David R. Henderson  

Illegal Means Illegal

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What's the difference between Silk Road and e-Bay?

George Washington University political science professor Henry Farrell recently wrote a piece titled "Dark Leviathan." He states his case so well that I won't try to paraphrase it. Instead, I'll quote one of the opening paragraphs:

[Ross] Ulbricht built the Silk Road marketplace from nothing, pursuing both a political dream and his own self-interest. However, in making a market he found himself building a micro-state, with increasing levels of bureaucracy and rule‑enforcement and, eventually, the threat of violence against the most dangerous rule‑breakers. Trying to build Galt's Gulch, he ended up reconstructing Hobbes's Leviathan; he became the very thing he was trying to escape. But this should not have been a surprise.

It's true that "this should not have been a surprise." It's the kind of thing you would expect in illegal markets.

Farrell tells how various unscrupulous actors took advantage of Silk Road's structure to cheat others. Assuming he has his facts right, there's nothing I object to in his account. He also nicely weaves various findings in game theory into his account.

You might be saying at this point, like Mona Lisa Vito in My Cousin Vinny, "So what's your problem?"

My problem is Farrell's conclusion, or, more exactly, the third line in the last paragraph of his conclusion. Here's the last paragraph:

Ulbricht's carelessness brought about the early demise of Silk Road. But if he hadn't been stupid, the marketplace would have soon collapsed under its own weight, or become the creature of larger organisations with a far greater capacity for violence. The libertarian dream of free online drug markets that can magically and peacefully regulate themselves is just that: a dream. Playing at pirates is only fun as long as the other players are kids too. The trouble is, once adults with real swords appear, it may be too late to wake up.

You can't have the "libertarian dream of free online drug markets" unless drug markets are, in fact, free. But, as Farrell well knows, they're illegal. As I put it in my 1991 article "A Humane Economist's Case for Drug Legalization" (UC Davis Law Review, Spring 1991, Vol. 24, No. 3, p. 664):
[D]rug laws make it difficult for drug producers and sellers to establish reputations for supplying high-quality, reliable drugs.

So Farrell's whole discussion, while it is a well-needed (again, assuming his facts are true) tonic for people who think that online markets in illegal drugs won't have big problems, tells us precisely nothing about how free markets would work. In short, "illegal" means "illegal."


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COMMENTS (20 to date)

When you write "illegal" David, I believe you must mean "against government law". I sometimes try to improve my communication with leftists by specifying "government law" as opposed to simply "law".

There are many kinds and sources of law. One of the unfortunate consequences of government takeover of courts, policing, and punishments, is that people who live in such a society lose their ability to conceive of sources of law other than the state.

References: Bruce Benson's stuff; my stuff.

Ray Lopez writes:

Well said by D. H. But I think the facts reported by Farrell are a bit wrong. From what I understand, and having dabbled in bitcoin (legally), the 'reputation' of a seller is a big deal, and if you cheat buyers continuously your reputation, just like at eBay, takes a hit, and your business decreases. So I don't think the illegal drug market is unstable due to fraud. The biggest problem is that if you use "Tor" to anonymize your purchases, you run the risk of picking up malware, since Tor is infected with such malware from thieves that try and steal your bitcoin.

David R. Henderson writes:

@Richard O. Hammer,
When you write "illegal" David, I believe you must mean "against government law".
Yes.
@Ray Lopez,
Thanks for the clarification.

Tom West writes:

Richard, while "government law" certainly has had its share of problems, law derived from other sources seem almost infinitely more problematic, primarily being used to maintain dominance or suppress religious or cultural minorities.

But this may a result of my limited knowledge of non-governmental law. Would you be willing to provide examples of non-governmental law that I may be overlooking?

GregS writes:

Footnote 41 of your UC Davis Law Review pdf references an unpublished manuscript of yours called "The Economics of Illegal Drugs." It says it's "On file with the U.C Davis Law Review." Do you have a link to a pdf of it? When I google the title along with your name, it brings up a blog post by you with the same title. Anyway, I'd be interested to read it. Maybe you published it elsewhere, or the same article under a different title?

Tom West,
There are books and articles and more books. For an introduction Reason magazine may serve you.

For a heavier, theoretical treatment, there are two links in my first comment above. Here is another.

Floccina writes:

Perfection is not an option. The people I knew in college who bought drugs always got what the paid for, so the market must work. thought not perfectly. Legal markets are not perfect either and political markets are far from perfect.
And I am not even a believer in stateless libertarianism. I think delegating enforcement of property rights and laws against fraud and violence to democratic Government is as good it gets.

