Do markets need government? One of my brilliant young GMU Econ colleagues, Pete Leeson, asks this important question in his contribution to this new volume of essays just published by London’s indispensable Institute of Economic Affairs.
Do Markets Need Government?
Previous post: The Perfect Political Speech
Next post: Your Dog Does Not Own Your House
Podcast RSS Feed
Full EconTalk Text
{ 50 comments }
Absolutely. That's why I hate being called an anarchist. It's not a market if someone with guns isn't protecting your freedom to choose whether you participate, and to hold all trading partners to their promises.
cpurick,
Be careful: law is not the same thing as government; and government is not the same thing as law.
Markets certainly need law; whether or not they need government is a different question. If government undermines law, or destroys better law in favor of poorer law, then perhaps markets do not need government after all.
Is there a market for governance? I say that there is and that that is the reason why a republic would work best if ever implimented. In my opinion, the Founders goofed when the ditched the Articles of Confederation. Imagine a real marketplace for governance in one umbrella country. It would be like actually having a ninth and tenth amendment that couldn't be easily subverted.
That's not the right question.
Do markets require a political hierarchy?
Yes, some form of 'government' is required, but I don't think a monopoly government is required.
What might an alternate form of government look like?
To discover that, we must be willing to relinquish the belief that what we are familiar with is the "only" way to coordinate human activities.
In fact, I hold that political government does not coordinate human activities, but rather, seeks to disrupt human cooperation.
I will further state that the only reason monopoly government is currently required is because that is what people believe in.
When what people believe changes, then the manifestations will change as well.
That's why the state engages in so much propaganda, to maintain the current belief system.
And otherwise deciding who owns what.
I'm not sure that the founders goofed in ditching the Articles of Confederation. That constitutional document did not help to encourage the great transcontinental free-trade zone that became possible under the 1787 document. The 1787 document, both in its original form and as amended, is certainly no perfect constitution. But nor were the Articles.
Government is hardly required to decide who owns what.
Take a look at black markets.
They function outside the law.
The "black" market was the only thing that enabled economic functioning under the Soviet Union. ("Black" is a statist aspersion against markets not controlled by the political class.)
By definition, participants in the black market do not enjoy legal protection, yet they so often find satisfaction there that they continue to participate in them.
Do people ever get ripped off in a black market? Sure, but they also get ripped off in the legal market as well.
Don, please, your definition of "government".
A market requires property (lawful possession or governance), and property requires a state; otherwise, we have no single standard of propriety. People will dispute others' claims. That's a law of nature, but we're discussing another sense of "law" here.
"Law" commonly describes the rules a state formulates and enforces. The Common Law is no exception, because the whole idea of a jury trial subject to various rules is such a formulation. I have no idea how anyone expects to know the limits of his property without some systematic standard imposed by a central authority. The idea that we'll all just agree, peaceably, on this standard without any central authority seems nonsensical.
I don't observe people being so agreeable. I observe people subject to artificial states, and I don't observe anything much resembling modern property in the state of nature. Natural territoriality is the foundation of property, but any lingering resemblance is superficial.
LCJ,
I would argue there is a market for governance. I'm an accountant (a young one). A former partner from my previous decided he wanted to scale back on working, so he moved to the Cayman Islands. He received mail at my former firm, and his staff prepares the returns, and he reviews them in the paperless system the firm uses, signs off on them, and they process and mail them from their US office.
He still pays a fair amount of US taxes, but he decided that he was willing to pay less in taxes, knowing that he gave up some of the protections he has here in the US. He views the taxes he pays to the US as a cost of working for a US firm, which gives him access to US clients.
(The tax implications of this are somewhat complex. As a US non-resident, he pays no US taxes on his interest and dividend income generated from non-US sources. His income from the firm is taxed in the US, since the firm is US based, and the income is derived from US sources. Its actually even more complex then that, but the details get boring quickly.)
The market is there, but the transaction costs are high (moving out of the country, working from a remote location). Our vast IT network which is fast covering the globe is bringing down the costs though.
Do you think its fair to say that Productivity, Wage/Price controls, Wal-Mart effect in business, Tax Rates, Trade Policy….are all in effect Monetary Policy in a way?
the Rothbardian cranks(Rockwell, Ron Paul) are out there talking about the Fed as some all powerful Central Control agency of the Economy and how we are on the brink of Economic Collapse as a result and how they just 'prop up the dollar' and our economy, etc…..
about to drive me crazy, the morons.
