About this Issue
Libertarians have always emphasized the importance of private governance: In a world with radically less public or state-supplied governance, how will individuals gain assurance that products and services are honest? How will they be able to trust one another? How are promises to be kept? If the state ever were to retreat from its currently prominent role in society, these questions would still need answers.
Happily, private governance is already more common than many people suspect, and it seems likely that it’s able to take on a still greater role. Private security firms frequently perform duties virtually identical to those of police forces. Stock exchanges are in many respects self-governing institutions, and, at one time in their history, they were entirely responsible for their own governance. (If you didn’t like it, you could always set up a rival.) And there are many methods - some new, some ancient - by which the public good of governance can be bundled with other goods and effectively priced.
As a result, private governance is here to stay. But just how much can it do? Can governance ever be entirely private? Or can the structures of private governance only grow up in the shadow of public governance? That’s a hard question to answer, in part because we have no ordered anarchies to experiment with. Critics would suggest, with some justification, that these societies are rare because they are impossible. Proponents would point out, again with some justification, that states are like gases; they expand to fill every vacuum.
Our lead essayist this month is Edward Peter Stringham, author of Private Governance: Creating Order in Economic and Social Life (Oxford, 2015). Joining him will be Cato’s own Aaron Ross Powell, editor of libertarianism.org; Professor James E. Hanley of Adrian College; and Mark Lutter, a graduate student at George Mason University who is researching private cities.
How Private Governance Made the Modern World Possible
What makes markets, and especially advanced contracts, possible? Most social scientists, including a high percentage of libertarian ones, describe the world as fraught with prisoners’ dilemmas (the idea that collaborators would be better off working together, but they each have an incentive to cheat) that can only be solved by government. For example, Israel Kirzner suggests that markets need “governmental, extra-market enforcement” stating that that without “enforceability of contract… the market cannot operate.” Similarly Mancur Olson states that without “institutions that enforce contracts impartially” a society will “lose most of the gains from transactions (like those in the capital market) that require impartial third-party enforcement.”
But in many cases government officials do not have the knowledge, incentive or ability to enforce contracts or property rights in a low cost way. Consider parties contracting in third world countries where trials take more than a decade. Or consider parties in the first world making a contract where time is of the essence or a lot of money is at stake. Who wants to get large resources tied up in a trial that can take months or years? Or consider making a low value exchange where the cost of going to trial vastly exceeds the value of a transaction. Or consider making a transaction across political boundaries which makes establishing jurisdiction for a trial difficult. At a minimum using courts or government law enforcers requires time and resources, and as practical matter entire classes of contracts are effectively unenforceable.
Judges, police, and regulators are a deus ex machina. Government is often dysfunctional and crowds out private sources of order, or it is simply absent or too costly to use. That means parties can either live with their problems or attempt to solve them. In some cases solutions have yet to be found or are too difficult to implement. Such is the world. But quite often solving problems is a profit opportunity and the more at stake, the more potentially profitable the solutions. Throughout history we can see lots of examples of private parties benefiting by figuring out better ways of facilitating exchange or protecting property rights. These protections of the market come not from government but from the market.
In his theory of clubs, James Buchanan argued that we should not assume that goods either must be private goods for one person or public goods for everyone in society, but instead a high percentage of goods are club goods that fall somewhere in between. One of the most important but underappreciated types of club goods is private governance, the various forms of private enforcement, self-governance, or self-regulation among private groups or individuals that fill a void that government enforcement cannot. A country club or a night club not only provide a physical space for leisure, but they also have rules of entry and conduct. The same is true of places of business or living like shopping malls, apartment complexes, stock exchanges, and financial intermediaries. eBay, for example, is a club that facilitates trade with reputation mechanisms and dispute resolution services. It evaluates the marginal benefits and marginal costs of having various rules or dispute resolution mechanisms and seeks to make its market as attractive as possible. American Express is another type of club that helps ensure that consumers get what they pay for and merchants get paid. Most people don’t think of their credit card as a rule enforcing club, but it is. A merchant that overcharges customers or a customer who does not pay his bills gets kicked out of the club and that encourages honest behavior.
Private governance helps protect property rights and facilitate trade in everything from the simplest to the world’s most advanced markets. It operates in markets where government theoretically can enforce contracts and where government explicitly refuses to enforce contracts. Let us consider some examples.
In all of the world’s first major stock markets, government officials considered much of the trading as a form of gambling or speculation used to manipulate prices. In the first stock market in seventeenth century Amsterdam, government refused to enforce all but the simplest securities contracts. After the founding of the Dutch East India Company in 1602 a secondary market for shares emerged among brokers who began specializing in trading stocks. Officials soon passed edicts outlawing their nascent market, but stockbrokers continued trading and developed many sophisticated transactions including forward contracts, short sales, and options. How is that possible? Instead of formal rules, stockbrokers relied on reciprocity and reputation mechanisms to encourage contractual compliance. In contrast to the one shot prisoners’ dilemma story, most business is repeated and brokers had to be reliable if they wanted others to do business with them. Not only would a defaulter sour his relationship with his trading partner, but he would be boycotted by everyone else who found out. Reputation thus served as a substitute to formal rules. The market was wildly successful and helped finance the Dutch Golden Age. Some estimates put the market capitalization of the Dutch East India Company in current dollars at $7 trillion. Modern New Yorkers can thank the Dutch East India Company for financing Henry Hudson’s first voyage to New York’s North River (the Hudson River) and the Dutch West India Company for founding New Amsterdam (New York).
The stock market in England had many similarities. In eighteenth century London officials banned stockbrokers from the Royal Exchange and also refused to enforce most contracts. The market persisted anyway with brokers meeting in coffeehouses around Change Alley. Adam Smith described how time bargains (forward contracts) were unenforceable but people made them and abided by them anyway. He stated, “A dealer is afraid of losing his character, and is scrupulous in observing every engagement. When a person makes 20 contracts in a day, he cannot gain so much by endeavouring to impose on his neighbours, as the very appearance of a cheat would make him lose.” If someone defaulted, brokers would label them a lame duck and brokers eventually began writing the names of defaulters on a blackboard. Later brokers decided to transform Jonathan’s Coffeehouse into a private club that could create and enforce rules. The club, later known as New Jonathan’s, The Stock Subscription Room, and then The Exchange or The Stock Exchange, had membership requirements and rules for dealing with default. They adopted as their motto “My word is my bond.”
One can see a similar history in New York about a century later. Early stockbrokers met in the Tontine Tavern and Coffeehouse which in 1797 adopted a “Constitution And Nominations of the Subscribers.” In 1817 others founded the New York Stock and Exchange Board, i.e. the New York Stock Exchange, which had more formal membership requirements and rules. Brokers added different resolutions over the years, and by the 1860s, in addition to blacklisting those who did not follow through with their contracts, to make sure everyone was proper they had rules prohibiting “indecorous language” (suspension for a week), fines for “smoking in the Board-room, or in the ante-rooms” (five dollars), and fines for “standing on tables or chairs” (one dollar). By 1865 the initiation fee was $3,000 and by 1868 one’s membership seat became a valuable property right that could be sold to potential members. They also created listing requirements for firms that wanted to be traded on the “big board.” The New York Stock Exchange always had to compete for business and throughout the years faced competition from the Open Board of Brokers (merged with the New York Stock Exchange in 1869, the Curb Market and its more formal outgrowth, the New York Curb Exchange (founded in 1921 and renamed the American Stock Exchange in 1953), the Consolidated Stock Exchange of New York (founded in the 1880s), and regional exchanges including the Boston Exchange and Philadelphia Stock Exchange (founded in 1834 and 1754, respectively, the latter in London Coffee House). By creating a set of rules to make stock markets more attractive to investors, they helped finance the growth of American business.
