Three Cheers for Anarcho-Capitalism

Scholarly considerations of economic regulation and governance generally take the state as a precondition, the necessity and centrality of which is not to be seriously questioned. The bold, creative scholarship of Edward Peter Stringham has, for some time now, begged leave to differ. Stringham explores the possibilities of private law and private governance, never more ably than in his new book.

Private Governance: Creating Order in Economics and Social Life sets out to show that, despite strong biases against them in the academic and public policy communities, voluntary associations and their private solutions to social and organizational problems continue to prevail and propagate, undermining the “deus ex machina theory of law.” This theory, “popular in bad social science,” treats the law as an “exogenous corrective device”  that exists entirely outside of the people and institutions on which it acts.

Stringham’s work draws extensively on public choice theory to expose the flaws in the deus ex machina outlook, challenging the largely unexamined assumption that law is uniquely and necessarily the province of government. As he notes, “Even if one assumes that certain problems require legal rules, one need not assume that a compulsory monopoly must provide them.” Indeed, observation of existing governmental monopolies should have taught us the very opposite: that unaccountable, concentrated power yields arbitrary results and opens the door to serious abuses of power and discretion, and that these are exactly the conditions a stable legal system ought to avoid.

Private Governance is a comprehensive and sophisticated answer to a question with which libertarians, particularly those of the free-market anarchist sort, are confronted: “But how would it work?” Stringham shows that a completely private, stateless system of governance is not only practicable but far superior to the coercive monopoly systems from which we derive our governing structures today.

The author previously edited an authoritative collection on this kind of ordered, private-property anarchism, Anarchy and the Law: The Political Economy of Choice (2007), which spanned a period of over a century and included contributions from such libertarian luminaries as Murray Rothbard, David Friedman, and Benjamin Tucker. His conversance with the extensive libertarian literature in this area is unsurpassed.

Stringham’s work follows directly from that of radical libertarians like Gustave de Molinari in the 19th century and Murray Rothbard in the 20th. It bears noting that “anarchism” may not be the most helpful of labels to apply to these thinkers, since it has long been fused to the economically retrograde, anti-market, and anti-property philosophy found in the works of, say, Peter Kropotkin or Mikhail Bakunin. In this case private property and market competition are not evil but good; these “anarchists” seek not their abolition but their universalization—their application to areas of political and social life that are today dominated by governmental monopolies.

Molinari’s The Production of Security (1849) argued that the free market could provide even defensive services. We in turn find the germ of this revolutionary idea in the “industrialism” of French radical liberals Charles Comte and Charles Dunoyer (the former of whom was an acolyte and son-in-law of the great classical economist, Jean-Baptiste Say). Comte and Dunoyer sought to depoliticize society, to “municipalize the world,” allowing peaceful free market forces to decentralize and ultimately dissolve governments.[1]

The themes of Private Governance hinge to a great extent on questions about how our institutional frameworks could better channel incentives and human nature. Public choice analyses are therefore at the center of Stringham’s project: if human beings are self-serving and avaricious in markets, then they will likely be no less so when inhabiting governmental bodies, at least if we’re being realistic rather than romantic about governmental agencies.

Early in the book, Stringham frames the question this way: the Nobel Laureate James Buchanan “never applied public choice to law . . . , but what if he did?” He proceeds to take the application of public choice to questions of law and social order as far as anyone before has dared—and then farther—cogently combining theory, historical lessons, and empirical research. The results are embarrassing for legal centralism, the idea that only government can supply law and order.

To replace legal centralism, Stringham posits a polycentric legal system “in which courts are engaged in an ongoing, dynamic discovery process of experimentation, trial and error, and feedback.” Drawing on Adam Smith, Stringham observes that even among governmental courts, competition “led to ‘superior dispatch and impartiality.’” Potential litigants might avail themselves of the law merchant, or the chancery, or manorial courts, just to name a few, the contest between these courts impelling each to produce fast, fair justice.

We can generalize from this and turn ever more governance functions over to market mechanisms. And we should because, as it happens, governments are not very well positioned to protect our rights. As Stringham explains, “Legal centralists’ wishes notwithstanding, law enforcement officials may not have maximizing utility in society or maximizing Kaldor-Hicks efficiency in their objective function.” Rather, it is just taken for granted that government bureaus and the “public servants” that inhabit them will automatically act selflessly, devoted undeviatingly to the common good.

It is as if the human beings working for the government were of a different kind, exempt from the assumptions we make about the fundamentally self-interested nature of those working in capitalist firms. Of course, those who accept such facile explanations don’t bother to confront either the fact that the “public good” is a famously slippery notion, or that people do not magically metamorphose into messengers of the heavens when they move from the private sector to the public. Public choice theory doesn’t let political philosophy’s gospelers of statism off the hook so easily; if people are selfish and incentives matter, then these facts hold across the board.