Much evidence exists to show that property emphatically does not require a state. Here are just some suggested readings:
Harold Demsetz, "Toward a Theory of Property Rights," American Economic Review, May 1967.
Robert C. Ellickson, Order Without Law (Harvard University Press, 1991).
Bruce Benson, The Enterprise of Law (Pacific Research Institute, 1990).
Terry Anderson & P.J. Hill, The Not So Wild, Wild West: Property Rights on the Frontier (Stanford Economics and Finance, 2004).
Govt./Military is needed for International Trade, goods don't magically make from piont A to B by themselves, free of "pirates" seizing them. OIl doesn't magically produce itself at capacity by Despots, Oil doesn't magically make it through the Strait of Hormuz in Persian Gulf with out Iranian interference, or to Europe via the Oil Pipelines Russia is trying to seize.
Hard Power is a reality and a component in the "Free market".
which is one reason Thomas Jefferson was so emphatic on fighting the Jihadist of his day, the Barbary Pirates.
other things is a key component to Economic Libertarianism is the Society(which is now basically in Global Scope) needs to share values….such as Property Rights. Those don't just come magically to the individual, they were found in the Bible originally and taught via the Family institution which Western Civilization was built on. This is something we are moving away from, which is bad for true Free markets.
Martin:
And otherwise deciding who owns what.
Actually, that's the part the market decides. Government's role is more about upholding the decision.
Don:
Markets certainly need law; whether or not they need government is a different question.
Markets need government because of externalities. Are you suggesting that a market can be expected to recognize the rights of non-players?
Hard power is indeed sometimes required. But the state is not the only potential source of hard power – and it's an open question if it is always, or even typically, the best source of such power.
Markets — or, more generally, private arrangements within a private-property-rights regime — are remarkably agile at exposing externalities and 'internalizing' them. Not always, of course — sometime the costs of doing so exceed the benefit.
But the state itself is a huge source of externalities — not the least of which is that each voter gets to have a say, largely free of charge, in how millions of strangers live their lives.
The research of Elinor Ostrom is especially important in documenting many actual examples of how private arrangements internalize externalities. See, for example, her 1990 book "Governing the Commons" (Cambridge University Press).
Gary said:
(The tax implications of this are somewhat complex. As a US non-resident, he pays no US taxes on his interest and dividend income generated from non-US sources. His income from the firm is taxed in the US, since the firm is US based, and the income is derived from US sources. Its actually even more complex then that, but the details get boring quickly.)
Is that right? It's my understanding that U.S. citizens must pay U.S. income tax on their worldwide income, subject to certain credits for foreign taxes paid on that income. In this regard the U.S. income tax system differs from most other countries that do not tax their citizens on income earned abroad.
Hernando DeSoto's "The Mystery of Capital" has some examples of people creating property rights without, and sometimes in spite of, the the government.
Apparently, you've never been sued, but you've surely paid taxes.
Possibly, some government you imagine operates this way. I'm discussing governments I observe.
Right. People disputing the players' claims of propriety are "external" to the market. They are outside the established state that market participants respect.
Don, I must part ways with you on this. Initially the new constitution was not well received because many of the Founders feared centralized power. But the leading Federalists (particually Madison) were very skilled and persuasive…probably not foreseeing the future consequences of centralizing the power. And, it was entirely possible that the Articles of Confederation and Perpetual Union would have been amended as necessary to facilitate trade by preventing the coastal port-housed states from exerting undue leverage on the inland states. But can you honestly tell me [even if you did not have the benefit of hindsight] that you would have found yourself on the side of the Federalists in establishing the new constitution? I mean, come on…centralization?! It seems like the baby was thrown out with the bath water.
Leeson's theory of multilateral enforcement reminds me of the feedback system on eBay. However, there will always be someone or some group who writes the rules for such a system and they will occasionally get it wrong and diminish the effectiveness of the system.
For example, eBay has recently changed the rules so that sellers can no longer give negative feedback to buyers. Unlike before this change, over which the eBay management has exclusive control, sellers can no longer judge the risk of allowing an unknown buyer to bid on their item, and must accept a higher risk of dealing with an unknown person than before this change in the rules.
Sellers on eBay now must rely on unilateral enforcement against defectors because they have lost the multilateral enforcement held previously. In a market of such size, that is no enforcement at all.