In modern times the largest and most advanced markets are also backed by private governance. Consider derivatives contracts, some of which can entail unlimited downside risk and even the best legal system cannot recover an infinite amount. Even the notional value of contracts traded through the Chicago Mercantile Exchange, Chicago Board of Trade and the New York Mercantile Exchange exceeds $10 trillion per year, the contracts go without a hitch. When two parties make a trade through these exchanges, they are not actually making a contract with each other but making separate contracts with the futures exchange. The futures exchange acts as an intermediary and assumes and manages risks for its customers. Rather than allowing any contract to occur and then attempting to enforce it ex post, they have various rules and margin requirements that specify what trades can be made. The risk management from these exchanges eliminates the “need” to have any of these contracts enforced in court.
Other financial intermediaries also assume and manage risks on behalf of customers. When doing business with PayPal or with most credit cards, if fraudsters make bogus transactions or attempt to takes money out of an account PayPal is on the hook. By 2001 fraudsters were stealing more $10 million from PayPal per month at a time when its gross annual revenue per year was only $14 million. At first PayPal contacted the FBI and found that it was of little help. After seeing the evidence, the FBI asked questions such as “What’s a banner ad?” These government officials were not at the forefront of technology, but even if they were, they still would have been powerless against anonymous fraudsters on the other side of the globe. Rather than sitting around and hoping that government would solve the problems, PayPal came up with private solutions to deal with fraud before it occurred. They developed human-assisted artificial intelligence to monitor accounts, search for suspicious activity, and temporarily or permanently suspend accounts. By assuming and managing risks on behalf of customers, PayPal transformed what many people assume must be legal questions into risk management questions. When parties can deal with problems ex ante, ex post contract enforcement is not the “necessity” that theorists like Kirzner or Olson assume.
Private governance is responsible for creating order not just in basic markets but also in the world’s most sophisticated markets, including stock markets, futures markets, and electronic commerce. The role of private governance in enabling stock markets and modern capitalism is one of the least known but most important achievements in the history of the world. Private governance also protects contracts and property rights in scores of other markets. Private governance can be found working in ancient and modern societies, in small and large groups, among friends and strangers, and for simple and extremely complex transactions. It often exists alongside, and in many cases in spite of, government legal efforts. I document more examples in my book Private Governance: Creating Order in Economic and Social Life published by Oxford University Press.
Friedrich Hayek used the word “marvel” to describe the price system and its role in coordinating disparate individuals. The mechanisms of private governance are just as miraculous and responsible for creating order in markets. As Thomas Paine writes:
Great part of that order which reigns among mankind is not the effect of government. It has its origin in the principles of society and the natural constitution of man. It existed prior to government, and would exist if the formality of government was abolished. The mutual dependence and reciprocal interest which man has upon man, and all the parts of civilised community upon each other, create that great chain of connection which holds it together.
The invisible hand analogy in economics sheds light on underappreciated processes of coordinating behavior, and the study of private governance sheds light on similarly underappreciated mechanisms for creating order. Private governance works behind the scenes so most people miss it, but it makes the modern world possible.
 Kirzner, Israel M. 2000. The Driving Force of the Market: Essays in Austrian Economics. New York: Routledge, p.83. Olson, Mancur. 1996. “Big Bills Left on the Sidewalk: Why Some Nations Are Rich, and Others Poor.” Journal of Economic Perspectives, 10(2): 3-24, p.22.
 Galanter and Williamson label the common worldview that all cooperation and trade depend on third party enforcement as legal centralism. Galanter, Marc 1981. “Justice in Many Rooms: Courts, Private Ordering, and Indigenous Law.” Journal of Legal Pluralism, 19: 1-47. Williamson, Oliver E. 1983. “Credible Commitments: Using Hostages to Support Exchange.” American Economic Review, 73(4): 519-40.
 Buchanan, James M. 1965. “An Economic Theory of Clubs.” Economica, 32: 1-14.
 These paragraphs draw from my research in my book: Edward Stringham. 2015. Private Governance: Creating Order in Economic and Social Life. New York and Oxford: Oxford University Press
 Hayek, Friedrich A. 1945. “The Use of Knowledge in Society.” American Economic Review, 35(4): 519-30.
 Paine, Thomas. 1791 . Rights of Man. London: J. M. Dent, p.84.
Public Governance All the Way Down
Edward Peter Stringham’s Private Governance confirms my priors: The state is generally bad at governing, and private individuals typically do a much better job governing themselves. Emergent orders are super neat and trounce the clumsy fist of coercive, monopolistic government. Stringham presents case studies telling me I was right about this all along.
Which made the task of responding to it rather daunting, especially as someone not trained as an historian and so not qualified to assess the veracity of his numerous empirical claims. What to say about a book I largely agree with? I was stymied until I noticed a common theme in my underlines and margin notes. While I’m very much on Stringham’s side when it comes to the benefits of private governance over public, and of market processes over state regulation and violence, I often found myself confused about how we might distinguish private from public, at least within the framework Stringham provides.
Put simply, Stringham’s definition of private governance appears to depend on the existence of public governments, such that the only way to ultimately tell private from public is to point at the latter and say, “This other thing is private because it’s not that.”
The definitions come in a footnote. Drawing on Merriam-Webster, Stringham calls government “the group of people who control and make decisions for a country, state, etc.” Private is “intended for or restricted to the use of a particular person, group, or class.” We don’t get a definition of “public” here, but he does tell us that whether an institution is a “government” (meaning “public government”) hinges on whether its agents “make decisions for everyone in a region (regardless of whether people agree), whereas rule makers or enforcers at private colleges or stock exchanges are private and only apply to people who do business in those venues.” (3n1) These differences get unpacked a bit in chapter 3, but not to a degree we might call a bright line.
So, while we get definitions (of sorts) of “government” and “private,” unless I missed it, Stringham doesn’t give a clear definition of “state,” which is of course what we have in mind when we talk about public government. For sake of argument, then, let’s take the most common definition, Max Weber’s, which applies the label to any “human community that successfully claims the monopoly of the legitimate use of physical force within a given territory.” For purposes here, to keep us in the realm of most governments and away from, say, volunaryism, I’ll add, “And funds its activity via taxes.”
Now, this definition clearly doesn’t apply to most of Stringham’s case studies, largely because most of them avoid the issue of physical force entirely. They’re non-geographic and economic – distributed systems of virtual goods, chiefly stocks and other financial instruments, existing outside physical space. Which is all well and good, but I’m not Doctor Manhattan, and so must live within geography, within territory, as part of the physical world. This means I’m always present in some space, and that space is either owned – privately or publicly – or unowned. No matter where my money is or how it flows, I have to live somewhere, and whether that somewhere in statist or anarchical, if I live near others, I’ll routinely encounter governance.
