Tuesday, July 09, 2013

Does Legal Polycentrism Have a Circularity Problem?

Recently, Michael Wiebe wrote a paper criticizing legal polycentrism, the view that multiple competing protection agencies would offer results superior to that of a government monopoly.  In the abstract, Wiebe states:
To show that competition between protection agencies would have beneficial  consequences, polycentrists often cite results from price theory about market competition.  But there is a circularity problem here: markets presuppose a legal framework; hence before polycentrists can employ price theoretic arguments about market competition, they must first show that the legal requirements of markets are satisfied, that is, that property rights and contracts are enforced.
The implication is that property rights and contracts are not respected unless there is a legal entity -- one assumes, the government -- to enforce them.  It also seems to imply that prices cannot be set without this legal entity, meaning that money cannot exist without it.  This latter implication contradicts Menger's theory of the origin of money.  Of course, there are people who dispute Menger's view, but one suspects that Wiebe is not one of them.  Just as money comes into being prior to legal frameworks, so does respect for property rights and contracts.

One can imagine the first traders, crossing mountains with desirable goods from their home villages to be traded for items to be returned to and traded in those same villages.  These traders must have been confident of their ability to protect themselves and their property, either personally or with the help of more skilled defenders hired for the purpose.  They also must have had some idea of acceptable behavior, each one pursuing his own idea of legality.  There was no one that assured them that their property rights were going to be respected or their contracts enforced unless it was through their own resources.  Participants in black markets face the same challenges, each having his own idea of appropriate behavior.  These are examples of individual-based legality -- maximal legal polycentrism.

Interestingly, it seems to be more the lack of property rights and contract enforcement that brings protection agencies to the fore.  For instance, Eugen Weber's "The Western Tradition" contains the assertion that the Catholic Church began to supplant Roman officials as judges in property cases, because the latter were so corrupt.  Realizing that the police cannot protect them or their property, many neighborhoods have organized supplemental Neighborhood Watch programs.  Private arbitration is frequently part of contracts in order to avoid the risks of courtrooms where juries are generally ignorant of contract law or dismissive of property rights.  And as to the enforcement of the contracts between protection agencies and their clients, there is always the risk of violent overthrow by customers if withholding payment or changing suppliers is not an option.

The idea that informal institutions do not scale up is belied by eBay's feedback system, which rewards and punishes both buyers and sellers on an international scale.  Admittedly, there are problems with identifying those who, after defrauding buyers or sellers, close their accounts and then open new ones under different names.  eBay, of course, relies on governments to police these issues as they hold the monopoly of enforcement.  The credit reporting companies are also a large-scale reputation monitoring system that has clearly grown to supply a history of behavior to supplement the limited ability of one person to evaluate another in a single interaction (Robert Axelrod's The Evolution of Cooperation documents the increased advantage of cooperation in the prisoner's dilemma game when future interactions are expected, which credit reporting companies support by maintaining a history of interactions that is supplied to future,  currently anonymous, users.).  Even if the ability to scale up informal institutions was limited in the past, who can doubt that there are entrepreneurs ready to step in with modern technology to accomplish the task?

The fact is that polycentrism already exists and has existed on many levels.  We have the example in ancient times of the Roman state operating side-by-side with the Catholic church.  Gangs have their own rules operating within a hierarchy of jurisdictions, setting their own prices for illicit goods while existing outside the legal framework.  Inmates in prison establish illicit "hustles" in order to live better without any legal framework to protect them.  Money and trade evolved in POW camps where rules evolved subsequently to remedy "problems."  Lastly, on the nation-state level we see governments with different laws who, while not controlling common territory, do resolve problems of fugitives and differences in law, generally without violence.

Near the end of the essay, Wiebe advises the abandoning of the idea of privatization and then refers to the problem of organizing violence in society.  We may ask a question similar to Hayek's: The question is not of planning for protection but who shall plan?  Who shall organize the violence?  The central planner or the consumer by purchasing or refusing to purchase?  As the state disintegrates and expresses less and less interest in the protection of property rights and contract enforcement, individuals will have no choice but to plan for themselves.  At that point the situation may be saved by existing companies expanding their protective services or new companies with fresh approaches and technology.  At that point, whether there is an evolution into a new freer society or a reversion to another statist nightmare depends on the resources available to those who are committed to avoiding the latter.

In Wiebe's defense, it is clear that a society that has no respect for property rights or contract will not directly evolve a peaceful and private marketplace for security.  No such market system would spring into existence from a state of nature.  It is for this reason that no classical liberal or libertarian feels the need to respond to assertions that Somalia is a libertarian paradise.  An evolution in our knowledge -- the comprehension of the value of property and contract -- is required.

Also, there is no proof possible that such a market system would be stable.  It is possible that if humanity evolved a market system for protection it would devolve into despotic chaos, but that is no worse than the current situation (Robert LeFevre said it best [paraphrasing] -- "Don't worry, if you get rid of government and it isn't working, be sure that there will plenty of people ready to start one up again!").  If, however, as von Mises frequently suggested, the great majority of people value peace and prosperity, we might expect an evolutionary process in which the prey have more resources for protection than the predators have for looting.  If this situation comes to pass, stability can appear.

Finally, Wiebe states that his contention that there is a circularity problem does not constitute an impossibility proof.  He does seem to believe that there are statements about markets that must be proved in order to take conjectures about them seriously.  This justificationist approach does an injustice to market processes that are evolutionary and require no argument.  After all, if legal polycentrism comes into existence in a free society, it will not be because it has been imposed, but because it has arisen through those processes.  Libertarians who argue market outcomes through logic are displaying a lack of imagination and failing to realize that having a hammer does not turn every problem into a nail.Enhanced by Zemanta


Dave Scotese said...

