David R. Henderson  

Does Contract Enforcement Require Government as a Backstop?

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Recently, Arnold Kling has been arguing that even when contract enforcement is totally private, it requires government as a backstop. He wrote:

Taking existing institutions as an existence proof for the feasibility of an-cap is not a valid argument. The fact is that eBay exists in a world with government. People who use eBay probably assume in the background that if a situation comes up where they think that they are getting shafted they can take the other party, or eBay itself, to a government court. That court will resolve the dispute, and everyone understands going in what that process will consist of.

His view is plausible a priori and, indeed, it used to be my view.

That is, until I read and reviewed Edward Peter Stringham's new book, Private Governance: Creating Order in Social and Economic Life. My review is published in the Jan/Feb 2016 issue of The American Conservative and, unfortunately, does not appear to be available on line.

Why did Stringham's work change my mind? Here's the relevant passage from my review:

One of the markets he examines is the world's first stock market, the Amsterdam Bourse, which began early in the 17th century. A problem that any stock exchange must deal with is enforcement of contracts. Imagine, for example, that someone sells a stock short, but contrary to his expectations the stock price rises, and he must satisfy his contract by buying the shares come settlement time. What if the short seller balks and doesn't stick to his agreement? This did not happen often, writes Stringham, because traders had to worry about their reputations.

But couldn't those who were cheated by short sellers have gone to the government to make the short sellers keep their word? They could not, and the reason is simple. Stringham points out that short selling was illegal and, therefore, going to the government was futile. If anything, those who had wanted to renege on their short-selling contracts could have gone to the government to get it to support their reneging. But Stringham quotes an analyst of the time pointing out that this didn't happen much. People were expected to keep their commitments and largely did.

This is strong evidence against the claim that complex market transactions between strangers need some form of external government enforcement. One might think that the participants behaved well because they knew that lurking in the background was a government with enforcement powers. But that couldn't have been the case for short sales because short sales were illegal: market participants would have known that they couldn't rely on government because they were engaging in illegal activity.




COMMENTS (53 to date)
Matt Moore writes:

Why go so far back? Until 2007, all UK gambling contracts (including casino play, private betting and betting in registered bookies) were utterly unenforceable. It was legal to make the agreement, but there was no civil or criminal recourse.

From a cursory look at the figures, there was exactly no change in the level of UK gambling once they were made enforceable under the Gambling Act 2005 (came into force 2007)

Bruce Benson convinced me of the superfluous nature of government-monopoly law in the first three chapters (Part I) of The Enterprise of Law, 1990 (2011).

Doubts concerning voluntary law may be softened by two current examples:

  • Credit card purchases. I feel mostly safe from fraud because I know that the credit card company will hear my complaint and, if convinced, will reverse the charge, sans state.
  • Used book purchases through Amazon or AbeBooks. The same applies. The intermediary company will represent my interest if I feel cheated, better than any state-law system, and much cheaper — I do not have to hire a lawyer.
For hearty travelers ready so see farther down this road I recommend my own Gateway to an Altered Landscape: Law in a Free Nation.

Matt Moore writes:

PS the legal principle was "sponsiones ludicrae" and essentially considered gambling too trivial to be worth court time.

If only much more of life was so considered.

Jameson writes:

I really like this example. Question: can we outline general conditions under which contracts will be enforced apart from government? It seems to me that one condition would have to be a large incentive not to be kicked out of the game, so to speak. This makes the value of one's reputation go up, but only in proportion to the ability of existing players to exclude you. Right?

David R. Henderson writes:

@Matt Moore,
Good evidence. Thanks, Matt.
@Richard O. Hammer,
Your examples are good ones but they aren’t good enough to handle Arnold’s objection about backstopping. Stringham’s example and Matt Moore’s example above do handle that objection because both activities were illegal. Your credit card purchases and book purchases are legal.
@Jameson,
Good questions. I think your answer is right.

@David Henderson
Backstopping is salient only if I would use it. In addition to the government-law backstop, I also imagine the Mafia, murder, and telling my mother, any of which might work better than government law. But would I go to these extremes? Almost never, and the likelihood that I would use one of these backstops is so small that it does not affect my decision to enter the trade contract.

If the intermediary company did not right my wrong, most likely I would simply decide to suffer that loss and to adjust my expectations regarding future trades. Before entering any contract I suppose a trader considers, perhaps subconsciously, and accepts such a consequence.

Arnold is right that some people enter some trades prepared to use the government-law backstop, but a huge class of legal trade occurs outside that scope.

Phil writes:

If only all illicit contracts were enforced in a gentlemanly manner. Borrow $1000 from Guido and it will probably be the integrity of your kneecaps and not your reputation that will ensure you do not breach the contract.

