Working Paper: “Legal Polycentrism and the Circularity Problem”

September 30, 2012 2 comments

Here’s the working paper version of my previous posts on the circularity problem facing market anarchism: “Legal Polycentrism and the Circularity Problem.” Here’s the abstract:

Legal polycentrism studies the provision of security and dispute adjudication through competing protection agencies rather than a government monopoly. 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. If these requirements are not satisfied, it is illegitimately circular to draw on market competition as an argument for legal polycentrism.

I’ve expanded upon and revised my argument, so check it out!

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Notes and Fragments: Classical public choice is wrong

September 11, 2012 Leave a comment
In this “Notes and Fragments” series I will briefly discuss some ideas that I might write about in more detail in the future. See Part I, Part II.

On the classical public choice view, “Politics is about concentrating benefits on well-organized and well-informed interest groups, and dispersing costs on the unorganized and ill-informed masses.” Since voters are rationally ignorant, they don’t pay attention to politics, and special interest groups determine policy against the wishes of the majority.

But there are problems with this story. Rational voters are not gullible; if special interests fund political advertising, rational voters would treat this information as biased and discount it accordingly. Even if ignorant voters have a small chance of catching politicians engaging in backroom deals with special interests, there is an easy solution: discipline politicians with optimal punishments. When politicians are caught misbehaving, punish them harshly to adjust for the small probability of apprehension. If voters are too uninformed to evaluate government programs, they can follow the rule: when in doubt, say no. On this account, rational ignorance leads to smaller government.

Furthermore, there are few examples of policies that are unpopular. As Caplan and Stringham argue, traditional examples of special interest activity like tariffs and pork barrel spending are in fact supported by a majority of voters. Foreign aid is unpopular, but is roughly 1% of the federal budget. Are there any other existing policies that the majority does not want?

These considerations should lead us to doubt that voters are actually rational. As Caplan argues, voters are rationally irrational: that is, it is instrumentally rational for voters to be epistemically irrational. The upshot is that although the arguments of classical public choice are false, most of the conclusions are still true.

See Caplan’s notes here and here, Caplan’s “Rational Irrationality and the Microfoundations of Political Failure,” Wittman’s “Why Democracies Produce Efficient Results,” Caplan’s Myth of the Rational Voter, and Wittman’s Myth of Democratic Failure.

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Notes and Fragments: Boétie was wrong

September 5, 2012 1 comment
In this “Notes and Fragments” series I will briefly discuss some ideas that I might write about in more detail in the future. See Part I.

Libertarians often cite Étienne de la Boétie to argue that government power depends on the consent or acquiescence of the governed. If government is outnumbered and outgunned by the mass of the population, then its power must depend on the voluntary support of the public. Hence governments can be toppled if enough people withdraw their support.

It seems to me that Boétie underestimated the severity of the collective action problems facing revolution: I benefit from the revolution whether I participate or not, and since participation is costly, I’m going to stay home. Suppose a majority of people do withdraw their support, and refuse to cooperate with the government. But the government has a military; if brutal enough, it could simply make an example out of a few resisters, thereby raising the costs of resistance and convincing everyone else to give up. So even though the government is outnumbered, what matters is not numbers but military strength, and the government military can defeat any uncoordinated mass uprising.

Hence I think it’s false that government power depends purely on ideology. (See also Jiborn’s “The Power of Coordination” and Caplan’s “Mises’ Democracy-Dictatorship Equivalence Theorem: A Critique.”)

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Notes and Fragments: Roving bandits as tragic commons

September 4, 2012 2 comments
In this “Notes and Fragments” series I will briefly discuss some ideas that I might write about in more detail in the future. This is Part I.

On Olson’s stationary bandit theory, a world of roving bandits is bad because no one has an incentive to produce or invest beyond subsistence level. A profit-maximizing bandit will therefore monopolize force in his domain, provide security, property rights, and public goods, thereby giving his subjects the incentive to produce and in doing so maximizing his income from tax receipts.

Olson is basically saying that if you view people like cattle, a world of roving bandits is an open-access commons, where resources (subjects) are wasted because no one can benefit from taking care of them. As a roving bandit, if I don’t plunder this village, someone else will; hence I plunder and we end up in the tragedy of the commons. Establishing a stationary bandit means privatizing the commons, where there is a residual claimant who can capture the benefits of using the resources efficiently (given a low discount rate). Hence, the stationary bandit theory is a special case of the tragedy of the commons.

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Three Conceptions of the Burden of Proof

July 23, 2012 1 comment

In rational discourse, the burden of proof is the obligation on a person to provide evidence for their position.

I. We might think that the burden of proof rests with the person asserting a claim. But consider:

(i) Suppose A asserts claim P, and afterwards, B asserts claim ~P. Under this conception, A bears the burden of proof.