What would it mean for me, an embodied being, to live within “public” versus “private” governance? I’m not sure Stringham clearly answers that question, which seems like a real concern if the project of the book is to promote private governance generally. After all, my life is more impacted by whatever governing system controls or limits – or protects – my choices about my body and my tangible property than it is by the rules governing how I can invest my earnings.
Sticking to the tangible, we get chiefly two examples from Stringham: private police and gated/private communities. Focusing on those, then, is there a meaningful way to tell which police/communities are public and which private without simply pointing at the one that’s declared itself public and then deciding the rest are necessarily private?
In a system only of private governance – i.e., with no organization labeling itself “the state” – we’d necessarily find ourselves in private communities patrolled by private police. We’d choose which community to live in and signal our acceptance of that community’s rules by buying into it. If the community provided any services at all – as nearly all do – we’d pay for those services via something like homeowners association (HOA) fees. Stringham mentions such a setup several times, and labels each “private.” If we don’t like the rules the HOA or community owner dictates, we might run for the HOA board, vote in HOA elections, etc. If things get bad enough, we might move somewhere else.
Our private communities would use some of those funds they take in from their residents to provide security. And just as with a shopping mall owner hiring a particular firm to provide security guards within his building, the community would likely hire a single firm – if it doesn’t run the security itself. It’s unlikely it would allow competing firms, or allow me to hire my own police and my own courts for just my house, just as the mall owner wouldn’t let competing guard agencies move in on his approved agency’s turf.
If this is an accurate picture of terrestrial “private” governance – and it certainly lines up with the examples Stringham gives us – then we’ve run into something of a problem. First, those HOA fees look an awful lot like taxes. I must pay them or management will fine me or have their security agents escort me from the neighborhood. Second, the single security firm certainly looks like it “claims the monopoly of the legitimate use of physical force within a given territory.” Thus is our private government – the owners/managers of the gated community – a state?
On the one hand, it meets the definition of “private,” for it’s “intended for or restricted to the use of a particular person, group or class” – in this case the residents of the community. But at the same time, it looks an awful lot like public government, for it “make[s] decisions for everyone in a region, (regardless of whether people agree…).” Stringham’s note that private organizations make rules that “only apply to people who do business in those venues” does not work here, because all of the residents did choose to do business by buying in, but also have to obey the rules even if they disagree, and with their only recourse being casting one vote among many, petitioning ownership, or exercising a right of exit.
Yet a government of a territory, claiming a monopoly on the use of force within the area, funded by non-voluntary fees, and able to be influenced only through casting one vote among many, petitioning ownership, or exercising a right of exit is exactly what we have with our existing, public governments.
In chapter 3, where Stringham has promised to clarify his definitions, we don’t get much help in solving the puzzle. “One of the most fundamental differences between public governments and private clubs is that private clubs are voluntary associations that people join contractually and are free to quit.” (25) If I immigrate to a new country, however, I’ve joined contractually (of a sort) and am free to quit provided the country doesn’t violate my right of exit. Most of us didn’t immigrate, of course, because we were born into our country. But my children were born into the privately managed community where I live now. They didn’t choose to be subject to its rules any more than they chose to be subject to the rules of the Commonwealth of Virginia or the United States of America.
Stringham says, “The essence of markets is voluntary choice, whereas the essence of the state is imposing its choices on everyone.” (26) But isn’t this exactly what a gated community does to everyone inside its gates? Again, residents/clients can vote or complain or leave, but so can citizens of most non-totalitarian states.
What about the claim that “providers of private governance have an incentive to provide assurances that they will treat their clients well,” because “otherwise, the demand for their product will not be as high as it could be?” (29) That pretty accurately describes what’s going on when citizens of one country leave it for greener pastures.
Then there’s the idea that “even if future customers are not present when private governance mechanism are put in place, private governance providers must heed future customer demands.” (29) Again, how does this not apply to public governments as well, at least those that are nominally democratic?
Reading Stringham, I’m not sure there’s a meaningful way to tell the difference between anarchism – a world of only private governance, with no public governance whatsoever – and Nozickian minarchism – especially if that minarchism looks like Nozick’s “utopia of utopias.” In effect, his definition of private governance suffers from a “turtles all the way down” problem. Private is what happens when people sidestep public governance in order to govern their behavior themselves. If that’s true, then Stringham’s book isn’t really about the qualitatively different “public” and “private,” but instead about the quantitatively different “maximal” versus “minimal” government.
Does any of this matter? For much of Private Governance, clearly no. The important historical insights carry much weight, as does the lesson that letting people organize voluntarily brings enormous benefits over the state’s coercive and monopolistic violence. At the same time, though, the clear theme of Private Governance is that public governance isn’t good for much, if anything, and could – and should – be replaced with a system of only private governance. In other words, with anarchy.
The trouble is, after 238 pages on Private Governance, I still don’t know what private governance is.
Private Police and Crime
Private governance remains poorly understood by political and economic theorists. Political scientists understand that politics as an activity is not limited to the domain of statecraft, but they tend to view the state as the primary, if not the sole, legitimate source of governance. Economists tend to look diligently for market failures—then negligently just assume government is the necessary source of solutions. Consequently we do not really know the limits of private governance, or if it even has limits.
Arguments for the state tend to be arguments from incredulity. Just as creationists respond to evolutionary theory with “God of the gaps” arguments, social scientists respond to private governance theory with “government of the gaps” arguments. The problem with such arguments is that they are not based on evidence, but on a lack of evidence, and their weakness is revealed each time a gap gets filled in. For example, tragedies of the commons are supposed to be inevitable without government rulemaking and enforcement, but Elinor Ostrom and a host of co-researchers have demonstrated that collective governance systems can manage common pool resources sustainably for centuries. Contract enforcement is also supposed to be impossible without government, but in Private Governance Edward Stringham shows how private clubs can promote assurance in economic exchanges.
In addition to the empirical weakness of “government of the gaps” arguments, social scientists should look for private governance solutions because of the problem of violence. The state is characterized both by its capacity for, and its claim to the legitimate use of, violence. We implicitly recognize that the violence of the state is a problem when we promote constitutional democracy constrained by the rule of law, the least violent form of government. But private governance, relying more on voluntary agreement and having a far more limited claim to be able to use violence legitimately, further minimizes the role of violence in governance. Although the western political tradition has taught us to view government as a human achievement, we can also view it as evidence of failure to resolve problems of collective governance without resorting to the threat of violence.
Yet these criticisms do not prove that private governance is sufficient in all cases or that formal government is wholly unnecessary. They simply mean that we need to look more seriously at the potential for private governance. There may in fact be gaps that can’t be filled by private governance, but we need to look at those perceived gaps as hypotheses, rather than as demonstrated proofs. And one gap that has not yet been filled is the one containing that class of activities we normally think of as criminal: personal violence and property crimes—cases where we cannot reasonably apply the concept of caveat emptor. In other words, it is not yet clear that private governance is sufficient to solve the problems that Hobbes and Locke used to justify government.
We know private policing has value; we just do not know if it is sufficient on its own. The value is demonstrated by the willingness of consumers to voluntarily pay for private police services above and beyond the public policing services for which they are already paying. But crime lacks some of the factors that characterize economic exchange. These include the discipline of continuous dealing, famously analyzed in studies of the iterated prisoner’s dilemma; reputational effects that allow us to avoid dealing with those who’ve cheated others; and what we might call “clubbiness,” the ability to sort ourselves into mutually trustworthy communities and expel those who violate that trust. While these factors might characterize criminal organizations, they do not characterize the relationship between criminal and victim.