There has to be more than just a lack of government legal recourse.

Consider the class of trades which are part of an ongoing series of trades, in which the future series of expected trades has a larger present value than the trade presently uncompleted on the table.

Anybody with any sense knows this, I assert. But a large class of scholars have had to be shocked into this perception through the prisoners' dilemma brouhaha.

Daniel Kuehn writes:

These arguments bother me a lot. On the one hand, the an-caps can very easily provide an existence proof. That's fine but completely uninteresting I think. Neither Kling nor anyone else that I think is worth chewing over on this is suggesting that without the government no transactions could ever be successfully struck, and the non-an-cap position absolutely doesn't require the existence proof here to fail.

In contrast, the an-cap position seems to require a much stronger proof that they're not making: not that contract *can* occur without a state backdrop, but that some reasonably complete set of social functionality including but not limited to a very wide range of contracts can occur without a state backdrop.

So we're in a situation where:
1. An-caps are pushing a result that few people (and no one of interest) are making an argument against and that even if proven doesn't demonstrate anything of interest about an-cap,

2. Failing as far as I can tell to present arguments (certainly not empirical arguments) that are required to defend an an-cap position, and

A related, but somewhat separate, point is the banality of the argument you often hear about how people get along well in a lot of what they do without the government. It's related because again the burden of proof is completely flipped on its head. Non-an-caps have never claimed there aren't going to be areas of your life where you don't need and in fact don't want government, quite the opposite. And demonstrating such a thing, even if it had relevance for the non-an-cap position, does absolutely nothing to bolster the an-cap position which requires an entirely different sort of proof.

konshtok writes:

What am I missing?

The quoted paragraph says that in 17th C Holland the enforcing mechanism for the stock market was fear of bad reputation

so far OK

but then it says

This is strong evidence against the claim that complex market transactions between strangers need some form of external government enforcement.

No it's not

You can only have a reputation with people who know you which is not the case with strangers.

this is simply iterated prisoners' dilemma vs single prisoners' dilemma
just because something works for the first situation can not be evidence that is works in the later.


John hare writes:

If government were absolutely required to enforce all deals, there would be no illegal drug industry.

Zeke5123 writes:

I forget the name of the book, but a Yale Law property professor wrote a book a while back regarding a rural Calirfoian ranching community (if I recall, the name of the town is Shasta). In it, he shows that communities with repeated interactions and lack of crowds produces rules without (and often in contrast to) positive law.

This would seemingly support your theory. But what if the players aren't repeate? What if they occur in a large enough market where 'cheaters' can defect without high personal cost? I'm not sure reputation solved that problem.

I think an even more damning argument is that (a) we already have defectors when (b) both government and reputation sanctions exist. Is there a reason to think the cost of that government sanction is less than the benefit and/or that the government sanction somehow weakens the reputation sanction?

Don Boudreaux writes:

Richard Hammer appropriately mentions the important work of Bruce Benson. One of the legal institutions that Bruce has researched and that he correctly presents as evidence against the case for legal centrism is the Law Merchant (or Lex Mercatoria.) This body of law emerged spontaneously, independently of any sovereign design or enforcement. It forms the core of today's Uniform Commercial Code in the U.S. and, indeed, is still in operation as the law of international commerce. (See the mid-1990s work of Robert Cooter, of Todd Zywicki, and of others on this topic. I believe the main source is a 1995 or 1996 issue of the Pennsylvania Law Review.)

Relatedly, see Yale law professor Robert Ellickson's detailed and learned 1991 volume, Order Without Law. (This volume is misnamed: a better, more revealing, if less pithy, title would be Law and Order Without - Indeed, In Spite of - Government Stipulated Legal Dictates.) Although Ellickson's book deals with property disputes rather than with contract enforcement, the rules that are followed by the property owners who were studied by Ellickson are not only rules not developed and enforced by government, they are rules contrary to those that are formally enforced by government.

pyroseed13 writes:

I have to agree with Daniel Kuehn on this. Yes, the example shows that when there is no dispute that needs to be arbitrated, you do not need a government backstop. But that's basically a tautology. When people don't keep their commitments, what happens then? There's no reason to think that we can generalize Stringham's admittedly very interesting historical example to the rest of market transactions.

baconbacon writes:

@Richard O. Hammer

Backstopping is salient only if I would use it

This isn't true, as it would still act as a backstop from the other parties mind. They couldn't possible know for sure if you would or wouldn't use the government and so would act as if it was at least a possibility.

Even if they did know that you would never, their experience with hundreds or thousands of others who would or might will build their habits in such a way that you could conceivably benefit.

Don Boudreaux writes:

Also, no discussion of this important topic is complete without mention of David Friedman's pioneering and persuasive 1973 book, The Machinery of Freedom.