Public choice reveals that in fact there is no deus ex machina. It shows that, if our institutional designs are going to work, they have to work with and for actual human beings, not the perfectly altruistic constructs of Progressive political theory. Economic thinking, when applied to policy questions and political theory, contests many of the facile assumptions of the deus ex machina notion of government.[2]

And that’s where Stringham’s book enters the scene, filling a gap in the literature and explaining how market mechanisms and spontaneous orders account for these flaws in human nature. Centralized, unilateral power and discretion, Stringham shows, are not the solutions they pretend to be but are fraught with moral hazard and information problems. Historically, market relationships—horizontal, decentralized, and voluntary—have actually been much better at managing risk and protecting interested parties. The array of historical examples and case studies that Stringham has collected give the lie to the argument that private governance is just the fantasy of fanatical libertarians.

We learn, for example, that during the Gold Rush in San Francisco, when the city’s police failed the people who lived in the city and were often “considered worse than the private criminals,” businessmen worked together to organize a private police service. This example is especially compelling insofar as San Francisco was then a rowdy boom town, just the kind of place for which private governance is supposed to be inadequate. At the middle of the 19th century, it was a Wild West maelstrom of criminals and single young men (80 percent of the population) in search of quick riches. And this rogues’ gallery had in it rogues who had emigrated from every corner of the globe. Such conditions are thought to preclude “social cooperation without government,” yet small business owners mobilized efficiently for their own protection.

Where government did not have the ability, knowledge, or incentive to solve the problem, concerned merchants did. Stringham likewise shows how the rules of the London Stock Exchange emerged from the specific needs and challenges of its participants, faced with laws that forbade many of their contracts. Undeterred, brokers devised ingenious rules and procedures through which to guarantee investments and prevent fraud.

The progenitors of such private forms of governance were not Rothbardian anarcho-capitalists or libertarian ideologues. They were practical businessmen, concerned with creating an environment in which economic value is protected cost-effectively. Thus were their solutions developed spontaneously, responding to specific, identified problems, often on an ad hoc basis.

“Providers of private governance,” writes Stringham, “recognize government is not the solution, so they take the initiative and provide private ones.” They are different from government bureaucrats in that they have a concrete incentive to take the initiative and, better still, to come up with solutions that actually work. With skin in the game and specialized knowledge of their own businesses and industries, private governance innovators are uniquely equipped to problem solve.

Just as important is their lack of the kind of binding coercive power possessed by legislators and government regulators. Where the customer is not a captive, bound by law to a package of services, a given provider must constantly readjust to changing circumstances and consumer preferences. Participants in such voluntarily ordered systems want and expect to deal with one another again; this expectation of repeated business interactions—if not with the very same individual, then at least within the same small network—is part of a highly complex, extra-governmental groundwork for honesty and fair dealing.

All that governments can ever do is compel and coerce, and this they often do rather arbitrarily, without due regard for the unforeseen (and indeed unforeseeable) consequences of their meddling. Government bureaucrats have an incentive problem: they are paid to meddle, whether it is necessary or not. And they aren’t rewarded for coming in under budget, for the efficient use of time and resources.

Private Governance demonstrates that free market competition in law and order is not unprecedented and does not yield an unregulated chaos in which the consumer is defenseless against greedy capitalists. Regulation is indeed everywhere: it is competition, rather than compulsion, that serves as the regulatory tool. The sophistication of markets, itself an outgrowth of expressed consumer needs and preferences, enables them to allocate risk much more effectively and safely than governments. Market actors with financial skin in the game, it turns out, end up formulating rules far superior to those arbitrarily handed down by regulators, too often oblivious or (what is often worse) just overzealous. The mandatory, one-size-fits-all rules of government are not without their costs. And when everyone is locked into government rules and regulations, the costs of bad rules—those that don’t actually serve regulators’ purported consumer safety goals—are that much higher.

Stringham shows that private organizations, equipped, unlike government, with specialized knowledge (peculiar to time, place, or their profession) can outperform government and formulate better protocols for social and economic behavior. The effective assembly of such rules is in fact just the kind of task to which specialization within a market economy is most well-adapted.

Classical liberal and conservative readers who are unable to follow Stringham to full-fledged private-property anarchism are nonetheless likely to find his arguments persuasive. Private Governance handily levels conventional wisdom about the necessity of coercive monopolies for the provision of law and law enforcement. As Molinari explained over a century and a half ago, free and voluntary associations are more than competent to dispense law and justice, however uncomfortable this fact may be.

With a careful combination of historical examples, empirical evidence, and old-fashioned (in the best sense) political economy, Edward Stringham offers an stimulating and challenging perspective on the intersection of law, politics, and economics. Destined to be a libertarian classic for all three fields, Private Governance is a testament to the power of free individuals, to the potential of a society without sanctioned coercion.

[1] The definitive treatment of Comte and Dunoyer’s radical liberalism is David M. Hart’s Class Analysis, Slavery and the Industrialist Theory of History in French Liberal Thought, 1814-1830: The Radical Liberalism of Charles Comte and Charles Dunoyer. Unpublished doctoral dissertation, King’s College, Cambridge, 1994.

[2] Economist and political scientist Michael Munger calls this the “unicorn fallacy,” observing “that people who favor expansion of government imagine a State different from the one possible in the physical world.” When these people imagine the state, they quite unconsciously ascribe to it a range of superhuman qualities; that is, they abstract it from its component parts, which are the very same self-interested human beings who make up market institutions. On its face, this is a problem for those who favor compulsory monopoly for some goods or services (for example, providing police and roads) but not others (for example, the manufacture of shoes and widgets).