Gated communities demonstrate both the value and the possible limits of private policing. The limits on access and the presence of private security clearly can play an important role in reducing crime, and as clubs these communities could enact rules expelling members who commit crimes. But whereas a stock exchange club can exclude outsiders entirely or make them visible enough that members know they are trading at their own risk with nonmembers, criminals from outside the gated community’s club have surreptitiously circumvented efforts to exclude them and have tried to remain invisible, while harmed club members normally haven’t chosen to take the risk of voluntarily interacting with the criminals. The trader who is cheated by someone he voluntarily traded with can punish that person by refusing to trade with her again, by informing the stock exchange’s authorities, and by publicizing her reputation for ill-dealing, but the victim of an anonymous burglary lacks those remedies.
Once the crime has been committed, private police may not be able to provide the remedies public police forces have available. Certainly private investigators exist and are often effective, so criminals might not succeed in going undetected, or at least not with any greater frequency than they do with public policing. But it’s uncertain what they could do once the criminal is identified. Stringham notes that until recent decades private police in San Francisco had powers of arrest, but it appears that this power was just on loan from the government. Without the support of government’s claim to the legitimate use of violence, would a private arresting power have any legitimacy, at least when they are not on the property they are paid to protect? Without the authority of government, is arrest merely assault? Is a search of someone’s property merely a home invasion?
If we do grant that a private police force can exert the de facto police powers of the state, we also need to address its potential to become a criminal enterprise itself. Stringham asserts that private trials and executions in 19th century San Francisco followed the standards of due process, but for evidence relies on contemporary accounts that likely were self-justificatory. We should view those irregular tribunals with the same skepticism we should bring to our study of government. Beyond this potential for vigilante justice (unfortunately not impossible with public policing and judicial procedures, either), private policing could morph into a protection racket, a mafia in practice if not in name. A community that collectively contracted for private police might even prefer such a service if it kept out rival police seeking to arrest community members for crimes committed elsewhere. Ironically, individual choices to exit a community guarded by Mafiosi would have the effect of diminishing opposition and enhancing the power of the criminal enterprise over the remaining community members. The violence of such stationary bandits is not always distinct from the violence of the state, and may even be the state’s origin.
The existence of private policing demonstrates that public policing is not a sufficient response to the problem of crime, but does not establish that private policing by itself is sufficient, either. Further, private policing may be a disequilibrium that devolves into government over the long run. Together these suggest that the problem of crime may mark the limits of private governance.
 Ostrom, Elinor. 1990. Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge: Cambridge University Press.
 Gambetta, Diego. 2000. “Mafia: The Price of Distrust,” in Trust: Making and Breaking Cooperative Relations, ed. Diego Gambetta.
 Olson, Mancur. 1993. “Dictatorship, Democracy, and Development.” American Political Science Review 87(3): 567-576.
Private Governance and Low-Frequency Preferences for Violence
Edward Stringham has written a great book, Private Governance, and a great introductory essay to this Cato Unbound. He argues that private governance, meaning non-state governance, can enforce complex contracts and often does so instead, or even in spite, of government. His research ranges from historical, to modern: at the emergence of stock markets, the Dutch government, for example, banned many types of contracts which were nevertheless enforced by the stock exchange; in the modern world, PayPal deploys sophisticated and effective anti-fraud mechanisms.
Such mechanisms work because of the logic of club goods. Clubs turn interactions into a repeated prisoner’s dilemma, where the discounted future value of cooperating is higher than the value from defecting. As such, it is in the interest of participants to continue cooperating.
While I would strongly recommend the book, I will take this essay to delineate how far the logic of private governance can be extended, something that Stringham did not do. First, is there a set of contractual interactions to which the club good model is not easily applicable? Second, how well does private governance deal with violence?
The success of private governance depends on whether the previous actions of participants are easily identifiable. If so, cheaters will be avoided and cooperators will be interacted with again. However, there are a class of people for whom their previous actions are not easily identifiable.
Imagine you are an entrepreneur in the third world. You have started a business, but cannot grow it because you are capital constrained. Banks are unwilling to lend you money because the government cannot be trusted to recover capital if you are late during repayment. Because you are a new entrepreneur there is not enough information about your ability and willingness to repay loans for the bank to simply trust you.
If we ignore the government failure of enforcing the banking contract, it is also apparent that a private governance mechanism cannot solve this need. And a recent paper by David McKenzie suggests it is stronger than usually recognized.
McKenzie examines the results of a business competition in Nigeria where a randomized selection of 729 firms were given an average of $50,000. After three years he found, “Surveys tracking applicants over three years show that winning the business plan competition leads to greater firm entry, higher survival of existing businesses, higher profits and sales, and higher employment, including increases of over 20 percentage points in the likelihood of a firm having 10 or more workers. These effects appear to occur largely through the grants enabling firms to purchase more capital and hire more labor.”
This suggests the private credit market in Nigeria is deficient in ways that have a strong effect on business creation and growth. The success of this policy experiment suggests there were long hanging entrepreneurs, so to speak. If so, then why wasn’t the market able to come up with a governance system to ensure they received credit which would have helped their businesses grow? As this example demonstrates, private governance may work far better than economists have believed, but it does not seem to be a replacement for all types of public governance.
The second question I would like to raise is how well private governance deals with violence. Stringham is often thought of as an anarchist in libertarian circles, having edited Anarchy and the Law. While he does not endorse anarchy in Private Governance, he does include a chapter on private police and a chapter arguing that Hayek would have been an anarchist had he followed his reasoning to its logical conclusion.
In this instance I think his book would have been improved if it were more clear about how far private governance may extend. For example, the logic of club goods only applies to police if they are operating in the shadow of the state. Private police forces in San Francisco, for example, are unable to extract resources through violence. While they provide superior services to the SFPD, it is unclear how they would act without the oversight of the state.
What might be termed the hard question of private governance is how violence is resolved outside the shadow of the state. David Friedman famously theorized that competing dispute resolution agencies and their police forces could reach an equilibrium in which no group held a monopoly on the use of force. Stringham had previously argued that proprietary communities, bundling real estate ownership with law enforcement under a single legal owner, could provide a stable form of governance.
However, the theory of clubs, at least as it is presented in Private Governance, does little to support either line of anarchist thought. Without a state, violence would be the defining relationship between groups and individuals rather than repeated social interaction. The relative prices are fundamentally different when exclusion means a violent defense of property, rather than non-inclusion in future business dealings. The implications we can draw from 17th century stock markets are limited in circumstances like these.
One common argument for free markets is they support low-frequency preferences, leading for example to more than 23 types of deodorant and 18 types of sneakers. However, it is a probably a good thing there is no market for violence, thereby suppressing the satisfaction of low-frequency preferences (I’d like to thank Vlad Tarko for this line of argumentation). Take, for example, the Ku Klux Klan. After the Civil War, it was founded with the goal of oppressing newly freedmen and suppressing their allies. Such actions have no place in a civilized society. In modern America there are still people with noxious views about race, religion, and immigration. It is a good thing that their low frequency preferences for violence are not satisfied.
