The idea that markets need government is as old as government itself. Even Milton Friedman believed this was true. As he put it: “government is essential both as a forum for determining the ‘rules of the game’ and as an umpire to interpret and enforce the rules decided on.”
According to conventional wisdom, Adam Smith’s “invisible hand” can privately generate market order within well-defined institutions of property rights and contract enforcement. But it can’t privately generate these institutions themselves.
My chapter asks: why not?
The obstacles society confronts when it comes to creating encompassing legal rules and enforcing these rules without government are difficult ones indeed. But precisely because the losses individuals stand to suffer from failing to overcome these obstacles are so large, they have strong incentives to do so.
The private governance solutions that individuals devise without government to secure social cooperation aren’t perfect, of course. But then again, neither is government. My chapter intends to show that private governance solutions are considerably more robust than we usually think. They can, and have, overcome the absence of state-created laws and enforcement – in some cases quite successfully.
To explore this argument, I consider the spontaneously-ordered legal foundations of medieval international trade – foundations that largely support international commerce to this day. I also examine the institutions that interior producers in 19th-century Angola developed to transform their economic partners’ behaviour from banditry to trade. Finally, I discuss the decentralised legal system that emerged to govern the violent interactions of the Anglo-Scottish Border Reivers.
Do markets need government? At the very least, the answer to this question is more ambiguous than we normally think. Hopefully, my chapter will help spur additional thinking about why the answer just might be no.