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Private GovernanceCreating Order in Economic and Social Life$

Edward Peter Stringham

Print publication date: 2015

Print ISBN-13: 9780199365166

Published to Oxford Scholarship Online: August 2015

DOI: 10.1093/acprof:oso/9780199365166.001.0001

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Beyond the Deus ex Machina Theory of Law

Beyond the Deus ex Machina Theory of Law

Chapter:
(p.9) Chapter 2 Beyond the Deus ex Machina Theory of Law
Source:
Private Governance
Author(s):

Edward Peter Stringham

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199365166.003.0002

Abstract and Keywords

Most theorists are strongly influenced by legal centralism, the view that order is attributable to law and that government police, courts, and regulators have the knowledge and incentives to solve problems in a low-cost way. But whether one hopes for government to eliminate fraud, deal with principal-agent problems, protect property rights, or enhance markets in any other way, law enforcers are often absent, or incapable of, or uninterested in, solving problems. Assuming that government will solve the problem is a nonstarter. With external enforcement lacking, private parties can either live with problems or take steps to mitigate them using private governance.

Keywords:   legal centralism, nirvana fallacy, incentive problem, principal-agent problem, private governance

2.1. Introduction

In Euripides’s (408 B.C.) play Orestes,1 the stage is set by describing Orestes’s grandfather Atreus, who killed Thyestes’s children and feasted on them, and Orestes’s father, Agamemnon, who is later murdered. Soon after, Orestes kills his mother and becomes sick from a cruel wasting disease, his mother’s blood goading him into frenzied fits. Orestes’s sister Electra spends half her life weeping and wailing about her being a maid unwed, unblest with babes, and dragging out a joyless existence as if forever. Orestes’s uncle, Menelaus, arrives to look for his wife Helen, whom he suspects has been murdered by Orestes, but Helen’s body is nowhere to be found. Menelaus finds Orestes and his friend Pylades with a sword at the throat of Menelaus’s daughter, Hermione, and they threaten to kill her and burn the family palace. “Ah me! what can I do?” Menelaus declares. With 95 percent of the play complete (the final 2.5 pages remain in the Coleridge translation), matters are looking pretty grim. But right before the very end Apollo appears from above with Helen, whom he has rescued from death. Apollo announces that Helen is granted immortality in the mansions of Zeus and will be honored with drink-offerings as a goddess forever. Apollo tells Orestes that Orestes will return to Athens and go on trial before the gods, but win his case, marry Hermione, and become ruler of Argos. Apollo takes the blame for forcing Orestes to murder his mother and says he will bring about reconciliation. Apollo says that Menelaus will become ruler of Sparta, and Menelaus wishes Helen well in heaven’s happy courts and gives (p.10) his blessing to Orestes to marry his daughter. Apollo declares, “Repair each one to the place appointed by me; reconcile all strife.” The end.

It might be nice if the world’s problems were solved that way, but commentators from Aristotle to Nietzsche argue such writing is questionable.2 The deus ex machina (god from the machine) plot device is named for Greek plays that used gods played by actors suspended on cranes to suddenly solve characters’ problems. One sees this in all sorts of movies where problems are solved last minute by an outside entity. In the end of the not-so-acclaimed movie Jurassic Park 3 the characters are saved by the U.S. Navy, and in the end of the even less acclaimed movie Matrix 3, Keanu Reeves is saved by a mysterious supercomputer named . . . Deus Ex Machina.

Not only is the deus ex machina popular in poorly written fiction, it is also popular in bad social science. In many social science and policy debates theorists think of potential problems and assume government can solve them (Demsetz, 1969). Although they do not view government law enforcement (regulators, police, and courts, which I will refer to as “the law”) as a literal deus ex machina, most theorists view the law as exogenous corrective device. Whether the issue is security property rights or facilitating exchange, the idea is that government can and will fix problems.