I expect the response of an anarchist would be to argue that such violent preferences are weakly held, at least compared to the subjects of the violence, and they would be bargained away in an anarchist equilibrium. While such a scenario is conceivable, we cannot realistically identify the plausibility without evidence. Until such evidence is available we should admit ignorance.
That being said, this response is not so much a critique as an attempt to find the limitations of Stringham’s arguments. My only suggestion would be for him to do so in his book, instead of implicitly asking his readers to this work. Nonetheless Private Governance is an excellent book which I expect to cite often and strongly recommend to any economist or learned citizen interested in all forms of governance.
The Importance of Voluntary Governance
How much can governance be voluntary, and how does that differ from traditional government? I appreciate the discussion of Private Governance from each of the commentators who raise many good questions. Let me focus on Aaron Ross Powell’s comments here. Powell starts with much praise, stating “Stringham’s Private Governance confirms my priors: The state is generally bad at governing, and private individuals typically do a much better job governing themselves. Emergent orders are super neat and trounce the clumsy fist of coercive, monopolistic government. What to say about a book I largely agree with?” but then he asks us to consider the differences or similarities between private governance and traditional government.
Powell writes, “I often found myself confused about how we might distinguish private from public” and concludes, “unless I missed it, Stringham doesn’t give a clear definition of ‘state.’” Powell goes on to discuss Weber’s definition of the state, a community that claims a monopoly of physical force within a community and Powell distinguishes that from voluntaryism by pointing out that the state funds its activity with taxes. I find this definition of government or the state entirely satisfactory, and in Private Governance I wanted to use the terms as most others do. Although I believe referring to government as coercive is redundant (and could imply that some governments are not coercive), I will refer to coercive government here to help contrast it with voluntary private governance.
Powell is correct that most of the entities I describe do not resort to violence, so they would not come close to meeting any Max Weber style definition of government. These providers of governance help ensure contractual compliance, something that most people assume must be done by coercive government, but that they do by purely voluntary means. Because some of the most sophisticated and important contracts in history have been enforced through private non-coercive means, I would like everyone to agree that coercive government enforcement of contracts is not the absolute necessity that most everyone previously assumed.
Relying less on coercion helps transform relationships into mutually beneficial ones. Powell, however, asks whether certain governmental arrangements can be considered voluntary or how much they differ from the examples of private governance that I describe. Powell suggests that an immigrant agrees to the rules of a government in the same way that he agreed to the rules of his homeowners’ association.
Here is our first major point of disagreement. Even if we assume for the moment that immigrants are voluntary customers of existing governments, that says little of the relationship between government and everyone else. My ancestors in New Netherland did not agree to be taken over by the English 350 years ago, and none of my ancestors were present at the Constitutional convention twelve decades after that. Nevertheless, they and all of their descendents became subjects of the British Crown and American politicians since. To liken an entity that asserts monopoly control to two billion acres under its control, to a voluntary arrangement like a homeowner’s association seems like a stretch. Such logic could also be used to state that everyone in Russia and the Soviet Union agreed to be subject to the czars and members of the communist party. The important difference is that providers of private governance do not claim jurisdiction over non-members and must persuade, rather than use force, to get people to join them.
Powell also suggests that governments must cater to the wishes of potential or existing residents in the same way that private entities do.
What about the claim that “providers of private governance have an incentive to provide assurances that they will treat their clients well,” because “otherwise, the demand for their product will not be as high as it could be?”(29) That pretty accurately describes what’s going on when citizens of one country leave it for greener pastures. Then there’s the idea that “even if future customers are not present when private governance mechanism are put in place, private governance providers must heed future customer demands.”(29) Again, how does this not apply to public governments as well, at least those that are nominally democratic?
Here too I beg to differ. In a private voluntary arrangement, the provider of governance does not have unwilling “customers.” Coercive government, in contrast, has the ability to treat citizens as sources of revenue or subjects to control. Although residents of Cuba, Syria, or any other country who are unhappy with the “customer” service from their government can pick up and leave, doing so is tremendously costly and the resident cannot take his land or other real property when he leaves. Bryan Caplan points out that this means bad or extractive government policies become negatively priced into property in a jurisdiction. Someone who owned a hotel in Cuba before and after the communist revolution cannot say, “I know that Castro cares about maximizing the value of my land, because if I am unhappy I can cash out and move my hotel to a more business friendly location.” Instead the burden of the bad or extractive policies is borne by the subjects, not Castro.
The exact same logic applies in modern democratic governments like the United States. Landowners or businesses that become subject to more restrictive regulation, regulatory takings, or increased taxation bear the burden of those damaging policies. “Love it or leave it” or “If you are unhappy, just vote them out of office” are extremely weak constraints on government officials whose goal is to extract resources or exert control.
In contrast, providers of private governance face very different incentives. Consider, for example, a rule-enforcing landlord pondering rules that the residents would disfavor. Here the badness of policies become priced into the rent that the landlord receives, and it will hurt the landlord. The landlord thus becomes a residual claimant for how well he is pleasing residents. I explore this idea in much more depth in an article I published in the Journal of Institutional and Theoretical Economics titled: “Overlapping Jurisdictions, Proprietary Communities, and Competition in the Realm of Law.” That article also features more discussion of the definition of government compared to private forms of enforcement.
The logic of a landlord’s potentially bad policies negatively affecting the income of the landlord also applied to other private governance whose business thrives, lives, or dies on the effectiveness of rules and regulations within their realm. If eBay imposes bad rules and regulations on its market, demand for doing business on eBay will decrease, and the biggest loser would eBay. That means that providers of private governance like eBay continually search for rules and regulations that their customers desire. In stark contrast, if economically illiterate senators like Senators Dodd and Frank impose rules that cost market participants billions of dollars per year, the market participants, not Door or Frank, bear those costs. Voting the now-retired Dodd and Frank out of office is not even an option.
The major difference between coercive government and private governance is choice. Powell is correct when he concludes that my normative ideal has many similarities with the third section of Nozick’s Anarchy, State, and Utopia. But where Nozick argued that government must create the framework for utopia by allowing people to opt into communities that they like, I disagree that government is created, or necessary, for the enforcement property rights and contracts. I am grateful for Aaron Powell’s discussion and questions, but believe that the evidence suggests that order is created privately all the way down.
Is the Private State Always Parasitical?
Atlantis is an island ruled by a single state. This state – call it Atlantia – was founded in conquest, pays for itself with coercively extracted taxes, maintains a navy to repel foreign invasion, and makes all of its citizens wear plaid and set aside every Sunday to prepare a feast in honor of the ruling party. Atlantis allows immigration and emigration, though airfare out of the country isn’t cheap. And it’s governed by a parliament, with seats open to anyone who wants to run.
The whole of the island’s landmass is consumed by ten arcologies, with free migration among them. Provided the citizens of each pay taxes, wear plaid, and prepare a feast every Sunday, the state of Atlantia largely leaves them alone. Most of the things we tend to associate with governments are provided by the private corporations who own the arcologies. They charge dues to live within them, but in return give residents housing, schools, police protection, and courts. All privately, and all overseen by a resident board, which anyone is free to run for. The arcologies compete with each other for residents by lowering their fees or offering better services, more housing options, etc. They also allow other, likewise private organizations to operate within them, from stock exchanges to bowling clubs.