Of course, the remedy for sellers is to find another market for their stuff, but competition with eBay has not arisen in any comparable way.
So just like government, a none-government system is also not reliable.
Good point about there already being a market for governance, Gary. Also very appropriate that you brought up the transaction costs of moving. I still am wed to my idea that the choice should and could be internal, within the United States of America: I just happen to feel that we should seriously consider removing the second "s" in states and just call this thing what it really is these days.
Leeson's examples of the emergence of rules to deal with criminal behavior tell us what we instinctively know; a well-armed society is a polite society. And perhaps it is only a well-armed society that will be a polite society.
The idea that we'll all just agree, peaceably, on this standard without any central authority seems nonsensical.
Seems to me that most people already do agree.
Do you think a 100% consensus is required?
Do you not think that arbitration can resolve most disagreements?
Are you at all able to consider other possibilities?
Do you recognize that a monopoly enforcer of 'justice' contains the capacity for enforcing injustice?
And given human nature, does not such enforcement become inevitable?
The answer to the question is no. Markets do not need government. There's plenty of evidence to support more success with no (or even less) government involvement. Law and the judicial system, as well as consumer satisfaction, have guided markets more efficiently.
the market, and the people, do not need a regulator, only a limiter.
Let's put it like this – if government didn't exist the market would create it.
Perhaps the question should be: does government require a state apparatus?
-Don
Someone has to enforce the law and that will require force. Is the question should that force and law be monopolistic or competetive? Should their be several separate groups enforcing different laws with different groups of force or on law and group of force? Is that the question?
It seems there have been several examples throughout history where force and law were separated into power groups, sometimes warring factions, cartels, ethnic groups, and it is very rare for there to be order in such a situation. Is there any situation where in such an occurrance a prolonged period of growth took place?
There are many historical periods of complete disorder. If markets can exist without governments, shouldn't order spontaneously break out. There is law in the broad sense that you use the word–there is mine and yours, acceptable and unacceptable, though there is no legislation. Shouldn't in these times we have seen order and growth without intrusive government messing everything up?
I'd really like to understand the anarcho-capitalist answer to this argument.
Charlie
Flash Gordon – eBay has only restricted negative feedback by buyers who fail to live up to their agreements. Otherwise if you received the item and paid for it, then you can leave any feedback you want.
Seems to me that most people already do agree.
Do you think a 100% consensus is required?
Just about. I don't know how many people already engage in non-violent lying, cheating and stealing but it's not small. Without fear of criminal prosecution by the government the number would surely be higher. Market incentives for cooperation that depend upon rational thinking already don't stop these people, and it is utopian thinking to believe otherwise.
The numbers on the propensity to violent crime are better known because those crimes are easier to detect and more difficult to hide. Only 3% or less of the population will ever commit an armed robbery, a violent mugging or a murder. But that <3% is enough to fill prisons faster than they can be built and to employ several million people in the U.S. alone in some aspect of the criminal justice system.
These criminals already have powerful incentives to refrain from their criminal behavior. But they don't. To believe that market incentives can deter crime or that markets can exist without government is sheer folly to be indulged in only by tenured professors in ivory towers of comfort.
I read all of Leeson's essay and found it most interesting and stimulating. I found myself agreeing with much of it and wanting to believe a lot more of it. But in the end, as much as I might like it to be possible…(imagine…no state…yes!)
But no, read the essay, enjoy it, expand your mind. Then take a reality check .
Most people agree in the context of an already established central authority. We have no idea how most people would think or behave in a radically different context. You don't even know how you would behave, and I don't know how I would behave. If could know, I'd nominate myself for philosopher king and chief central planner, but I can't know, and neither can anyone else.
Arbitration presumes a central authority. It works if this central authority outweighs other parties to the arbitration. A negotiation without this authority is mediation rather than arbitration, and I don't think it can resolve many disputes.
You and I can disagree fundamentally over the resolution of a dispute. If we both want to eat the same antelope, no natural propriety governs which of us will eat it, never mind the antelope's sense of propriety. A rational argument in favor of one or the other presumes some fundamental agreement on standards a priori, and these arguments ultimately may be more rationalization than rationality. You simply prefer the "rational" standards supporting your claim while I prefer the standards supporting mine.
Regardless, I don't observe mediation settling disputes as a matter of fact. I observe people subjected to forcible propriety. I was born into this world, and I'll die in it, and I have little clue how life would be otherwise. Neither do you.