Ellickson (1991, p. 138) uses “the phrase legal centralism to describe the belief that governments are the chief sources of rules and enforcement efforts.” Legal centralism takes various forms, but all forms assume that markets would not be able to fully function without government rules and regulations.3 In addition to assumptions about the ability of markets to function without government, legal centralism includes assumptions about the efficacy of government. For Williamson (1983, p. 520), “Most studies of exchange assume that efficacious rules of law regarding contract disputes are in place and that these are applied by courts in an informed, sophisticated, and low-cost way. . . . The ‘legal centralism’ tradition reflects this orientation.”

The strongest forms of legal centralism consider legal rules or regulation costless (notice, for example, that the Securities and Exchange Commission almost never mentions the costs of its policies), while weaker forms of legal centralism recognize some costs of legal rules or regulations but still consider them absolutely necessary. For Ellickson (1991, p. 138), “The quintessential legal centralist was Thomas Hobbes, who thought that in a society without a (p.11) sovereign, all would be chaos,” but he argues that such thinking strongly influences law and economics scholarship today: “The seminal works in law and economics hew to the Hobbesian tradition of legal centralism.” My professors James Buchanan and Gordon Tullock are often skeptical of government in general, yet they ultimately follow Hobbes and believe that government enforcement is essential for markets. As Buchanan (1975, p. 163) writes, “The protective state has as its essential and only role . . . one of enforcing rights to property, to exchanges of property, and of policing the simple and complex exchange processes among contracting free men.”

Classical liberals typically advocate two main functions for the government legal system: protecting property rights and enforcing contracts to deal with force and fraud. One could support one function but not the other (e.g., calling on government to protect property rights but relying on private mechanisms for facilitating exchange), but most believe government must do both. As Richard Epstein (1999, p. 285) comments, “Under its classical liberal formulation, the great social contract sacrifices liberty, but only to the extent that it is necessary to gain security against force and fraud. Perhaps we might go further, but surely we go this far.” Epstein suggests that one would be a “naïve visionary” to “believe that markets could operate of their own volition without any kind of support from the state.” Likewise, Rajan and Zingales (2004, p. 293) write, “Markets cannot flourish without the very visible hand of government, which is needed to set up and maintain the infrastructure that enables participants to trade freely and with confidence.” Such a sentiment is also found in Mises ([1927] 2002, p. 39): “The state is an absolute necessity, since the most important tasks are incumbent upon it: the protection not only of private property, but also of peace, for in the absence of the latter the full benefits of private property cannot be reaped.” And the sentiment is found in Kirzner (1985, p. 680), who writes, “Preservation of this fundamental framework of individual rights calls for government that protects these rights against potential enemies.”

The strongest forms of legal centralism consider property rights and exchange impossible without government enforcement, while weaker forms of legal centralism recognize property rights and exchange as possible without government enforcement, but believe they would be extremely limited. To authors such as North (1990), Landa (1994), Olson (1996), Frye (2000), and Soto (2000) advanced markets and sophisticated exchange crucially depend on government making them legal centralist in some ultimate sense. Soto (1989), for example, describes how most Peruvians live on private property that is not recognized in any government registry, but ultimately Soto (2000) believes that advanced markets would require government to codify these property rights. Similarly North (1990) and Olson (1996) recognize that exchange often occurs in absence of government enforcement (one need not use law to trade among families, friends, or close-knit groups), but ultimately they argue that sophisticated markets such as those in capital markets would (p.12) be impossible without government enforcement. A common prediction is that cooperation breaks down as groups become larger or more heterogeneous, or trade takes place through time (Landa, 1994, p. 60; Frye, 2000, p. 34). Although Frye (2000) recognizes that private governance is important, he believes that private governance must be ultimately be subordinate to and backed up by law and that advanced markets cannot work without law.