Atlantia looks like any other government we’re all used to, albeit with some weird rules and relatively limited meddlesomeness. It’s very clearly public. The arcologies would seem to fit Stringham’s model of private governance. They’re basically big apartment buildings, overseen by an HOA. They don’t restrict resident movement, which means I can pack up and leave if I don’t like the amenities – though for most, leaving means going to one of the other nine arcologies, given the high cost of travel to another landmass.
But this is where I get confused, and Stringham’s reply to my essay doesn’t quite clear it up. How do I know the arcologies are, by definition, private governance? They meet our criteria for being states as I set them out and as Stringham agreed to – even though we’d be inclined to call them “private states,” I suppose. Given that we have a clear instance of a “public” government – the government of Atlantia – we might call the archologies private simply by way of contrast. They’re not Atlantia, but they operate within Atlantia, and public governments claim a monopoly on public governance within their borders, so these therefore must be private.
Stringham says the difference is “choice.” Private governments compete for clients, because the clients are free to choose other private governments if they’d like. And while that sort of choice certainly applies to our arcologies, it also applies, perhaps to a lesser degree, to Atlantia. Citizens can fly to another country, just as they can move to another arcology. Both “choices” have costs, of course. Neither is entirely free. Given that, how do we recognize that the degree of choice a citizen of Atlantia has is sufficiently low to turn Atlantia “public,” or sufficiently high for the arcologies to keep them “private?” Consider as well that how easy it is to exercise the choice to move from arcology to arcology, or from Atlantia to another country, depends a great deal on the specific circumstances of individual citizens and residents. It would be odd to draw a line between public and private such that what’s public for a poor student with deep, local family ties (and so low “choice”) is private for a rich orphan (with high “choice”).
Coming at it from another direction, imagine that tomorrow the parliament of Atlantia hears an orator read Lysander Spooner, converts to political anarchism, and dissolves the government. Now we don’t have a public government we can point at in order to declare the arcologies private by contrast. Instead, we have a land mass controlled by ten smaller governments, each charging taxes, maintaining a monopoly on the use of force, and offering a (varying) level of choice to their residents. If we came across that Atlantis, knowing nothing of once proud Atlantia, and having read Private Governance, would we identify it as a group of ten private communities, which it was just 24 hours earlier? Or as an island controlled by ten small, public states? Nothing’s changed about the governing structure of the arcologies, but without the overarching public government to point at, I think we’d have a difficult time not seeing them as public.
That’s the definitional question I sought to raise in my first essay. Of course, in the world as we find it today, telling the difference between public and private governance isn’t terribly hard. But the conceptual framework, as outlined in Stringham’s book, still strikes me as leaving “private” governance definitionally unstable. I might even go so far as to argue that within that framework, actual political anarchism is impossible, because the very concept of private governance is always parasitic on the existence of a public state.
When Does Governance Go Public?
I have long thought that defining private governance is trickier than most people acknowledge. Edward Stringham and Aaron Ross Powell have been debating its meaning, thereby illuminating some of the difficulties. I will restrict my remarks to territorial governance as Stringham and Powell have done.
First, I would like to note that the conversation has drifted a little. At some points Stringham and Powell are discussing private governance, at others they are discussing states. These topics are related, but not identical. In my response I will first define state then review several thought experiments to illuminate what private governance is.
I prefer Weber’s definition of a state, a territorial monopoly of force. This means that a sovereign privately developed and owned city would be a state, contrary to Stringham.
There are three facets which can help define territorial private governance. The first facet involves the decisionmaking process of the governing body. The second facet involves the acquisition of the territory on which the body governs. The third facet is the size of the population in question. Ultimately I argue that the definition of private governance is somewhat nebulous, and that that is ok.
In this essay I will use examples of several types of territorial governance structures, by which I mean any body with decisionmaking authority over a given territory. I am assuming that the territorial governance structures have sovereignty over their territory, that is, they are not subordinated to any broader governing body.
The first facet is the decisionmaking process of the governance body. Assume a developer wants to build a new independent city. They justly acquire the land under allodial title. After building the attractions of the city, the developer now has two choices. First, they can establish a home owner’s association (HOA), giving up decisionmaking rights. Second, they can lease the land, retaining decisionmaking rights, a setup known as a proprietary community. A third option not available to the developer is simply to exist as a democratic socialist state. There are now three contrasting decisionmaking processes over a potential city-state in addition to traditional government.
The second facet is the consent when establishing a governance body. One can establish a governance structure with no consent, universal consent, or anywhere in between. Establishing a territorial governance structure with no consent would be the conquest of a new region. An example of establishing a governance structure with universal consent would be a company buying land and building a new city, Jamshedpur India for example. The Swiss state is an example of a governance structure being established with partial consent.
The final facet is the population in question. Does private governance become public when a certain number of people are subject to their decisions?
There are various thought experiments with these facets to test our intuitions about what private governance is.
Take, for example, a developer wanting to build a city-state. They try to copy an existing government. To do so the developer creates an HOA, basing the constitution and procedures on the existing government. After finishing there are two city-states, one governed by a government and one by an HOA. However, they are functionally the same, they have the same decisionmaking process, and they have the same outcomes.
If the developer instead chooses to lease the land, rather than establishing an HOA, the governance structure would look different. However, assume the developer likes the idea of both an HOA and retaining ownership. The developer could lease the land for 1000 years and grant an HOA decisionmaking authority for those 1000 years. The city is still privately owned, but with a governing structure identical to a traditional government.
Regarding consent when establishing the governance body, assume two identical cities. Both are governed by a traditional democratic socialist state. Both have existed about the same amount of time. However, one was founded by conquest while the other was founded on a deserted island. In other words, they are functionally identical but differ in the consent levels during the founding.
Now, assume the two cities are both privately owned. A corporation retains ownership over the land. The corporations have the same governance structure. However, one city was founded by conquest and the land for the other was legitimately acquired.
Lastly, does size impact whether something is considered public or private governance. Is an HOA of two people public governance? What about a proprietary city of 10,000,000?
For what it’s worth, here’s my intuition. An HOA is public governance. Initial consent is irrelevant to considering whether something is public or private governance. And a proprietary community of a sufficient size can be considered a form of public governance. That being said, reasonable people can disagree. However, the fact that the lines between private and public governance are not clear does not mean the concepts are indistinct, after all, night and day are distinct even though dusk and dawn still exist.
Private Enforcement of Contracts versus Property Rights
Most people assume that government courts and police are needed for the enforcement of contracts and property rights. James Hanley, however, points out:
Arguments for the state tend to be arguments from incredulity. Just as creationists respond to evolutionary theory with “God of the gaps” arguments, social scientists respond to private governance theory with “government of the gaps” arguments. The problem with such arguments is that they are not based on evidence, but on a lack of evidence, and their weakness is revealed each time a gap gets filled in.
The assumption that contracts can only take place because of government blinds most people to evidence of private sector enforcement. Hanley also discusses how that assumption leads people to advocate state violence for enforcing contracts even though nonviolent private alternatives exist. He states, “Although the western political tradition has taught us to view government as a human achievement, we can also view it as evidence of failure to resolve problems of collective governance without resorting to the threat of violence.” I very much share Hanley’s perspective on political science here.
