed. Finally, while I might have arrived at the same policy conclusion without thinking about an ultimate objective of anarchy, I am not nearly as sure that I would have as Randy seems to think. If I had not spent years thinking about how private legal arrangements work, and how private law differs from state law, I may have had second thoughts about contracting out [first thought: it makes government more cost effective so it is a good thing; second thought: it creates numerous public choice problems so the savings are not likely to be as great as expected, but it still probably is an improvement over the alternative contractual arrangements] but I probably would not have the same ideas about how prisons under private law would differ so much from prisons under state law. Therefore, I doubt that I would have had the “Third Thoughts About Contracting Out” [Journal of Libertarian Studies 11 (Fall 1994): 44-78] that produced my conclusions [third thoughts: if a private firm under contract is more cost effective at producing something that should not be produced by the state (i.e., something that should be left to the private sector operating in anarchy), then it is undesirable].
Let me conclude my last post (I will have to try to educate Randy directly if he sends in a reaction to this one) by thanking Will Wilkinson and Pete Leeson for inviting me to participate in this exchange. It has been fun.
I’d like to thank Bruce Benson, Dani Rodrik, and Randy Holcombe for participating in this discussion and for offering their insightful comments. By way of concluding, I will offer a few final remarks that I hope tie together several of the threads of commentary that followed my opening essay.
I want to highlight four major areas of our conversation, bringing attention to the points of agreement and disagreement in each. I do not intend to put words into others’ mouths or to indicate agreement or disagreement when this is not in fact the case. If I fail in this, I apologize in advance.
With that in mind, here we go:
1. There seems to be agreement that there is, at the very least, a tendency for individuals to develop private solutions to the obstacles that stand in the way of their ability to realize the mutual benefits of cooperation, even where government is absent. This is significant because it means that, at a minimum, anarchy is not a Hobbesian Jungle, but will instead tend to generate private institutions of order.
The disagreement is about what extent of cooperation such private action is capable of enabling. I have argued that evidence from the international arena suggests that this extent can indeed be considerable. To my recollection, no one has disagreed that international commerce is massive. If this is right, international commerce would seem, by itself, to affirm the ability of private governance to enable large scale exchange. The presence of relatively recent multinational agreements that in theory make private arbitral decisions enforceable in state courts does not affect this for two reasons. First, well before such agreements, international trade was already large. Second, ultimately such agreements rely on self-enforcement to work since there is no supranational sovereign to enforce them externally.
This affirmation does not answer the question of whether international exchange could be increased even further if some kind of ultimate supranational authority of enforcement for international commercial parties existed. But the current presence of transactions costs in international trade in the absence of this authority does not mean that such an authority would expand trade if it existed. If we allow for government actors, just like market actors, to be imperfectly informed and self-interested, another point we all agree one, a supranational authority of enforcement may not only fail to enhance commerce, but may in fact reduce it.
2. No one has contested the empirical claim in my initial essay that Somalia is better off stateless than it was before its government collapsed. Thus, there appears to be agreement that in some cases at least, anarchy generates better outcomes than government.
In my mind this is important because: (a) in a number of the world’s countries, government is not dramatically different than it was in pre-anarchic Somalia, suggesting the desirability of anarchy at least in these places, and (b) it demonstrates that the conventional wisdom that anarchy must always produce inferior outcomes to government is wrong.
The disagreement here is about whether Somalia is better off remaining stateless, or whether some attempt should be made to construct a new government in the country that resembles one of the few well-functioning states in Sub-Saharan Africa, such as the one in Botswana.
One suggestion is that the success of well-functioning government in Botswana implies that well-functioning government in Somalia is also possible. Accordingly, we should try to construct a well-functioning government in Somalia to remove it from anarchy. The other suggestion is that Botswana, and more generally countries with well-functioning governments throughout the world, face very different constraints on what kind of states they may have than Somalia does. Due to this difference in constraints, it would be very unlikely to get a well-functioning government in Somalia if a new state were constructed there. Instead, such efforts would likely lead to a highly dysfunctional government, not unlike government in Somalia’s past, which we know produced worse outcomes for the country than anarchy. Thus, anarchy is a constrained optimum for Somalia and should be allowed to persist.
3. Everyone agrees that government has grown larger. I also believe that everyone agrees that there are no examples of countries that have become very wealthy under anarchy. There is disagreement, however, as to whether this fact shows that anarchy is inconsistent with prosperity or not. One view sees the absence of wealthy anarchies and historical growth of governments that attended increases in wealth as evidence that only government is compatible with increasing standards of living. The other view, summarized nicely by Bruce, sees the growth of government as following parasitically on the growth of the economy. In this view, prosperity occurred not because of state intervention, but rather despite state intervention, or because state intervention was low. I will not go into this matter further here other than to note that my arguments supported the second view.
4. Despite some fundamental disagreements about the desirability of anarchy and its ability to generate prosperity, there seems to be universal agreement with Randy that: (a) anarchy is not politically possible, and (b) that anarchy may not always be stable. It was suggested, and I think correctly, that (a) stems largely from the fact that most people do not believe anarchy is capable of adequately supplying services government has traditionally provided. It was argued with respect to (b) that the very forces responsible for the growth of government noted above may very well lead anarchy to devolve into a state even if it is superior in terms of individuals’ welfare.
I will only make two remarks here, both of which echo my earlier comments. First, the political feasibility of anarchy does not in any way bear on the question of anarchy’s superiority (or inferiority, depending upon one’s position) to government. Second, the (in)stability of anarchy is not unique to anarchy but seems to equally plague all forms of social organization, including the limited government form advocated by non-anarchist libertarians.
Anarchy deserves our attention. It should not be ignored; nor should it be summarily dismissed on the grounds that government is “obviously” always superior. Although this discussion has seen significant disagreement about anarchy’s effectiveness, I hope that it highlights the openness of the matter and why it is one worth considering.