2.2. When the Assumptions of Legal Centralism Do Not Hold

Legal centralism is a clean theory that lets people declare, “Here is how I would like the legal system to shape the world,” and is thus understandably popular. It does, however, rest on many theoretical and empirical assumptions, and if some of those assumptions do not hold, the theory may not be useful for understanding or shaping the world. Whether one likes it or not, “market augmenting” (Olson, 2000, p. xi) legal agents might not exist, be inaccessible, have diverging interests, or know too little to help out. Instead of assuming that government has the ability and interest to solve problems, we must look to see if certain conditions are met. Whenever a potential problem exists, one should ask the following questions:

  • Do regulators, police, and courts have the ability to solve the problem in a low-cost way?

  • Do regulators, police, and courts have the knowledge to solve the problem?

  • Do regulators, police, and courts have the incentive to solve the problem?

Where the legal centralist assumes that the answers to these questions will be yes, the researcher of private governance considers the possibility that regulators, police, and courts may be lacking in important ways. Knowledge and incentive problems exist (Barnett, 1998; Benson, 1990; Boettke, 2005, 2012; Hoppe, 1989; Pennington, 2011; Rothbard, 1973, 1977; Stigler, 1975; Stringham and Zywicki, 2011a). Whether one hopes for government to eliminate fraud, deal with principal-agent problems, protect property rights, or enhance markets in any other way, simply assuming government will solve the problem is a nonstarter. If the answer to one or more of the above questions is no, then unmet needs exist, and then we should ask:

When unmet needs exist, will the private sector have the ability, knowledge, and incentive to solve them?

In many cases there is no solution, and people just have to live with the problem. In many cases, however, private parties will notice problems and (p.13) look for solutions through private governance. The chapters in this book describe cases in which market participants clearly could not rely on regulators, police, and courts to solve their problems. This explains why parties need to turn to private governance. Thinking about institutional, Austrian, and public choice economic insights in the area of governance gives reasons to question the legal centralist approach.

2.2.1. Do Regulators, Police, and Courts Have the Ability to Solve the Problem in a Low-Cost Way?

“What? This $25 long-distance phone card is bogus?” The thoughts “I’ve been had” and “This cannot be happening to me” raced through my mind. I contacted various law enforcement agencies and lawyers to initiate a lawsuit. For weeks I sat by the phone, but for some reason nobody returned my call. I have been living with this missing $25 and devastation for the past two decades. . . . Actually I did lose $25, but I never ended up making any of those calls. How much good would it have done? I could have assumed that relying on courts would have been relatively low cost. But assuming something so does not make it so. Because the cost of initiating a lawsuit, including the cost of my time, far exceeded what I reasonably could expect to get back, I preferred treating the $25 as a sunk cost over spending time and money through avenues with little prospective gain. At the time I had no private solution either, but the fact that legal solutions are costly or often nonexistent should be the starting point of our analysis, as that reality shapes how individuals and businesses choose.

A $25 phone card is trivial, but it’s actually the just tip of an iceberg. Each day trillions of small transactions take place, and although theoretically it is possible to take a party to court each time another party does not follow through with its part of the bargain, at a minimum doing so would be very costly. What percentage of transactions in your typical day do you think could be easily enforced in courts of law? Where would you even begin? Even the most litigious person must weigh the expected benefits of initiating a lawsuit (what you could be awarded times the estimated probability of winning the lawsuit) with the cost of hiring a lawyer and going to trial, the hassle of dealing with the courts, the value of your time, the inconvenience of having assets held up in the legal system, the negative repercussions of being seen as a litigious person, and so on. Whenever the cost of enforcement exceeds the value of what is at stake or what one can reasonably expect to gain through law, then private parties must simply live with the problem or seek private solutions.4

(p.14) How significant are the costs of formulating, implementing, complying with, and enforcing rules (Hertog, 1999, p. 225)? How significant are the costs of hiring lawyers, going to trial, having facts verified and interpreted, and after the trial, getting the party in the wrong to rectify the situation (Barzel, 2002; Bernstein, 1992; Hart and Moore, 1999; Klein and Leffler, 1981; Telser, 1980; Tirole, 1999)? The costs of using courts are often significant, and whenever they outweigh what is at stake in a lawsuit, most people will not bother with the law. Galanter (1981, p. 3) describes how “courts resolve only a small fraction of all disputes that are brought to their attention. These are only a small fraction of the disputes that might conceivably be brought to court and an even smaller fraction of the whole university of disputes,” and transactions with disputes are but a fraction of the total number of transactions.