Daniel Kuehn writes:

pyroseed13, re:

"Yes, the example shows that when there is no dispute that needs to be arbitrated, you do not need a government backstop. But that's basically a tautology."

I'd go farther and say that when there *is* a dispute that needs to be arbitrated a government is not a necessary condition. It's not that claim I have a problem with. There's plenty of work on this, including what Don mentions and some of the private law work discussed by Bob Murphy. My point is more that that doesn't get us to an-cap, as non-an-caps aren't really arguing that the state is necessary for any kind of exchange activities.

For an argument to actually address an-cap claims it's got to be a much more general proof than things like this. Empirically I'm not sure such a proof is possible, which is why classically anarchists have taken up theoretical arguments. I think that's a lot more defensible than this recent attempt at empirically grounded anarchism.

pyroseed13 writes:

@Daniel Kuehn

Sorry if I wasn't entirely clear. Yes, I totally agree with your point. The importance of those examples are that they illustrate the limits of government regulation and show us when such regulation may not be warranted. eBay obviously works pretty well without any kind of intrusive government oversight.

But the problem you identify with an-caps is the problem I have with most libertarian arguments in general, and something that Jeffrey Friedman eloquently pointed out over a decade ago in "What's Wrong with Libertarianism?" The kind of evidence libertarians and an-caps frequently offer for their positions are not nearly enough to justify their radical conclusions. I'm not saying that their positions are necessarily wrong, but that the evidence they provide does not meet a sufficient burden of proof for their views.

Greg G writes:

Add me to the list of people who don't think that a small black market niche from 400 years ago where the participants mostly knew each other has much to teach us about modern financial markets.

The state's near monopoly on violence in enforcing contracts minimizes violence and coercion and increases the willingness of parties to take financial risks with people they don't know. That is why history hasn't shown us any development towards an-cap. That is why capitalism has followed, not preceded the nation state historically. That is why you have to go back so many centuries to find the example that was the subject of this post.

If an-cap had the advantages its supporters imagine we should see some evolution towards it. We don't.

Daniel Kuehn writes:

As the list of skeptics grows I think the important point to keep in mind is not just that the proof here is insufficient to demonstrate the case for anarcho-capitalism. David shows no such grand intentions for the post, after all.

The important point, I think, is that Kling never suggested in the first place that it's impossible to contract without the backdrop of the state. He merely says that that backdrop is very, very important across much of human exchange activity (citing eBay specifically). Demonstrating it's not impossible to do without the backdrop doesn't change a thing to touch or dissuade us from Kling's claim.

Robert H. writes:

Don -- there is a lot of scholarship attacking the whole "lex mercatoria was a universal law independent of government" thing. See, for example, emily kadens, "the myth of the customary law merchant," 90 Texas l. Rev. 1153 (2012).

Don Boudreaux writes:

Robert H.

Yep. But there's also work defending the Benson (and, relatedly, Leon Trakman) interpretation of the Law Merchant. Most notably is Benson's 2011 paper "The Law Merchant: How Romantic Is It? I can't find an ungated on-line version, but I believe that this paper by Bruce is a version of it.

David R. Henderson writes:

@Richard O. Hammer,
Backstopping is salient only if I would use it.
Not true. All that’s required is that enough people would use it to cause the potential cheater not to cheat.
Also, Richard, I’m not defending the idea that your examples are bad. As I said, they’re good. But they are not good examples of cases without backstops.
@Richard O. Hammer,
But a large class of scholars have had to be shocked into this perception through the prisoners' dilemma brouhaha.
True. We discussed this at UCLA in the early 1970s and game theory wasn’t mentioned once. Hell, I learned it from my parents in my single digit years.
@konshtok,
You can only have a reputation with people who know you which is not the case with strangers.
I don’t think that’s true. McDonald’s has a reputation such that, if I were traveling in Georgia, say, and wanted a good cheap breakfast, I would eat there. The people who would serve me are highly likely to be strangers.
@Zeke5123,
The book you’re thinking about is referenced by Don Boudreaux in a later comment.
@pyroseed13,
Yes, the example shows that when there is no dispute that needs to be arbitrated, you do not need a government backstop.
I’m not clear why you read it that way.
@Greg G,
Add me to the list of people who don't think that a small black market niche from 400 years ago where the participants mostly knew each other has much to teach us about modern financial markets.
Ok. Will do. Can I be confident, then, that you won’t use examples from 400 years ago to apply to today?
@pyroseed13,
The kind of evidence libertarians and an-caps frequently offer for their positions are [sic] not nearly enough to justify their radical conclusions. I'm not saying that their positions are necessarily wrong, but that the evidence they provide does not meet a sufficient burden of proof for their views.
I think that’s a good point and I basically agree with it. I think it’s true a fortiori with people who argue for government solutions.
@Daniel Kuehn,
As the list of skeptics grows I think the important point to keep in mind is not just that the proof here is insufficient to demonstrate the case for anarcho-capitalism. David shows no such grand intentions for the post, after all.
Exactly. What I have cited here is an interesting--and strong--piece of evidence.
@Daniel Kuehn,
Demonstrating it's not impossible to do without the backdrop doesn't change a thing to touch or dissuade us from Kling's claim.
I would strongly suggest that you speak just for yourself, not others.
@Don Boudreaux,
Relatedly, see Yale law professor Robert Ellickson's detailed and learned 1991 volume, Order Without Law. (This volume is misnamed: a better, more revealing, if less pithy, title would be Law and Order Without - Indeed, In Spite of - Government Stipulated Legal Dictates.)
Yes, I strongly recommend it. But one thing, Don. Either I’m misremembering the book, which is entirely possible, or I’m now seriously confused about your views. Your recent book on Hayek, which I highlighted here, finally convinced me of the distinction you’ve been pounding home between law and legislation. I had taken you to mean by “law,” not just generally accepted mores, but also common law. If I recall Ellickson's book correctly, he was saying that the ranchers ignored common law too, right?