I'll discuss reforms of current law, like a progressive consumption tax or various forms of educational privatization or Social Security reform. Maybe we can speculate meaningfully about the consequences of an incremental change; otherwise, we can only play a hopelessly utopian game.
Not in my lexicon. A state can enforce human misery but not "injustice", because "justice" is a word that simply denotes whatever a state enforces. If the state orders you to march with your children to a concentration camp to be exterminated, that's "justice". Justice is the business of armed men and bullshit artists.
Well, life isn't so miserable in my neck of the woods really, and it seems to become less miserable for most people I know. That's all I can say. I imagine it could improve. I imagine a lot of things.
If markets need governments, we'd all be talking newspeak, and I doubt the above question would arise
Let's put it like this – if government didn't exist the market would create it.
-
Or if its not a Civil Govt. like we have, an Alternative form of Govt. would fill the Vacuum….like the Mafia.
always order in disorder, and basic human nature and history is indicative of this
which is why Anarchy in the world we live in isn't scientifically possible. There is always Order in disorder, if not the Civil Govt. a strong man(mafia) with Guns will fill the void naturally.
The Civil Gov't is always a strong man (mafia) with guns. Imagining it as anything else is a mistake. When anyone's idea of "the good guys" (including mine) rules the day, the Civil Gov't will still be a strong man (mafia) with guns.
Rudy wrote: "There's plenty of evidence to support more success with no … government involvement."
Plenty of examples? Of complex markets like those typical in the west being successful with no government involvement? Really? Can you identify this plentiful evidence?
Commercial trade in the Mediterranean, starting about 1,000 years ago, had no sovereign power governing it. It was governed — very well, by the way — by a body of law that emerged spontaneously in the course of actual trading practices. This body of law is known as the Lex Mercatoria, or "Law Merchant."
Much of today's commercial law, including the Uniform Commercial Code in use the U.S., comes directly from the Law Merchant.
Furthermore, a great deal of today's private international commercial law is not enforced by any sovereign power. See a series of papers written in the mid-1990s by Robert Cooter of the Boalt Hall law school at UC-Berkeley.
Without fear of criminal prosecution by the government the number would surely be higher.
Unless the government creates disorder by interfering in markets via policies such as drug prohibition.
Much of the disorder through history is caused by conflict between competing rulers, rather than by the people they seek to rule.
The problem of state power is that it legitimizes sociopathic activity by displacing moral values, replacing them with legislation.
History reveals not that many people can't get along without a state, but that the state refuses to allow people to get along without its 'services'.
because "justice" is a word that simply denotes whatever a state enforces
Justice is a moral concept. The law does not care about justice. The only interest the state has is in obedience to its rules.
There's a story (perhaps apocryphal) about the Chinese official under Mao who simply could not fathom Milton Friedman's answer to his question. This official's question was "Who decides how much steel is produced in America?" Friedman answered "no one."
If you're accustomed to 'order' being brought about one way — by human decision and force — then it is difficult to conceive of it coming about without central direction and force. And it's doubly difficult to imagine that whatever would come about spontaneously would be BETTER than what is designed and imposed from above.
Much the same, I believe, is true about the way people today think of law. Because the state is its chief enforcer today — and because the state imposes so much legislation (and calls it "law") — many people today dismiss out of hand the notion that law can be produced by some means other than central state design and imposition.
It's much like the debates that raged throughout Europe from the late middle-ages until about 150 years ago: because religion was always supported by the state, with some creeds favored and others persecuted, the belief was widespread that the state simply HAD to be enforce religious belief — that freedom of religion would result in utter anarchy, a deterioration of social order, a war of all against all.
Of course, we know now that neither steel production nor religious beliefs need to be planned by, or even endorsed by, the state.
The same is true of law. History is full of examples of law emerging and changing spontaneously. The Law Merchant is perhaps the most instructive such development.
Don,
Those are both interesting examples but they're addressing different questions than the one I asked (which were related to Rudy's statements). The example of Lex Mercatoria from one-thousand years ago is about a time where trade was much less complex and much slower (that's why I qualified my question with "complex markets like those typical in the west"). In the second example, it's true that modern international trade has no single sovereign power governing it. However it is absolutely and emphatically not true that there is no government involvement in supporting (or perhaps, in your view, hindering) that trade.
My point is not that trade is impossible without governments. Indeed, my belief is that trade preceded government by tens of thousands of years (unless you consider an alpha-male leading a small tribe a form of government).