Shadow-of-the-state theories of order suggest that even if most transactions are not litigated, the prospect of litigation, punitive damages, or high fines makes the expected costs of bad behavior too high. Yet the greater the “transaction costs” of using various aspects of the law, the greater the likelihood that the legal system deviates from textbook ideals (Williamson, 1996, p. 142). That helps explain why even with high fines, government cannot stamp out drugs in society, or even prisons, and that helps explain why many petty fraudsters continue to exist even though fraud has been illegal since time immemorial.

The cost of using the legal system can be significant not just for small dealings but for large dealings as well. Businesses that have millions of dollars at stake in transactions or require fulfillment to move forward with business do not want to have assets tied up in government courts. When I worked on a trading desk in the late 1990s, we needed to make sure each poorly executed trade was rectified by the end of each day, not the end of the year. Our trading desk worked out dozens of potential problems daily, and not once did we or our counterparts initiate a lawsuit.

The cost of using the legal system can be significant not just for straightforward transactions but even more so for complex ones. In simple models two parties agree to exchange two assets, and government simply needs to verify whether each party delivered (Buchanan, 1975, p. 104). Sophisticated transactions, however, often involve complex bundles of goods that are not easily verifiable by third parties (Lancaster, 1966; Hart and Moore, 1999; Dore and Rosser, 2007). For example, a court can observe parts of a bundle, such as whether custom software was installed on customers’ machines, but be less able to evaluate the other more subjective and more important elements of the product. When goods have a thousand attributes (Microsoft Windows and Macintosh operating systems each have tens of millions of lines of code that interact with each other), government may be able to reasonably evaluate only a handful of them. How significant are the costs of writing contracts describing multifaceted and heterogeneous goods, stipulating the myriad of possible (p.15) contingencies (if that’s even possible), remedies when specific performance is not met, or relying on the legal system to fill in these details (Barzel, 2002, p. 37; Lind and Nyström, 2007)? When was the last time you sued Microsoft or Apple when your computer crashed?

The cost of using the legal system may be significant only in a few areas, or it may be extremely widespread. One of the biggest markets is the labor market (according to some estimates, labor accounts for roughly 75 percent of national income [Gomme and Rupert, 2004]), yet Vandenberghe (2000, p. 541) describes it as being full of implicit contracts that are “too vague to be legally enforceable.” Have you ever worked with someone who shows up to work and follows all the rules but is not effective at actually producing value? Does law enforcement help businesses make unproductive employees more productive, or does it make it difficult for companies to fire them? If regulators, police, and courts do not have the ability to solve a problem in a low-cost way, then unmet needs will exist.

