The problem with self-enforcing agreements is that they do not scale up. One of the findings from Elinor Ostrom’s extensive case studies is that self-enforcing arrangements to manage the “commons” work well only when the geographic scope of the activity is clearly delimited and membership is fixed. It is easy to understand why. Cooperation under “anarchy” is based on reciprocity, which in turn requires observability. I need to be able to observe whether you are behaving according to the rules, and if not, I have to be able to sanction you. When the size of the in-group becomes large and mobility allows opportunistic behavior to go unpunished, it becomes difficult to maintain cooperation. Imagine that the pirates numbered in the millions and they could easily jump ship to join competing groups mid-voyage; would the arrangements Leeson describes have been sustainable?
Read his whole essay. Also read the opposing views of Bruce L. Benson, who writes,
When a strong coercive power can limit exit, economic success requires that property rights be recognized and supported by that power — that is the essence of a protection racket. Thus, state recognition of property rights is required to achieve the most efficient use of resources, but only because the state is the primary threat to those rights.
If your personal economic situation is improving you're more tolerant of infractions on your social or political freedoms.
...When I've talked to 30 year-old or younger Russian or Chinese people, they say that they prefer stability and a fatter wallet than all the "freedoms" that America and Europe celebrates. After all, they say, history shows that the freedoms will come in time -- but first people need to live above the poverty line.
The problem with anarchy is that it is a public good. Individual liberty requires collective action.
I think that Rodrik nails it when he says that non-coercive solutions to public-goods problems do not scale.
One challenge to our view is that international business arrangements exist that are not overseen by an international government. The arrangements can be quite complex and involve trade among strangers.
It is possible that international business is an existence proof for self-governance. However, my guess is that international business is based primarily on two types of institutions. One type is the internal government-backed legal infrastructure of the countries involved. Thus, a foreign firm that trades with a U.S. firm can enjoy some protection under U.S. law. I suspect that it costs less to engage in trade with countries that have reliable rule of law than with countries that lack reliable rule of law.
The other type of institution that undergirds international trade is one based on personal interaction--repeated transactions, reputations, and so on. I think that the costs of the personal mechanisms are what make it more expensive for Virginians to import goods from Africa than from California.