Rather, my point is that modern, complex economies with their associated domestic and international trade exist only with the presence of governments and I believe that it is a wild leap of faith that these markets and trade, even though flawed in many ways, would ultimately be inferior to other theoretical frameworks under which markets could operate.
Yes, there is great cost to government. However, there will always be great cost to any human system that supports a modern civilization.
Bret,
Trade in the Mediterranean, even 1,000 years ago, was quite complex — involving insurance, complex financing arrangements, and creative credit instruments. By any measure, it was complex commmerce
It's interesting, and revealing, to reflect the single greatest increase in the complexity of society — measured by things such as the extent of the division of labor, the increase in the mechanization of production, and the increase in the quantity, quality, and complexity of the goods and services available for consumption by ordinary men and women came about when the shackles of state control were loosened.
Freer trade did not result in chaos or penury in Britain, as many people predicted — predicted would be the result of letting consumers make choices more freely and, hence, with less 'control' by the state.
Ending slavery and liberating peasants to work as free laborers according to terms of contracts — contractual terms dictated neither centrally nor by tradition — did not result in a chaotic labor market in which either workers were exploited or businesses found themselves unable to hire qualified workers.
Having money supplied privately in Scotland for much of the 18th and the 19th centuries did not result in out of control inflation or other monetary problems. (By the way, George Selgin, in his wonderful new book "Good Money" explains how private entrepreneurs, not the state, supplied small-denomination coins that were vitally important to commerce in the 19th century.)
Freeing people from central control of both the state and of many superstitions resulted in the wealth explosion that we call the industrial revolution. The complexity of society grew as central control receded.
cpurick,
Am late to the discussion that you kicked off.
I am with Don 100% on this. Free markets do not need government but they do need law.
A form of government that provides law but not intrusive government is Kritarchy.
"Kritarchy is a political system based on equal justice for all and the concept of natural rights. It differs from other political systems by its application of the rules of justice. Under kritarchy even courts of law, police forces and other organisations that look after the day-to-day business of maintaining law, are denied any power, privilege or immunity that is not in conformity with natural law. Every person is entitled to offer judicial or police-services to willing others; no person can be forced to become a client of any court of law or police force against his will. In short, under kritarchy judicial and police-services are offered on a free market, which is considered to be the natural law of the human world insofar as exchanges of goods and services are concerned."
The ancient Jews lived under Kritarchy successfully for centuries, but then got stupid and clamored for a King.
After the U.S. pulled out of Somalia in the early 1990s, instead of chaos, order emerged under Kritarchy and the ability of wartorn Somalia to prosper in peace amazed observors.
However:
The U.N and individual nations simply could not stand the thought of a nation not having a central government and have been operating doggedly to install a central government and war/conflict and poverty are returning to Somalia as the U.N. meddles in the internal affairs of Somalia.
Some sort of government is necessary for markets to operate. Otherwise, there would be no way to enforce things like property rights, contracts or the rule of law.
It may be that everybody would be better off if they each voluntarily respected property rights, upheld their ends of bargains and didn't go around killing people to take their stuff. But, all you need is one guy to decide "I have the bigger gun. I'm going to take what I want and nobody's going to stop me," and the whole system breaks up as others follow suit.
So, what happens? Well, everybody else gets together, decides "This isn't working. We need rules. And we need to kill that guy with the gun." So, they go capture him or lock him up or something, and scare others into following the rules.
And, that — a set of rules backed by a threat of force — is a government.
Now, I'll agree that we could do away with huge portions of the US government, and markets would still work. But, you can't get rid of things like common law (both civil and criminal) and a system to enforce it, the police and the military. Or, rather, you can get rid of those, but then you need to come up with substitutes.
Don,
I don't disagree that excessive centralization stifles economic activity. I also don't disagree that it's possible for markets, at least at some level of functionality, to operate without the involvement or perhaps even the existence of government(s). Furthermore, I agree that the economy of the United States would be better off with fewer laws, regulations, and taxes than it currently has.
However, I seriously doubt that totally eliminating all governments would result in greater economic activity and higher levels of prosperity and well-being for the inhabitants of the planet. That's a pretty hard case to make and the fact the some economic activity has occurred parallel to governments isn't adequately convincing.
I haven't yet read Leeson's essays, but since they're free, hopefully I'll get to it. Maybe those essays will convince me.