2.2.2. Do Regulators, Police, and Courts Have the Knowledge to Solve the Problem?

In fall 2011, thousands of protesters converged in downtown Manhattan through the Occupy Wall Street movement, demanding that government rein in and increase regulations on the financial sector. One list of demands at the website OccupyWallStreet.org (2011) called for everything from “outlawing credit rating agencies” to “immediate across the board debt forgiveness for all. Debt forgiveness of sovereign debt, commercial loans, home mortgages, home equity loans, credit card debt, student loans and personal loans now!” Despite the economic nature of most of their demands, a New York Magazine survey (Klein, 2011) of Occupy Wall Street protesters found that in response to the question “Who is the chairman of the Federal Reserve?” 42 percent answered “Don’t know” (only 38 percent could answer correctly), in response to “What is the ‘S.E.C.’?” 68 percent answered “Don’t know,” and in response to “What is the Dodd-Frank Act?” 84 percent answered “Don’t know.”5 For a movement that focuses on economic issues, protesters’ knowledge of economics (not to mention their knowledge about the importance of bathing at least once per month) does not appear to be that strong. Without irony, Harvard law professor and now U.S. senator Elizabeth Warren states, “I created much of the intellectual foundation for what they do,” and “I support what they do” (Johnson, 2011). Meanwhile, on the productive and better-dressed (p.16) part of Wall Street, trillions of dollars of shares exchange hands. The masters of the universe on Wall Street could sit around and hope that the state will be a “market-augmenting government” that will “expand the dominion of markets by providing rules that facilitate voluntary and reliable trade” (Azfar and Caldwell, 2003, p. 3) and hope for “effective judicial enforcement of complicated contracts” (Glaeser, Johnson, and Shleifer, 2001, p. 854). Or they can recognize that government officials often lack an understanding of the markets they are allegedly bolstering. While private parties are figuring out how to make incredibly complex financial deals possible, government officials are debating banning short sales or imposing price controls on interchange fees (Zywicki, 2011).

Ludwig von Mises and Friedrich Hayek argue that government is not omniscient and that without markets in consumer and producer goods, central planners cannot calculate whether the value of what they are producing is worth more than its costs (Hayek, 1945; Mises, [1920] 1990; Salerno 1990).6 Hayek describes the market as a discovery process in which different people get to test out different ideas and see what best fulfills customer desires. Profits and losses provide constant feedback about whether firms are serving their customers, but such feedback is absent with government. Although Hayek used terms such as discovery to describe the process of common-law judges figuring out the best legal rules, he did not entertain the idea that all rules and regulations be subject to the market test (Stringham and Zywicki, 2011). But what if he did? How will a monopolist government best identify problems, and how will it know where to devote scarce resources? How will government measure the costs of additional rules and regulations, and how will it measure the potential burden they impose on subsequent parties? What is the likelihood that the government designs and enforces rules in an optimal way, and what is the feedback mechanism when it does not solve problems or makes problems worse? Just as the central planner assumes that without property rights, prices, profits, and markets the government can engage in rational economic calculation, the legal centralist assumes that government, a monopolist legal and regulatory system, can effectively weigh the effects of each rule to prevent problems in markets. If regulators, police, and courts lack the knowledge of what rules or enforcement procedures are augmenting markets and what are harming them, then unmet needs will exist.

(p.17) 2.2.3. Do Regulators, Police, and Courts Have the Incentive to Solve the Problem?

San Francisco has a lot of gentle people with flowers in their hair, but it also has a fair share of down-and-out drug addicts. I remember walking down the aisle in the Safeway grocery store across from the San Francisco Giants’ ballpark, AT&T Park, and observing a man lying flat in the middle of the aisle, staring up into the air.

Several employees came over, thinking he had fallen. “Are you okay?” one asked.

“Yes, I am completely fine.”

“May we help you get up?”

“No, there is no problem whatsoever. What is the problem?” he asked, bothered that they were asking questions of a normal person simply minding his business. In his drug-influenced alternate universe there was no problem with him lying there for hours, but to a high-volume grocery store each minute of his presence meant lost sales in the short run and fewer customers in the long run. To Safeway, matters like this are a potentially big problem.

When something is a big problem to a merchant such as Safeway, especially to a merchant that pays so much in taxes, one could assume that government police will set their priorities accordingly. But the San Francisco Police Department has other priorities. Even a well-meaning government police force has to prioritize its time, and no matter how important the issue is to Safeway, the police can lack incentives to cater to Safeway’s needs. In San Francisco, the police classify a merchant call about removing an unwanted guest as a low-priority event and usually will not send anyone at all.