Tom West writes:

Richard, thanks for the reply. Sorry, I was unclear. I was looking for examples from history or elsewhere that illustrate the successful use of non-governmental law.

I see from your link that you mean a somewhat more radical departure that as far as I know has never been attempted.

At least Google comes up empty for "non-governmental law", and pretty much empty for "government law" and "governmental law".

Tom, thank you for your reply and your interest.

Here are two examples:
1. The rules of natural language. English grammar is full of rules, none written by the state.

2. Before the Civil War, abolitionists knowingly violated government laws to help slaves escape. I would say they were creating, or following, a higher law.

Keep seeking. You will find. Voluntary law lies all around us, and can be seen by those who have learned to recognize it. Here is another book.

You said:

...as I know has never been attempted.

Here is a third example. If you take a long view of human history, government law has only been "attempted" for the last 5,000 years. Before that there were no states.

Charlie writes:

I read it as a critique of anarcho-capitalism. Basically, that in "lawless" market places, we very rarely get good adjudication processes. We see it in a lot of instances, where property rights are centralized. Thus, the authors discuss the mafia as well. I don't think they are arguing that a legal drug market isn't possible, just that the state (and coercion) is needed for adjudication and property rights.

If my reading is right, how would you reframe your argument. Do you agree with them or disagree with the authors?

David R. Henderson writes:

@Charlie,
If my reading is right, how would you reframe your argument. Do you agree with them or disagree with the authors?
Please clarify. By “them” and “the authors,” do you mean Henry Farrell?
@GregS,
You’re a careful reader. I don’t have a copy. It was never published and it burned in my office fire. But I remember that Jack Shafer (sp?) years ago on Slate had a piece in which he quoted from that paper. Somehow he had a copy. It has a 1978 date on it.

Charles writes:

Yes, sorry. Henry Farrell. I read this piece a few days ago and thought it was by multiple authors.

"However, in making a market he found himself building a micro-state, with increasing levels of bureaucracy and rule‑enforcement and, eventually, the threat of violence against the most dangerous rule‑breakers."

As I read it, a consistent theme is that anarchy breeds violence. Either a state is inevitable or mafia type warloads fill the void with their own forms of violence.

Alex writes:

Charlie said: “As I read it, a consistent theme is that anarchy breeds violence. Either a state is inevitable or mafia type warloads fill the void with their own forms of violence.”

I entirely agree.

Farrell is saying that coercive entrepreneurs tend to emerge in markets, period. In illegal markets, it’s the mafia. In “legal” markets, it is the state – which is just a different type of protection racket. If drugs were legalized, he might say, there would still be a protection racket preforming many of the same functions of the mafia, namely, the state.

Farrell is (citing Charles Tilly) drawing a parallel between governance in illegal markets and modern state formation. Tilly said that states are, in essence, coercive entrepreneurs that prey off commerce. They emerge whenever there is someone to tax, and whenever there isn’t another, stronger coercive authority to stop them. According to Tilly, states and mafia organizations are very similar: their key functions are defined by coercion and extraction(taxation/racketeering). The only difference is that states were shaped by 500 years of warfare and so developed huge armies, tax collection bureaucracies, and specific territorial boundaries.

So, if to restate Farrell’s critique of libertarianism: if there was a truly free market where there was no coercive entity taxing and regulating, it is inevitable that one would emerge and that it would tend towards monopoly or worse, war with a rival. That’s basically the story of modern state formation. Furthermore, we see it in many “ungoverned” spaces in the developing world where there is a lot of high value commerce. Consider for example, weak and failed states that have oil or diamonds. Rebel groups, militias, and other armed groups frequently emerge to loot those businesses. This is "micro state formation" in Farrells terms. Not to agree or disagree with whether that is a valid critique, but I think that’s the gist of his argument.

Hazel Meade writes:

I'm inclined to disagree with Farrell's argument.

Yes, many unscrupulous individuals found means to take advantage of others via the Silk Road. However, given the anonymous and distant nature of the internet it tends to inherently limit actual violence. Someone rips you off on a drug deal, it's going to be pretty hard to track that person down and kill them. You can, however, leave a negative review on their profile.

And then their hacking and stealing people's user data, but still, that is only virtual violence. Let's remember that as far as we know not a single person actually got killed over any of silk road's transactions, despite all of it's users being essentially anonymous to eachother.

It may not be perfect, it's certainly a lot more peaceful than how any of our "real life" black markets operate.