Don Boudreaux writes:

David,

I'd put it this way: Ellickson showed that ranchers (and property owners) in Shasta County ignored government's formal rules - both legislative and those declared by government courts. (I forget how many of these government rules were legislated and how many court-declared.) If the rules declared by the government courts are called "common law" - and if only such rules are called "common law" - then, yes, ranchers and property owners in Shasta County ignored also the common law.

But I have (and many legal scholars have) a broader definition of common law: it is that set of rules that people expect others to follow, and to be enforced if someone violates those expectations. Common law, in other words, is not a synonym for the rules declared and enforced by Anglo-American governmental courts. The happy fact is, as it turn out, that these courts have long looked to evolved practices (and the expectations to which those practices gave rise) as a source of the law that they declared in their decisions and ruled should be enforced. But the essence of common law isn't that it is declared and enforced by government courts; it is, instead, that it is the evolved array of practices and expectations that people generally follow.

konshtok writes:

@David R. Henderson eh? i'm again missing the point. Strangers would only accept gov money from you so for one time deals you need gov backing. isn't that the opposite of what you said you think?


Greg G writes:

David,

>---"Ok. Will do. Can I be confident, then, that you won’t use examples from 400 years ago to apply to today?"

Yes, you can be pretty confident about that. Any economic principle worth defending should have plenty of more recent examples.

Thomas Sewell writes:

I'd throw out another distinction most folks above don't seem to be making, which has muddled the issue a bit.

An-caps aren't proposing no governments and no governing. The proposal is for no single monopoly government, with an expectation of organized interaction between multiple choices of law and governments.

It misses the point to discuss enforcing agreements without government enforcement in terms of anarcho-capitalism theory, when it would be better to say enforcement of agreements by competing governments agreed to by the participants.

Most people wouldn't make an agreement of any substance with a stranger without some sort of enforcement mechanism built into the agreement, even if just the custom for that type of agreement. Anyone remember common law? Much of it evolved out of that sort of thing.

There's no reason a stock market can't be governed by the participants using a reputation system, either formalized or informal, depending on the needs and desires of the participants, while another type of agreement may lend itself better to a different form of enforcement/governance for that type of agreement.

In terms of an-cap style enforcing agreements across competing legal systems and governments, an obvious example is to look at how it works currently between geography-based monopoly governments.

There is an established practice (with no monopoly government enforcing the agreements behind the scenes between them) where governments from the distant past to the present have acted to make agreements to recognize each others' laws in circumstances they agree to, provide criminal extradition agreements, enforce foreign financial judgements, etc...

@Greg G:
The older time periods are interesting in researching because governments were smaller in most places (think city-states and merchant organizations), so they provide interesting details on how they interacted with each other and their participants, who could in many cases much more easily change governments if they had a little wealth.

In terms of evolving towards an-cap ideals, how much private arbitration was used 100 years ago compared to today? The monopoly court systems for resolving civil disputes have in many ways failed and been replaced by agreements referencing private arbitration and specific choices of legal frameworks to govern the agreements in question.