James Buchanan and Gordon Tullock asked economists to consider the possibility that government agents consider their well-being when making decisions. Buchanan never applied public choice to law (instead Buchanan [1975] describes government enforcement mechanistically, like an alarm clock acting), but what if he did? A weak version of the public choice hypothesis is that law enforcement officials care about the public but also consider their own well-being when making choices. They might like protecting property rights or facilitating economic exchange on other people’s behalf but not be very motivated, in the same way that many government teachers work, but not as hard as they could. A stronger version of the public choice hypothesis is that law enforcement officials care about their personal well-being and not that of their subjects. Police objectives can include relatively benign failings such as keeping patrolling to a minimum, consuming leisure, or pursuing overtime, or more malevolent failings such as using the law to extract resources or exert power. Legal centralists’ wishes notwithstanding, law enforcement officials may not have maximizing utils in society or maximizing Kaldor-Hicks efficiency in their objective function.

(p.18) Surveys indicate that elected officials are seen as “influenced by special interests, looking out for themselves” (Pew Research Center, 2010, p. 50), and only one in five Americans says “they can trust the government in Washington almost always or most of the time”(Pew Research Center, 2010, p. 13). Are law enforcers, regulators, judges, or police different, or should we consider the possibility that law enforcers care about advancing their career, income, power, or leisure? Should we assume that officials sprout angel’s wings when they step behind a regulator’s desk or put on a policeman’s uniform or a judge’s robe? The many cases of police brutality and prosecutorial misconduct (Roberts and Stratton, 2008; Balko, 2013) suggest that the hypothesis of self-interest is at least often true. When government is not sufficiently motivated to solve people’s problems, then unmet needs will exist.

2.2.4. If Unmet Needs Exist, Will Providers of Private Governance Attempt to Meet Them?

If regulators, police, and courts are deficient in any of the above ways, then potentially important unmet needs can exist. Here the private sector will either have to live with a problem or attempt to solve it. Why wouldn’t they? Of course, providers of private governance are not dei ex machina. Imperfect knowledge, conflicting interests, transaction costs, and other collective action problems will always prevent the economy from reaching nirvana. In some cases, especially with problems on government-owned land that lacks a residual claimant, there are no private solutions, or private solutions that are not worth implementing. (A residual claimant is typically an owner of an enterprise who profits when things go well, and earns losses when things do not. Government property is typically not owned and no one makes profits or suffers losses based on its good or bad management.) For example, it does not make sense to hire an armed guard to watch over a $100 bicycle. Certain problems might persist simply because providers of private governance have yet to figure out solutions.

In many cases, however, private parties can profit by ameliorating problems, and the more important the solution, the larger the potential profit opportunity (Klein, 2002). Putting governance into the hands of private parties encourages them to look for creative solutions, just as entrepreneurs look for ways to better serve consumers. Demsetz (1967, p. 352) maintains that issues (such as establishing the property rights in beaver) are more likely to be addressed as the value at stake increases. Is the same true for unmet needs of governance? The question is more than just academic. Before conducting business everyone must evaluate whether one can rely on regulators, police, or courts to protect one’s property or facilitate exchange. Setting up in areas with (p.19) lots of criminals, such as Washington, DC, and simply assuming that regulators, police, and courts care about one’s problems may not be the best business model. Because regulators, police, and courts are so often incapable of or uninterested in solving problems, private parties must rely on mechanisms of private governance. PayPal founder Peter Thiel once told me that one can observe suboptimalities in the world and complain about them or consider the tremendous good one can create by eliminating them. PayPal noticed an existing set of problems and found ways to solve them. The company helped facilitate nonrepeat transactions between complete strangers around the world and enriched many people as a result.

Providers of private governance will never solve all problems, in the same way that entrepreneurs will never invent every possible product. But just as profit lures entrepreneurs to find ways to better serve customers, profits lure providers of private governance to find better ways of protecting property rights and facilitating exchange.