(ii) B asserts claim ~P, and afterwards, A asserts claim P. In this case, B bears the burden of proof.

Except for the order of speaking, both cases are functionally equivalent; yet the burden switches from A to B.  But surely the burden of proof does not depend on something as arbitrary as the order in which people speak.

One might object that both A and B bear the burden. This could be true sometimes. But sometimes only one of A or B bears the burden, and this conception fails to account for such cases. (For example, when P is the statement “The sky is blue.”)

II. A less naive conception is that the burden of proof rests with the person asserting a positive claim. But consider:

(iii) A asserts positive claim P, so that A bears the burden of proof.

(iv) A asserts negative claim ~(~P), so that A does not bear the burden of proof.

But since P and ~(~P) are equivalent, we have that A both does and does not bear the burden of proof. Since this is a contradiction, this conception must be flawed.

Now, it’s certainly true that the burden sometimes does rest with the person making the positive claim; if A claims that UFOs exist, then A bears the burden of proof. But there are easy counterexamples: if B makes the positive claim that the sky is blue, then surely the burden rests with those who would disagree.

III. The correct conception, it seems to me, is that the burden of proof is determined by common sense and expert consensus. If someone asserts a claim that contradicts common sense or expert consensus, then they bear the burden of proof. This conception captures what is correct in the other conceptions, and avoids their mistakes. For example, the person who claims that UFOs exist bears the burden of proof, not because it’s a positive claim, but because it contradicts common sense and expert knowledge. The person who would deny that the sky is blue bears the burden because they are contradicting common sense.

To be sure, common sense and expert consensus are imperfect. This is why the burden of proof is defeasible: if it turns out that common sense is defective, or if the experts are unreliable, then in those cases the burden has to be determined by other considerations.

In sum, simplistic formulas for determining the burden of proof are mistaken. Instead, establishing the burden requires making arguments and judgments about common sense and expert consensus.

Categories: Philosophy, Uncategorized

Anarchists Arguing Badly: Examples of the Circularity Problem

July 13, 2012 4 comments

In my last post, I introduced the circularity problem with market anarchism. To recap: a key analytical task of market anarchism is to show how a nonstate legal system could arise in the state of nature. To show this, market anarchists want to draw on the beneficial properties of market competition, as laid out in standard price theory. But market competition presupposes a legal framework; there must first be enforcement of property rights and contracts for markets to work. Now, some legal institutions, based on customs, reciprocity, focal points, etc., can arise in the state of nature, and these can be the foundation for some limited market competition. But this type of competition under imperfect property rights is substantially different from competition under perfect property rights, and the conclusions of price theory are based upon the latter. Hence market anarchists are not justified in employing the results of price theory to argue that competition between protection agencies would lead to good outcomes, unless they first show that the legal institutions assumed by price theory are already in place.

In this post, I will go through the theoretical literature on market anarchism to see how widespread and deep-rooted the circularity problem is.

Friedman

Friedman (1996) writes:

Imagine a society with no government. Individuals purchase law enforcement from private firms. Each such firm faces possible conflicts with other firms. Private policemen working for the enforcement agency that I employ may track down the burglar who stole my property only to discover, when they try to arrest him, that he too employs an enforcement agency. (235-36)

There are two ways the circularity problem can come up here. First, what is the law between individuals and protection agencies? How are contracts between individuals and protection agencies enforced? It’s not obvious that they would be self-enforcing; it’s possible that agencies would use their enforcement power to extract taxes, or coercively prevent clients from switching to a different agency. Would other agencies enforce them? This seems to just push the question up one level. And of course, one cannot appeal to market competition as a mechanism for ensuring contracts are enforced, since the very issue being considered is whether there is a legal framework sufficient to support market competition.

Second, what is the law between different protection agencies? How are contracts between different agencies enforced? Friedman seems to appeal to repeated interaction and reputation as the basis for self-enforcement. These mechanisms might plausibly secure cooperation between agencies; this should be explicitly argued, though, and it should be shown that the conditions required for repeated interaction to produce cooperation (small groups, low discount rates, etc.) are met.

Rothbard

Rothbard (1973):

[I]f police services were supplied on a free, competitive market […] consumers would pay for whatever degree of protection they wish to purchase. [...] On the free market, protection would be supplied in proportion and in whatever way that the consumers wish to pay for it. A drive for efficiency would be insured, as it always is on the market, by the compulsion to make profits and avoid losses, and thereby to keep costs low and to serve the highest demands of the consumers. Any police firm that suffers from gross inefficiency would soon go bankrupt and disappear.” (217)

Rothbard wants to employ the standard results of price theory to argue that competition between protection agencies would lead to good outcomes. But to draw on price theory, he must first show that its assumptions hold, namely, a legal framework to enforce property rights and contracts. How are these conditions met in Rothbard’s analysis?