After agreeing with the importance of private governance, Hanley goes onto ask whether formal government is wholly unnecessary. He states, “There may in fact be gaps that can’t be filled by private governance, but we need to look at those perceived gaps as hypotheses, rather than as demonstrated proofs. And one gap that has not yet been filled is the one containing that class of activities we normally think of as criminal: personal violence and property crimes.”
Hanley correctly points out that interaction between a criminal and a victim has a different set of characteristics than two people choosing to do business. While interaction of members of a stock exchange can easily made to be among friends, thieves who invade a gated community explicitly disregard the fact that others do not want to deal with them.
I agree with Hanley that the analysis and potential remedies for mutually agreed to interaction versus coercive interaction are quite different. I also agree that evidence that private governance can successfully handle sophisticated contracts does not prove that private governance can handle protecting property rights.
But if private governance is so effective and important for facilitating advanced contracts, something that legal centralists assumed was impossible, we should not underestimate its potential in other realms, such as physically protecting individuals and property.
As the Wall Street Journal points out, police tend to focus “on nuisance and vice—the cheap and easy, low-hanging fruit of the trade” rather than protecting persons and property. Many college campuses are located in cities with high crime rates, yet on campus, private security or private police do a great job keeping crime down. A recent study by my friend Jonathan Klick also found that increasing private policing around the University of Pennsylvania also reduced crime off campus too.
In Private Governance, I describe some of the reasons why San Francisco merchants pay for the Patrol Special Police instead of relying on free government police. One of the biggest reasons is that government police have limited resources and simply do not respond to what they consider low priority events. An unwanted drugged out guest may be a big problem to a restaurant or store, but government police prioritize it differently. Private police, on the other hand, respond right away. In other cases, simply having an unarmed security guard or a doorman suffices.
We can assume that order that exists only due to government police, or we can consider the possibility that the order comes about by other means.
Private Governance and Unsecured Loans
What are the limits of private governance? I very much appreciate Mark Lutter’s praise for my book and his critical discussion.
Lutter writes: “While I would strongly recommend the book, I will take this essay to delineate how far the logic of private governance can be extended, something that Stringham did not do. First, is there a set of contractual interactions to which the club good model is not easily applicable?”
Lutter describes how private governance works well when people have information about the past behavior of potential business partners. A lender can choose to make a loan to a person with a long history of paying loans and choose not to make a loan to a person with a long history of defaulting.
But Lutter suggests that when someone does not have an established reputation, formal contract enforcement is the only real solution for securing a loan. He argues that in Nigeria, banks don’t want to make loans to entrepreneurs because they cannot recover damages in court. He then describes a Nigerian business competition that gave loans to a certain set of firms and ended up benefiting those firms. He argues that the good results of the experiment show that the market for private governance was not working. “This suggests the private credit market in Nigeria is deficient in ways that have a strong effect on business creation and growth.”
Although I agree that the private credit market in Nigeria is much less developed than it should be, the lack of advanced mechanisms of private governance may not be due to market failure, but to longstanding government interference in the economy. In 1980, Nigeria’s score on the Fraser Institute’s Economic Freedom of the World list was 4 out of 10, and today it is 6 out of 10. Although I wish markets could bulldoze or ignore bad government policies wherever they exist, sometimes the bad policies are triumphant and significantly hinder markets.
Let me suggest that extractive government policies are much more of a hindrance to Nigerian entrepreneurs than government not doing a good job at enforcing credit contracts. In the United States, government policies impose many problems, but Fraser has always found the United States to have higher levels of economic freedom than Nigeria.
Yet even with better economic policies in the United States, we should not assume that successful venture capital markets are made possible because of good enforcement of contracts. We know, for example, that around 75 percent of startups fail and early investors often lose all of their money. Many belly-up firms have nothing to turn over. Moreover, most founders do not have track records running businesses as big as the founders’ optimistic projects.
Despite these potential problems, all of that information goes into investors’ decisions and gets priced into equity prices or interest rates for loans. Markets work so well because they let potential borrowers or recipients of investment build up a history of success, however small, to woo investors. But they also let investors take risks and give their money to less established founders, and all of that can get priced into equity shares or interest rates.
As I describe in Private Governance, a potential stockbroker in 17th-century Amsterdam asked others how he would be allowed to get into in the market without a credit history. Others tell him that he should start small with low risk options and then he can expand as his reputation grows. The same is true with modern lending. Few banks will give a recent high school graduate $250,000 to buy a house, but most banks are willing to offer a credit card with a $250 credit limit and see whether the borrower pays back his loan. Only later will a bank offer a larger loan, such as for a car or other higher value purpose.
Because loans to entrepreneurs and many other loans are unsecured, the lender does not really have an option of recovering funds in even the most efficient court. Nevertheless, markets for unsecured loans exist and quite often thrive.
Private Governance Is Non-Coercive
A theme among the questions from the commentators is how we draw the line between public government and private governance. For example, Aaron Ross Powell asks, “Is the private state always parasitical?” He describes a privately owned and governed island and classifies the owner of the island as a state. Mark Lutter similarly asks, “When Does Governance Go Public?” and writes, “I prefer Weber’s definition of a state, a territorial monopoly of force. This means that a sovereign privately developed and owned city would be a state, contrary to Stringham.”
In responding to these questions, I will also respond to Lutter’s earlier question about whether a monopoly government is superior to having many competing providers of private governance. Lutter says that although having a market produce 23 types of deodorant is a good thing, we don’t want to let every crazy person exercise their preference for violence.
I agree with Lutter on this last point and I have written about this in more depth in my article, “Overlapping Jurisdictions, Proprietary Communities, and Competition in the Realm of Law.” I wish I had included more of the discussion from that article in my book, but let me elaborate on some of these arguments here.
Lutter and I agree that one of our main goals should be to minimize the use of violence, and we should not be looking for ways to satisfy “low-frequency preferences for violence.” Authors including Robert Nozick and James Buchanan supported monopolizing law enforcement for this reason. But to me, one can limit violence without resorting to a coercive monopoly government.
Part of the potential disagreement between me and Lutter and Powell is over the key features of a state. To me, if an island is private property and governed by its owner, the owner is a proprietor or a landlord and not a state. Although I mostly like Weber’s definition of a state, a “human community that successfully claims the monopoly of the legitimate use of physical force within a given territory,” I like Aaron Ross Powell’s amendment where he adds: “And funds its activity via taxes.” Even more, I like Rothbard’s slightly amended version where he says states also rely on taxation and “arrogate to themselves a compulsory monopoly of police or judicial protection.” To me the key is that the government arrogates a monopoly of law, not that an entity is a monopoly. Even if one provider in a region exists, as long as people voluntarily choose it and it does not rely on taxation, that entity is fundamentally different from a state.
Consider how amusement parks or shopping malls bundle many public goods like sidewalks, street lights, and restrooms with the provision of private goods like entertainment or shopping. Does Disney have a monopoly of restrooms in Disney? Yes! But is it a problem? No.
Because Disney bundles restrooms with the rest of its services, it needs to provide a package that customers desire most. As the owner of its realm, Disney is the residual claimant for the quality of everything that it provides, including entertainment, restrooms, and security.
A proprietary community that provides security must evaluate how its security affects the demand for its other products. Government by contrast neither earns profits nor suffers losses if the quality of its police improves or deteriorates. Government police often act against the wishes of the public, and the public has little option but to put up with it.