2.3. Summary and Thoughts

Legal centralist tendencies seem engrained in many people. I recall the Friday in July 2000 when my professor and I had just landed in Prague, a city that was rapidly liberalizing but still had many remnants of communism. On our way for food and drink, my professor was attempting to take money out of a perfectly modern bank machine. The machine required the user to retrieve the card before the machine dispensed the cash, but when he did not retrieve his card in time, the machine thought he forgot it and sucked it in. He stated, aghast, “What do I do? The bank will not be open until Monday.” His free-market credentials notwithstanding, my professor’s reaction was nothing less than “Let me seek help from these nearby police officers.” After some protestations, I realized the futility of convincing him that GE Capital may not give the Czech police keys to their bank machines. The Czech police, predictably, were unable to retrieve his card. Why didn’t GE Capital give the Czech police access to their vaults? Why did they even spend private resources on security when they could rely on around-the-clock protection from government? To ask these questions is to answer them. No deus ex machina solution was available, so my professor had to wait until Monday; GE Capital judged the best outcome to be holding potentially lost cards for safekeeping rather than allowing former communist policemen to open its bank machines.

Despite its popularity, legal centralism may not be helpful for attempting to understand and shape the world. Market participants have to be aware of imperfect government solutions, not just with bank cards but with all areas of economic life. Depending on the severity of its deficiencies, government may be anything from an inept protector of property rights and facilitator of (p.20) economic exchange, to their primary disruptor. Throughout history governments have had a tremendous track record of undermining property rights and interfering with markets, but even if one assumes that government is ultimately beneficent, one must recognize that government does not meet all needs, and that explains why people turn to private governance.

Rather than assuming that government will fix one’s problems, people know they must take many steps if they want their problems addressed. The examples in this book describe not hypothetical deus ex machina solutions but actual solutions of private governance. If you are a broker in seventeenth-century Amsterdam, should you assume that government officials understand your advanced financial transactions and will work to make them possible? If you are a broker in eighteenth-century London, should you assume that officials want to make your market as orderly as possible? If you are a merchant in nineteenth-century San Francisco, should you assume that government police will make sure your shop is safe? If you are an online processing company at the beginning of the twenty-first century, should you assume that government will protect you from anonymous fraudsters? If you are a multinational firm with millions of dollars at stake in a transaction, should you assume that courts around the world will adjudicate your case in a fast and fair manner? The legal centralist perspective might be correct. Government agents may have the knowledge, incentive, and ability to solve the public’s problems in a low-cost way. Or they may not. The demand for private governance exists because government is not a deus ex machina.

Notes:

(1.) I create this paragraph abridgement almost entirely using exact phrases from the translation by Coleridge (1893).

(2.) Abel (1954) argues that Euripides’s use of the deus ex machina plot device is not a fault but an excellence that intends to get the audience to think about the secular versus the divine. Abel may be right to defend Euripides specifically, but I doubt whether he would defend the use of the deus ex machina plot device in movies starring Keanu Reeves.

(3.) Legal centralism is found among various normative frameworks, among advocates of rights, utilitarianism, wealth maximization, and much else, regardless of one’s support for markets or other political perspectives.

(4.) I am not arguing that the many litigious parties and million lawyers in the United States do not exist. Their mere existence, however, does not prove that they are augmenting markets. Instead, many simply are using the state according to Bastiat’s ([1848] 1995) description, in which “The state is that great fiction by which everyone tries to live at the expense of everyone else.”

(5.) For readers who did not live in the United States at the time of this survey, the correct answers were Ben Bernanke, the Securities and Exchange Commission, and a major set of financial regulations signed into law in 2010.

(6.) For example, a road might be valuable, but without knowing the opportunity cost of the inputs (stone, cementing agents, labor, and land) or the value of the road to consumers, government can only guess whether the road is worth more than what otherwise could be produced. With markets, producers can see the prices all of their inputs and outputs, which enable them to calculate whether it makes sense to produce any given product or to produce it in a different way. Without markets, such feedback is absent (Mises, [1920] 1990).