August 26, 2008

Do Markets Need Government?

  • Peter Leeson

    Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics

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Do markets need government? Virtually every economist believes they do. Even the most libertarian thinkers argue that markets require government to establish the rules of market exchange and to enforce these rules. As Milton Friedman 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 upon’ (Friedman, 1962: 15). Markets, however, may be better at producing institutions of enforcement of their own than we think. Could economists have underestimated the power and beauty of markets in this regard? This question is of more than mere hypothetical interest. At least 10 per cent of the world’s governments are classified as ‘weak or failed’ (Foreign Policy, 2006). In these countries, the state is so corrupt, fragile or otherwise dysfunctional as to create anarchic (as in the case of Somalia) or ‘near anarchic’ conditions. Citizens cannot rely upon the civil magistrate to uphold contracts or protect individual property rights. Furthermore, international market activity, which now comprises close to a quarter of world GDP (World Bank, 2005), has no overarching supranational authority to interpret or enforce commercial agreements. In these markets as well, government cannot be relied upon to create or enforce the rules of the game required for exchange relationships to thrive.

Nevertheless, markets, in both ‘weak and failed states’ and internationally, flourish. The long-standing existence of vibrant markets under conditions of real or quasi-statelessness suggests that private ‘rules of the game’ must be possible without government. This chapter examines these rules, how they emerge, and how they are enforced. It investigates whether there might be something like ‘laws of lawlessness’. I consider two major areas of law: commercial or contract law and criminal law. The first part of this chapter examines how contract law might be provided privately and supplies evidence for this possibility. The second part examines how criminal law might be provided privately. Unlike contract law, the question of criminal law under anarchy has received almost no treatment. In addition to exploring this issue theoretically, I also consider evidence for the spontaneous evolution of criminal law without government.

Citation (Chicago Style)

Leeson, Peter T. "Do Markets Need Government?" In The Legal Foundations of Free Markets, edited by Stephen F. Copp, 42-64. London: Institue of Economic Affairs, 2008.