Don Boudreaux writes:

On the challenge to the veracity of the account of the Law Merchant as a spontaneously evolved system of law that relied upon no sovereign enforcement, I offer this passage from page 117 of Garrett Barden's and Tim Murphy's remarkable and deep 2010 volume, Law and Justice in Community (footnotes excluded; link added; emphases and brackets original to Barden and Murphy):

Harold Berman has characterized the medieval lex mercatoria as a coherent, European-wide body of general commercial law, driven by merchants, and more or less universally accepted and formalized into well-known and well-established customs during the period 1050-1150. Although it is generally accepted, Berman's account is not undisputed, and some suggest that the law merchant evolved from two sources: legislation by public authorities and, only secondarily, from the practices of merchant communities. Emily Kadens, for example, suggests that the documents produced by merchants, such as contracts, bills of lading, and arbitration decisions, 'give little indication that medieval merchants thought of their practices as anything more than "the way we do things"'. This characterization of the lex mercatoria as nothing more than 'the way [merchants] do things' is in our view critically significant. It is critically significant because it describes perfectly a central component of the account of law and justice that this book proposes and defends. As we have said, humans living together in civil society 'do' a whole host of 'things' in particular 'ways'. These ways include the customs, practices, well-known and accepted procedures, and mutual expectations that establish the jural relationships particular to communities. As customs, methods, and practices constitute the living law of a community, so in the trading order they constitute the lex mercatoria.

In short, the fact that medieval merchants did not self-concsiously create and enforce rules that they thought of as being the same thing as what that modern legal scholars (and modern people generally) think of as "law" - that is, as dictates of a sovereign power - does not mean that the rules that evolved and were generally followed by these merchants were not law.

Robert H. writes:

Don -- Yeah, I didn't mean to imply that it was a settled question.

That said, I'm definitely on the Kadens side of the "lex mercatoria" fence. For lots of reasons, but the TLDR version is probably that this debate tends to devolve into an argument between law and economics types (benson has a phd in economics) and medievalists (as well as her JD, kadens a phd in medieval history). But this isn't an argument where economists should have much to contribute: we aren't applying economic theory to historical facts, we are simply asking what the historical facts were. Either there was a universal lex mercatoria that allowed medieval merchants to govern complex exchanges without recourse to coercive courts or there wasn't.

The end result is that people like Benson just seem out of their depth to me. Not able to keep up with the historical research of the other side, they've got to retreat to less and less bold claims until you've got stuff like Benson's "well yes, the lex mercatoria 'interacted' with state and church legal institutions, but you should ignore that" argument.

I think Benson thinks his contribution is that he better understands the idea of custom and customary laws (see, for example, that essay you linked), but he mostly doesn't. Legal scholarship has a thousands-year-old debate about what custom is, does, and, most importantly, how it arises (when does a repeated practice become a binding custom? When people think it is? When it's adjudicated to be? When people suffer reputational harms from breaking it?), a guy bursting into that ancient conversation and saying "I don't think you medieval legal historians understand the concept of 'custom.' See, it all goes back to Hayek..." is just... unpersuasive.

Greg G writes:

Thomas Sewell,

I agree that older time periods are very interesting. I disagree about the extent to which they provide evidence for the viability of an-cap today.

Contracts today that call for private arbitration are still subject to enforcement by the state. So I don't see how they are evidence of evolution towards an-cap. When the state's monopoly on the legitimate use of violence to enforce contracts is absent, it will be replaced by private violence for the same purpose. Indeed, this is what an-caps propose.

An-cap would be better for those offering private violence for hire or desiring to handle this job own their own. For everyone else, not so good.

Don Boudreaux writes:

Robert H: I agree that the matter isn't settled - in large (if not in exclusive) part because people can't agree on what the term "law" means, or, alternatively, on what are the minimally necessary features of law.

You are correct, too, that Bruce Benson is an economist and neither a lawyer nor a medievalist. Yet my assessment of his work on this matter isn't as negative as yours (but, then, I, too, am an economist! [although one with a law degree]). In part my confidence in Bruce's work stems from my reading of Harold Berman's work. Berman was both a law professor (at Harvard, no less) and an acclaimed legal historian. (He studied, I believe, under the famed legal historian Theodore F.T. Plucknett.) His account of the law merchant squares with that of Benson.

Dan writes:

I don't understand why the stock mkt example is special. All but miniscule % of daily economic activities rely on government enforcement. Most rely on reputation and culture. If you are thinking of illegal activities, there is the illicit drug trade which relies on complex arrangements and informal contracts.

I also don't understand the reliance on informal rules that emerge endogenously from economic interactions. If we could rely on informal rules, reputation, etc., then government enforcement mechanisms would not matter for economic activity or development. But we know that institutions play an important role in economic development.

For instance, if the court system is corrupt and the person you are suing you bribes the judge, then no one else would deal with that person again and their reputation would be damaged. You can just rely on private arbitration. And the independence of courts in countries would not affect economic activity.

David R. Henderson writes:

@Don Boudreaux,
Thanks for clarifying on the law.

Daniel Kuehn writes:

Dan - it's not a question of enforcement but of the backdrop of the state. The important feature of this case is not just that there's no enforcement but there's no backdrop.