Shane L writes:

"So, if to restate Farrell’s critique of libertarianism: if there was a truly free market where there was no coercive entity taxing and regulating, it is inevitable that one would emerge and that it would tend towards monopoly or worse, war with a rival."

I broadly agree, except to add that non-state societies persist in some parts of the world and were the norm for most of human existence. From what I've read from Azar Gat, Lawrence Keeley, Ian Morris and the like is that such small clan-based societies lacked a "coercive entity" but featured extremely regular wars with rival clans. Since this scenario persisted for tens of thousands of years it makes me wonder if the development of states was not at all inevitable. Daron Acemoglu and James Robinson from Why Nations Fail describe environments where ambitious men in a clan or tribe tended to be knocked down by the others; people don't like being pushed around so there was some tendency for egalitarian clans to remain without any coercive chief. Only in some places were conditions ripe for statehood.

David R. Henderson writes:

@Charlie,
Thanks for clarifying. You wrote:
Do you agree with them [Henry Farrell] or disagree with the authors [Henry Farrell]?
I don’t agree or disagree. I don’t know. Nor does Farrell. My point is simpler: one cannot take an illegal market in which various governments are aggressively enforcing laws against that market, notice that certain means of enforcement of contracts don’t work great, and then conclude, just on that basis, that a legal market would not work. Neither Farrell nor I knows how well a free market would work without any government to enforce contracts, that is, anarchy. It might work; it might not. My goal was less ambitious than resolving the issue of anarchy in one short blog post.

gwern writes:
Ulbricht's carelessness brought about the early demise of Silk Road. But if he hadn't been stupid, the marketplace would have soon collapsed under its own weight, or become the creature of larger organisations with a far greater capacity for violence.

Farrell, like a lot of people trying to write on the black-markets, could stand to have some more personal experience with them. For example, both Evolution and Agora seem to be larger now than SR1 was, and may have been for a while; yet they seem to have not 'collapsed under their own weight' or become cartel playthings, and even if they did, there's plenty of would-be replacements - and always have been.

Sieben writes:

I'm kind of confused. Most people would consider the Silk Road a success. Does over a million successful transactions count for nothing? Does a marketplace have to have exactly 0 grisly events in order to be a success?

"omg you guys, it's not a suburban white middle class utopia 24/7... market = failure"

I guess real-life drug deaths are a market failures too because it's really just what you get if people are allowed to make their own rules.

Charlie writes:

@DH

Then basically, I think you are critiquing Henry Farrell out of context. When you cite, "The libertarian dream of free online drug markets that can magically and peacefully regulate themselves is just that: a dream." He is very clear of the specific "libertarian dream" he is discussing and draws out in passages like the one below. When you critique it, you seem to be ascribing it to be a different definition.

"Neither Farrell nor I knows how well a free market would work without any government to enforce contracts, that is, anarchy."

Again, this is the whole point of the article. Farrell is citing examples where the government has effectively lost the ability to enforce law and contracts and looking at the way "the market" responds. If you want to critique his argument, you should address it directly. Why doesn't the mafia teach us about anarchy...etc.?


"Silk Road was ‘regulated by market forces, not a central power’, and even he, the Dread Pirate Roberts, was subject to market competition. If sellers and customers didn’t like the rules he made, they could go to other drug bazaars on the hidden web. He acknowledged the theoretical possibility that ‘voluntary organisations’ such as his site might spy on users, imprison them or even kill them. This would indeed mean that ‘[W]e’re back to where we started, the present day state.’ However, he insisted, market competition would make sure that this never came to pass."

nickik writes:

> This would indeed mean that ‘[W]e’re back to where we started, the present day state.’

No it would not.

If you actually read David Friedman then its clear that the idea in anarcho capitalism never was that there is no law, law enformcent or violence.

The hole point of anarcho capitalism is that if the sild road would come after me, that I had some kind of protection for that. And further that this protection, would be smart enougth to do despute arbitration.

Even if that is not the case, I am far less afraid of the people behind silk road then the goverment. Silk road is a market place, one of many, it does not have the policy and the NSA.

Of course you would have lots of data gathering (syping) by every company that you interact with, but the people gathering the data are not the same people that run the private policy force and they face wildly diffrent insentives.

Anarcho Capitalism is not utopion, nobody calmes thare would not be theft and scames, maybe even more then in there current system but that is a very low price to pay.

There are lots of people who want drugs but not by them on the streets and Silk Road has given them a viable option that works far more often then it does not. Its the most simple and risk free way to get drugs for many people. So overall these systems are still a success a great success.

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