Assume Anarchy? Peter J. Boettke Constitutional Economics Econ 828/Fall 2005 28 November

Analytical and Empirical Relevance of Failed and Weak States The “Giveness” of Institutions of Property and Contract in Neoclassical Economics Exogenous Process --- theory of adjustment of variables within fixed parameters Endogenous Evolution --- theory of changes in the parameters The Reality of Ambiguous Property Rights and Non-existent Enforcement Former Communist States War Torn Regions Third World Countries

The Contemporary Landscape

Governmental Capabilities: Scale, Scope and Strength Market “failure” and the Public Goods Argument Market Enabling Institutions Private property and freedom of contract Market Preserving Institutions Federalism, judicial independence, central bank independence Market Destroying Institutions Unconstrained Predation by Private and Public Actors

A Strong Minimal State?

Ambiguity in Rule Regime Changes

The Social Dilemma C1, C2 Share Extensive Form C1 > 0 C2 > 0 W2 > C2 Invest Player 2 L1, W2 Player 1 Hold Up Don’t Invest Player 2 0, 0 Hold Up Share Invest C1, C2 L1, W2 Player 1 Normal Form 0, 0 0, 0 Don’t Invest

Standard Solution to the Social Dilemma (as represented in this one sided PD game) Without government to enforce contracts, promise keeping will not be credible and thus the solution will be to not enter the game and thus pass on the gains from trade that might be available in that game. Through Repeated Interactions and the introduction of penalties for opportunism, we can turn the 1-sided PD game into a 2-sided PD game

Is the Law a Factor of Production? People, Resources and Rules Incentives and the gains from trade and the gains from technological innovation Property Rights Systems and Their Enforcement Time Horizon, Husbanding of Resources, and investment decisions Worker control systems Common Property Systems Slavery Regulation

Without the State How Does Cooperation Emerge and Get Maintained in 2-sided PD Games?

But Do We Need a State to Get Governance? Discipline of Repeated Dealings, including punishment through ostracism from trading network Information Flows concerning reputation are reliable These mechanisms degrade as group size increases!!!

The Challenge That Must Be Confronted Self governance in large group settings among socially heterogeneous agents with sufficient discount rates (cannot possibly get cooperation to be sustained if people have high discount rates [ultra high time preference] and thus don’t value the future) Cooperation in Anonymity Smith’s division of labor Hayek’s division of knowledge

State-Building and the Nirvana Fallacy The role of indigenous conflict resolution systems in social cooperation Local customs on resource access Trading traditions and evolved norms of behavior The Costs of Transition to Formal Enforcement Systems Epistemic Community and Legitimacy Interest group resistance to change