Kling isn't arguing there can't be private enforcement and here at least he doesn't even argue that there can't be private enforcement without a state backdrop only that it's pervasive and that existence proofs in this case are not very strong.

William Newman writes:

Skimming and textsearching the Kaden article cited by Robert H., it is certainly an attack, but I'm not convinced that it is entirely scholarship. From the beginning of the abstract:

"Legal scholars from many disciplines—including law and economics, commercial law, and cyber law—have for decades clung to the story of the so- called law merchant as unassailable proof that private ordering can work. According to this story, medieval merchants created a perfect private legal system out of commercial customs. As this customary law was uniformly and universally adopted across Europe, it facilitated international trade. The law merchant myth is false on many levels, but this Article takes aim at two of its fundamental principles: that uniform and universal customary merchant law could have existed and that merchants needed it to exist."

It is logically possible that formulation of academic opponents' positions is not a pure strawman. However, the article for some curious reason chooses not to demonstrate that it is not: despite the many general citations to writings of academic opponents, there are no specific citations for the specific extreme parts of the position (e.g., for the extreme terms "perfect" and "unassailable") or representative citations to support the claim that "uniform" and "universal" are fundamental principles of the widespread "myth".

IMO a scholar should be reasonably careful when attributing positions to opponents, and if one can't or won't meet that standard, one should be particularly cautious about choosing vocabulary like "myth" and "clung" to characterize the general population of one's opponents when one can't be bothered to demonstrate that even one actual opponent has ever held the curiously extreme position that one is able to argue against.

@David Henderson and baconbacon
Thank you for your correction. I agree that the prospect of government-law backstopping may affect the other's behavior even if it does not affect mine.

@Robert H.
But this isn't an argument where economists should have much to contribute: we aren't applying economic theory to historical facts, we are simply asking what the historical facts were.

I've been reading up on my philosophy of science (currently rereading Bruce Caldwell). With some confidence I'll say that facts do not exist separate from theories. An observer cannot perceive some fact except through a set of nervous system interpretations, each interpretation enacting some theory. I think Hayek said as much. An economist pawing through reams of history will observe a different set of facts than than an astronomer pawing through the same reams. If you want a history relevant to law and economics, send a specialist from that field to paw through the reams.

David R. Henderson writes:

@Daniel Kuehn,
The important feature of this case is not just that there's no enforcement but there's no backdrop.
Exactly.
Kling isn't arguing there can't be private enforcement and here at least he doesn't even argue that there can't be private enforcement without a state backdrop only that it's pervasive and that existence proofs in this case are not very strong.
Actually, Daniel, Arnold Kling IS arguing that there can’t be private enforcement without a state backstop. (I assume that you mean by “backdrop" what I mean by “backstop.")

BC writes:

I think the strongest evidence that government might not be necessary to enforce contracts arises by watching nations' interactions. There is no global government (though some might want to make the UN into one) to enforce treaties. Yet, nations still sign them and build whatever enforcement mechanisms deemed necessary into the treaties themselves.

Government enforcement mechanisms are those enforcement terms determined through the political process rather than by the contract parties. So, if there were a global government, then Japan (and all other countries) would have a say on how to enforce contracts between the US and Canada, for example.

The question really isn't whether government is "necessary" to enforce contracts. Enforcement is really just another term of the contract and, clearly, government isn't necessary for parties to agree on contract terms. For example, when we say that government enforces that A pays B under a contract, we really mean that A and B agree that, if A doesn't pay B with a check, then government may direct a bank to transfer the amount from A's account to B's account. Without government, A and B could make the same agreement with the bank(s). To ensure the banks' compliance, the banks could agree to cross-post margin with each other, etc.

So, the question is really under what conditions, if any, do there exist advantages of determining mandatory enforcement terms through the political process? In answering this question, one must consider that private parties can pre-agree amongst themselves to standardized enforcement mechanisms, e.g., agreed upon margin requirements on a securities exchange. So, the question of whether there is an advantage to negotiating contract terms through the political process is different from whether there an advantage to pre-agreement to standardized terms among many parties.

Kling's argument that people need backstops doesn't establish why those backstops need to be determined *through the political process*.

James writes:

Greg G wrote "An-cap would be better for those offering private violence for hire or desiring to handle this job own their own. For everyone else, not so good."

I cannot tell if your last sentence is error or just hyperbole.

Whether or not ancap would be good for someone depends on the costs and benefits of government to that person and the costs and benefits that person would experience without a government. Some people benefit a great deal from government but there are plenty of people who are, on balance, made worse off by their governments.

James writes:

Kling, and many commenting here, are trying to reason from observations of a non-ancap world to reach conclusions about what an ancap world would look like. The error in logic should be obvious.