I don't like that you attack an implication. Perhaps you could point out that one can easily show that the legal requirements are satisfied without being met through the *same* "legal framework" by all market participants. Look at any black market and see that not all participants are relying on the same legal framework.

Wiebe's requirement is so easily met that it fails as a decent objection.

Brian J. Gladish said...

I've edited the post and hope that I have addressed your criticism.

Brian J. Gladish said...

Michael Wiebe's response, from his Facebook page:

Michael Wiebe Brian, I'm not impressed. You write that Ebay and credit rating systems are examples of the scalability of informal institutions. But as I say in the paper:

"It is true that there are counterexamples to the standard story. Economists studying anarchism analytically have found examples which show that cooperation can be self-enforcing in cases of large groups, heterogeneous agents, or high discount rates.19 But for the most part, it seems to me that the standard theory is correct. Merely proving the possibility of cooperation without third-party enforcement is not enough to show that legal polycentrism is a robust system. Rather, it must be shown that cooperation is likely to emerge and persist, especially under deviations from ideal conditions. If future research can show that informal institutions are more scalable and robust than the standard theory says, then norms and reputation may be a potential solution to the circularity problem. But until then, the current evidence is not enough to overturn the standard theory."

You also say: "as to the enforcement of the contracts between protection agencies and their clients, there is always the risk of violent overthrow by customers if withholding payment or changing suppliers is not an option."

Given the collective action problems facing revolution, this is a very weak constraint.

You again: "It is possible that if humanity evolved a market system for protection it would devolve into despotic chaos, but that is no worse than the current situation"

This is ridiculous.

Brian J. Gladish said...

My response, posted on his Facebook page:

Michael, I didn't expect you to be impressed. I'm simply suggesting an approach that I think can be more productive for libertarians.

The problem as I see it is contained in the last sentence of your paper: "If legal polycentrism is superior to the state, then it must be shown that a polycentric organization of violence is superior to a monocentric one." Nothing "must be shown." All that is required is that entrepreneurs, if permitted to, establish competing legal entities and enough consumers patronize them that they make profits rather than losses. Whether this possibility is "superior" or not is not an issue as that is a value judgment. Also, how these companies would interact and resolve jurisdictional disputes or even how jurisdiction would be divided (by physical territory - e.g. a proprietary community or city, the mall, the toll road; or belief system - e.g. Secular Humanism vs. Christian vs. Moslem) can be imagined but hardly predicted with any accuracy.

In fact, each enterprise that comes into existence in the market is a theory -- a theory that it is solving a problem and creating a value for some set of consumers that will generate a profit. Theory in the academic sense does not precede market discovery but tries to explain it. People gambled before probability theory, prices existed before price theory, money existed before monetary theory, and interest was charged long before it was explained through time preference. No one had to show that money was superior to barter, or that putting your money in a bank was superior to keeping it in a mattress.

Brian J. Gladish said...

Michael Wiebe's response, from his Facebook page:

Michael Wiebe "Nothing "must be shown." All that is required is that entrepreneurs, if permitted to, establish competing legal entities and enough consumers patronize them that they make profits rather than losses."

Several thoughts:

First, if you want to show that legal polycentrism is a desirable system, you have to give persuasive arguments to that effect, no? I don't understand what you're trying to say here.

Second, entrepreneurs are always permitted to establish competing protection agencies; the problem is that governments have outcompeted them. In the "market for protection," people compete through the use of force; you're allowed to use force to pursue your goals, and I'm allowed to use force to stop you. This is why the free-entry criterion for competitiveness doesn't apply (see fn. 24). (Whether competing protection agencies will result in a society that respects the NAP is a conclusion to be proved, not a premise to be assumed.)

Third, you seem to be making the argument that "the market will take care of it" is the answer to the problem of how competing protection agencies would work. But this ignores the main argument of my paper: arguments about the beneficial properties of markets only hold when the institutional requirements of markets are satisfied. "The market will take care of it" is an answer to the problem of the production of bread, because this production takes place within a legal framework, i.e., the legal requirements of markets are satisfied. It is not an answer to the problem of the production of a legal system, because the issue here is whether there exists a legal framework to provide the foundation for markets in the first place.
July 23 at 11:11am · Like

Brian J. Gladish said...

My response, posted to Michael Wiebe's Facebook page:

There is no need to show that legal polycentrism is a desirable system. The only thing that is required is that some customers prefer a legal system put forward by an entrepreneur over the one extant. If there are enough customers and the price supports it there will be a profit and the enterprise will be sustained. Persuasion would be needed to _impose_ a polycentric legal system, but it's not required to have it emerge.

It would seem that you could argue that drug cartels compete through the use of force, but most of us (libertarians) don't believe that that would continue to be the case after the repeal of laws against drugs. Would Walgreen's be trying to blow up CVS? My expectation is that insurance companies would be the first to enter the property protection business upon exit by the state. Would Prudential agents be assasinating Travelers agents? You seem pretty set on this subject, so I expect that you think that this one service is directly connected to some violence gene and that peaceful competition cannot arise.

I don't ignore your argument, I reject it. Markets exist prior to legal institutions and bring them into existence in order to function more smoothly. The question is whether or not those institutions (now the monopoly of state violence) accomplish the ends intended. I don't think that they do, and legal polycentrism remains a subject of interest as long as we realize that people free to choose may not agree on the value or quality of a service offered by a single agent.