What would happen if the federal government, your state government, or your town council or mayor’s office had a monopoly over providing sidewalks and restrooms in all amusement parks and shopping malls? Most people would recognize that this would be a disaster. One option would be to say that we should privatize restrooms and let multiple restroom companies in each park or mall. Proposals could have a different restroom company on each block or would have porta-potties traveling throughout. Although either option might work, a more straightforward option is to privatize restrooms and let them be provided by the proprietor of the park or mall. Nobody worries that a mall or park owner is the monopoly provider of restrooms in its space. Most modern economists reject old fashioned structure-conduct-performance style analysis (basically, the idea that having more firms is always good and having fewer firms is bad) and I think we should reject it here too. As long as consumers voluntarily choose the product, one knows that a firm’s dominant position is due to customer satisfaction.
If I want to do business at the London Stock Exchange or be a guest at Disney, I am okay with agreeing to follow the rules of the London Stock Exchange or Disney. Neither arrogates their monopoly of rule enforcement in their realm or coerces taxation out of unwilling subjects. Instead they must win customers and work to please people who does business with them. This is how private governance works.
 Stringham, Edward Peter. 2006. “Overlapping Jurisdictions, Proprietary Communities, and Competition in the Realm of Law.” Journal of Institutional and Theoretical Economics, 162(3) September: 516-534.
The Hard Case of Private Policing
Two threads of thought run together for me in the discussions about private policing and about the distinction between private governance and public governance. Aaron Ross Powell and Mark Lutter have both asked where we draw the line between them, a question I have been pondering for many years. Both employ something like Max Weber’s definition of the state, which includes an important qualifier to Lutter’s phrasing: “a territorial monopoly of [legitimate] force,” which I also employ. And while I am largely in agreement with Stringham’s overall thesis, we seem to disagree on the issue of private policing. I think a pointed look at the issue of policing helps nail down the issue of private versus public governance, because policing is the most fundamental case of government’s monopoly of legitimate force.
To begin, Stringham’s argument for the effectiveness of private policing fails because he cannot provide for it the same type of example that he can for contract enforcement—a case where private policing indisputably worked well in the absence of public. His example of private policing in gold rush-era San Francisco may be such an example, but the evidence he is able to provide does not satisfactorily demonstrate that he is not really examining a case of vigilante justice. And his examples of more contemporary private policing occur in the context of that private policing being adjunct to the existence of public policing. These private police provide services in addition to the public police, not in the absence of public police or government.
Put simply, he has not demonstrated that private police don’t gain their legitimacy from the existence of public government. Private police don’t privately prosecute suspects; they hand them over to public police and prosecutors. They don’t privately jail convicted criminals; they leave that to the public government’s prison system.
And that reliance on a public enforcer is, I think, the Weberian key to distinguishing between public and private. Consider Powell’s example of arcologies without an over-arching state above them, where residents have freedom to exit from one and move to another. Do any of those arcologies claim to have a monopoly on the use of force over its members, for example by confiscating property of non-dues payers or confining a violent person? If so, it is the highest level user of force, not constrained in that use by anything except its residents’ willingness to exit. If residents choose not to leave, they have legitimated its use of force. At this point, how can we meaningfully say it is not public governance?
The charter cities movement is of interest to me, and I would hope that it gains strength so that we can see what happens when governments have to operate on a more market-competitive basis. But the proposed charter cities are perhaps private governance only because they are proposed to be established within, and subject to the rules and violence monopoly of, existing states. Seasteading, by contrast, would establish new privately owned territories outside the territorially bound violence monopoly of existing states. Seasteads would, by Weber’s definition, become de facto states themselves. That is, unless residents denied the seastead owners/managers’ authority to use violence.
The perhaps surprising conclusion of this approach is that private policing may be a concept that can only exist within the confines, and subject to the authority of, public government. “Private” policing with no higher authority is effectively an expression of the violence-monopoly, and would indicate the presence of a real state, and therefore public government.
Between Singapore and Heathtopia
Edward Stringham responds to Powell and me and clarifies what he means by state, arguing that a privately owned sovereign city is not a state. He writes, “Even more, I like Rothbard’s slightly amended version [of Max Weber’s definition of the state] where [Rothbard] says states also rely on taxation and ‘arrogate to themselves a compulsory monopoly of police or judicial protection.’ To me the key is that the government arrogates a monopoly of law, not that an entity is a monopoly. Even if one provider in a region exists, as long as people voluntarily choose it and it does not rely on taxation, that entity is fundamentally different from a state.”
I remain convinced that a privately owned sovereign city – we’ll call it Heathtopia, should be considered a state. Heathtopia would have a territorial monopoly of force, satisfying the Weberian definition of a state. Stringham lists three additional qualities that he holds to be necessary in a state, namely arrogating a monopoly of law, the lack of voluntary choice, and reliance on taxation. Yet Heathtopia would have functional equivalents of all three qualities.
If someone wants to enter my house, I can ask them to remove their shoes. If they do not remove their shoes, I can refuse entry to my house. Similarly, in Heathtopia, they can have a system of rules compliance with which are required for living there. At a minimum, these rules would include prohibitions on physical violence. These rules would ultimately be enforced by the threat of agents of Heathtopia using physical violence. We can imagine a scenario where Heathtopia adopts the same rules as Singapore has, including prohibitions on drugs and spitting gum on the sidewalk. The rules of Heathtopia would be functionally equivalent to the laws of Singapore, whether or not you use the same descriptive words.
Taxation is the same. Heathtopia would need funding, they could raise it through property “fees,” which would be assessed by estimating the value of property then taking a percentage of that. Heathtopia could also raise revenue through income “fees,” requiring residents to pay a percentage of their income every year. If we assume Heathtopia also shares revenue generating mechanisms of Singapore, there would be functional equivalence between Singapore’s taxes and Heathtopia’s “fees.”
Stringham’s third qualifier, voluntary choice, is trickier to understand, and I think the heart of the manner. Let us continue with our analogy. Heathtopia is functionally the same as Singapore. It has the same rules and raises funds in the same way. The only difference is that Heathtopia is a publicly traded company whose stock price depends on their revenues and costs. Further, imagine that Heathtopia was founded in 1963.
Now compare two children, one born in Heathtopia and one born in Singapore. Would the child born in Heathtopia voluntarily choose to live there any more than the child born in Singapore? Both would live under identical “laws” and identical “taxes.” Both would face approximately the same cost of leaving. The primary differences would be political, in that the Singaporean could vote and participate in Singapore’s political system. The Heathtopian could buy shares and go to board meetings to influence governance in Heathtopia.
My point is that territorial governance is categorically different from non-territorial governance. Leaving non-territorial club goods simply returns me to a default position of not having any club goods. I can quit a soccer club or the New York Stock Exchange, and I am simply no longer a part of those organizations. Exit is zero cost for non-territorial governance. Leaving territorial governance, no matter the organizational form, is costly because it requires moving to a new living space.
Because of this I would consider Heathtopia a state. Third-generation residents “choose” to live in Heathtopia to the same extent third-generation Singaporeans “choose” to live in Singapore. The only difference is the organizational structure of the monopoly of force. Statehood has traditionally been only concerned with whether there exists a monopoly of force, not the decision making arrangements governing it. I see little reason to alter the definition now.