Ebay needs the state as a backstop because Ebay is operating in a world in which the state requires Ebay to need it in that way.

Right now, Ebay could acquire weapons and hire people trained in their use or they could contract with some other company dedicated to such purposes. They could require, as a precondition for using the site, written consent to the condition that Ebay's enforcement team will use force to penalize violations of Ebay's rules.

The reason Ebay isn't doing this is not because the government is the best or lowest cost provider of dispute resolution services. It's because various federal and state law enforcement agencies would interfere if Ebay tried to resolve disputes with private force. So, yes, Ebay does depend on the state as a backstop. But that is not a permanent characteristic of the world. It is a characteristic of a circumstance in which the state forbids Ebay to hire some other entity to act as a backstop.

Brian Meehan writes:

Anonymous online marketplaces like the silk road and it's spin-offs operate in a market with no state backstop for dispute resolution. The volume of trade in these marketplaces has gone up significantly across the last decade, and even though the original silk road was shut down the marketplace seems pretty resilient to constant attempts by governments to take them down.

https://www.usenix.org/system/files/conference/usenixsecurity15/sec15-paper-soska-updated.pdf

David R. Henderson writes:

@James,
Kling, and many commenting here, are trying to reason from observations of a non-ancap world to reach conclusions about what an ancap world would look like. The error in logic should be obvious.
Good point.
@Brian Meehan,
Anonymous online marketplaces like the silk road and it's spin-offs operate in a market with no state backstop for dispute resolution. The volume of trade in these marketplaces has gone up significantly across the last decade, and even though the original silk road was shut down the marketplace seems pretty resilient to constant attempts by governments to take them down.
Good point. It does seem fairly clear that a government that is trying to take them down would not be willing to be in the business of enforcing agreements made on their online marketplace.

Cole writes:

Is Kling claiming that it is the expectation of a government backdrop that makes the ebay example unfeasible, or is it the actual existence of a government backdrop?

If it is just the expectation of a government backdrop, then the actual effectiveness of any backdrop is mostly irrelevant. If people tended to behave in market transactions, because of the expectation of divine punishment by Zeus it would be equally as effective as government.

If it is the actual existence of the government backdrop, wouldn't you need to demonstrate that the backdrop is actually effective? Who would actually be able to litigate an ebay claim for less than 200 hundred dollars, and not lose more than that in court costs and opportunity costs?

If all the work of contract enforcement is done by what people imagine the government could do (but not what it is actually capable of doing), then credit should go to people's imaginations, not to government.

Sean Leal writes:

Kling is merely restating the same unimaginative belief of most statists -- If government doesn't do X, then X won't get done. In this case, X being contract enforcement.

The fact that he cannot conceive of any other method than guns being the final contract backstop (guns being the ultimate end of all government action) is also no argument against the possibility of peaceful conflict resolution. He has not furthered the conversation here.

lib-boy writes:

I think the real question is, are states necessary to enforce contracts which approximate prisoner's dilemmas? That is one-off agreements where each party has the incentive to defect, and there are no "do-overs".

I think this answer is quite obviously no. To overcome a prisoner's dilemma all each party needs to do is pre-commit to retaliate if the other party defects. Since the whole point of pre-commitment strategies is signaling, both parties will be made aware of the other's pre-commitments. This means that both will agree to the penalties for defection, increasing the likelihood the transaction is Pareto-efficient.

Because pre-commitment is costly, people could insure against it (note that ancaps often bundle law enforcement with insurance) as was done in 18th century England:
http://www.daviddfriedman.com/Academic/England_18thc./England_18thc.html

Jhanley writes:

I wrote about Stringham's book for a Cato Unbound symposium. While he didn't persuade me on private policing, he did convince me on private contract enforcement.

He made a powerful historical argument against those who argue that markets can only exist when government creates laws to govern them.

Of course that argument also errs in assuming government is forward looking, rather than always being reactive to what people are already doing.

Tom West writes:

My suspicion is that any system that doesn't use government enforcement as a backstop will, given sufficient time, evolve into a defacto government itself, perhaps under a new name.

The efficiency gains of enforcement through violence are simply too high to be held at bay simply as a matter of principle.

To say nothing of the fact that those perpetrating fraud are probably better off under a system of criminal justice compared to what they might face from their victims directly.

Jhanley writes:

There's a lot of emphasis in these comments about how often we interact with strangers, but "stranger" isn't a meaningful characteristic. What really matters is whether that person has a reputation.

It seems to me that some folks here are using "stranger" as a synonym for "person of unknown reputation," when they're not the same at all.

Wheb I moved to this town and needed a,mechanic, I asked other people for recommendations. I ended up going to a stranger with a good reputation (who has now been my mechanic for over a decade).

