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.
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."