The fundamental business model of EBay is to reduce transaction coats between buyers and sellers, including the cost of learning about their reputation.

David, above, noted McDonalds, which of course is famous not for having the best burgers, but consistency, cleanliness, and food safety. In the same way, buying a bicycle helmet with ANSI and SNELL certification makes me willing to deal with a manufacturer who isca stranger to me.

What some of the critics miss is that this knowledge about sellers (and buyers) has orivate value, it's not simply a private good, and so there is incentive to provide that information. The mistake is glaring enough to make me wonder how well these folks really understand the fundamentals of markets.

Daublin writes:

To support the intuition here, consider how many times a typical person actually interacts with the courts. Any courts-as-backstop scenario is going to *sometimes* involve the courts!

The examples I can think of where the courts are important are for really big ticket items. Things like rental property disputes, inheritance, and divorce.

Nathan W writes:

Perhaps in a system where everyone knows everyone. But in the modern world a) everyone does not know everyone, especially when doing business in a foreign country/market, and b) government-backed contracts makes it possible for people with no network to also benefit from trust in contracts.

In both cases, the government backstop increases the scope of economic trade/activity. Of course there are markets and common law/practices without government. But government makes it easier for new people to join, by creating rules that everyone can transparently see.

GregS writes:

Many of the people commenting in this thread need to actually read Stringham’s book. He specifically mentions eBay. In fact, he offers a personal account of a dispute that was resolved by eBay. When some ties he had ordered were not as described by the seller, eBay refunded his money (and presumably sanctioned the seller somehow or simply ate the loss). His point (I think) is that there was *no chance* that the government would step in to resolve this dispute. No police department would take it seriously as a case of criminal fraud, and the time and expense of bringing the case to court made that option unfeasible. (See Kevin Erdman’s comment near the top of Kling’s post; it makes the same point, but for even larger sums than the price of a couple ties bought on eBay.)
Stringham makes a similar argument about modern financial markets. He doesn’t just say, “Look, it worked in this obscure black market 400 years ago.” He makes the point that financial institutions (today) make thousands of transactions every single day. Disputes are fairly common, but they must be resolved and business can’t grind to a halt over a few disputed transactions. There is *zero* chance that the government will step in and settle all of these disputes. These institutions must come to arrangements with one another and resolve the disputed transactions quickly.
He’s not simply arguing “Anarchism can work sometimes.” He’s not saying, “It worked over here, so it works everywhere.” He’s making a stronger point. He’s saying that government is quite often absent in realms of disputed property, where it’s supposed by many thinkers to be necessary.
Now, you might argue that you need a government backstop for very large institutionalized cases of fraud. It’s possible (though very unlikely) that a large player like eBay will take all its customers’ money and run. Of course that would completely annihilate any future profits and thus destroy all of its market value; the company’s owners would suddenly lose all of their investment. Maybe it’s still a reasonable concern; some unscrupulous individuals have surely absconded with large sums of other people’s money. Maybe you need a government to catch them and maybe you don’t. But it’s fairly clear that in many (most?) disputes and potential disputes, the government is not present, even as a very distant backstop.

mike davis writes:

@ David Henderson, @ Daniel Kuehn

Actually, Daniel, Arnold Kling IS arguing that there can’t be private enforcement without a state backstop. (I assume that you mean by “backdrop" what I mean by “backstop.")

David, might not want to assume anything. In this conversation, it is useful to very clearly distinguish “backdrop” from “backstop”.

Backstop implies that an agency with a monopoly on the use of force stands ready to enforce a contract should these other non-coercive mechanisms fail--law suits as a kind of “in case of fire, break this glass” thing.

Backdrop implies that the existence of an agency with a monopoly on the use of force is necessary for the existence of non-coercive mechanisms that facilitate respect for contract.

Example: My wife likes to buy customized stuff for the baby from craftspeople selling on Etsy. Such transactions are, for obvious reasons, susceptible to opportunistic behavior by either side and there is no real backstop guaranteeing payment or performance—nobody is going to sue over a $50 stuffed giraffe. But the commerce thrives because of the non-violent sanctions devised by Etsy (bad reviews, etc). Do the anarcho-capitalist believe that institutions like Etsy will be sufficiently robust without the backdrop of government? That, to me, is the much more interesting question, and I have no idea how you would even find conclusive evidence either way—but then again I am shamefully ignorant of this whole an-cap literature.

Tom West writes:

GregS
He’s making a stronger point. He’s saying that government is quite often absent in realms of disputed property, where it’s supposed by many thinkers to be necessary.

I think he's missing the fact that there's a huge difference in the behaviour caused by "there's no realistic way the government will intervene" and "there's no government intervention".

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