Long

Long (2008) argues that market competition provides a stronger constitutional constraint on power than any governmental constitution: “Far from eschewing checks and balances, market anarchists take market competition, with its associated incentives, to instantiate a checks-and-balances system, and to do so far more reliably than could a governmental system.” (141) But market competition presupposes a legal framework that ensures the enforcement of property and contract. What legal framework does Long propose to rely on to provide the foundation for such competition?

Long also writes:

[T]he market anarchist objection to government is simply a logical extension of the standard libertarian objection to coercive monopolies in general … because monopolies are insulated from market competition and hold their customers by force, they lack both the information and the incentive to provide consumers with fair, efficient, and inexpensive service. The anarchist accepts these arguments, and merely asks why they should apply with any less force to the provision of legal services. (133)

The reason the standard price theory arguments for competition over monopoly might not apply to legal services is that they only hold in the context of a pre-existing legal framework. Market anarchists can only appeal to price theory arguments if they first show that property rights and contracts would be enforced. Now, some enforcement, based on norms and reciprocity, can emerge in the state of nature, but this is not enough to satisfy the assumptions of price theory.

Discussing which system best constrains tyranny, Long writes:

Under a governmental system, the cost of state policies leading to war is borne by taxpayers and conscripts, not by the politicians who crafted those policies. Under market anarchism, by contrast, agencies who resolve disputes through violence rather than arbitration will have to charge higher premiums and will thus lose customers. (146)

But it’s possible that a protection agency could externalize its costs through taxation or conscription, or by preying on its competitors and their customers. Long seems to be assuming that there is some robust legal system already in place, which assures that costs are internalized. But this is what must be shown; it cannot be assumed as a starting point.

Hoppe

Hoppe (1998) writes:

[D]efense is a form of insurance, and defense expenditures represent a sort of insurance premium (price). Accordingly … the most likely candidates for offering protection and defense services are insurance agencies. The better the protection of insured property, the lower are the damage claims and hence an insurer’s costs. (22)

But how are contracts between individuals and insurance companies enforced?

[A]ll insurance companies are connected through a network of contractual agreements of mutual assistance and arbitration as well as a system of international reinsurance agencies, representing a combined economic power which dwarfs that of most if not all existing governments. (22)

How are contracts between insurance companies enforced? Are they self-enforcing? Furthermore, if the system of insurance companies is so powerful, what prevents them from preying on customers? Competition? If so, what is the legal framework that supports such competition?

Hoppe argues that “as the result of competition between insurers for voluntarily paying clients, a tendency toward falling prices per insured property values would come about.” (24) But what if insurers compete through violent conflict? What if they coerce payments from clients? With no established legal framework, how are these outcomes prevented?

Murphy

Murphy (2002) writes:

All actions in a purely free society would be subject to contract. For example, it is currently a crime to steal, because the legislature says so. A prospective employer knows that if I steal from his firm, he can notify the government and it will punish me. But in a stateless society there wouldn’t be a legislated body of laws, nor would there be government courts or police. Nonetheless, employers would still like some protection from theft by their employees. So before hiring an applicant, the employer would make him sign a document that had clauses to the effect of, “I promise not to steal from the acme Firm. If I get caught stealing, as established by Arbitration Agency X, then I agree to pay whatever restitution that agency X deems appropriate.” (14)

But to do any work, contracts must be enforced. So are they self-enforcing? This seems implausible, since self-enforcement usually only works well in small groups with repeated interaction. Are they enforced by the arbitration agency? But then how is that contract enforced? Maybe Murphy can answer these questions. But he should answer them before he uses contracting to do any work in his theory.

Caplan

Caplan (1997) writes:

The most impressive arguments for privatizing dispute resolution have little to do with the unique attributes of the adjudication industry; rather, they are the standard arguments for the prima facie superiority of private to public supply. Namely: (1) Public bodies have no incentive to be efficient, and private ones do; and (2) Public bodies usually don’t know what is efficient, while private bodies, though not omniscient, know better. (6)

But these standard arguments from price theory presuppose a legal framework which enforces property rights and contracts. How is this legal framework provided?

Imagine this enforcement system: Throughout the society, there exist 10,000 private security and police companies (approximately the number we have today). Everyone in the society pays premiums to one such security company; in exchange, the client receives protection from criminals and arbitrary prosecution by other police firms. (25-26)

But how are contracts between individuals and protection companies enforced?

Conclusion

Overall, then, there seem to be three circularity-type problems that come up in the literature. First, how are contracts between individuals and protection agencies enforced? Second, how are contracts between different agencies enforced? Third, what legal framework provides the foundation for market competition? Market anarchists have spent some time addressing the second question, but little to none on the others. Note that I don’t mean to imply these questions are unanswerable; just that they haven’t been answered yet.

Finally, a point about method: In general, market anarchists start their analysis with a market in legal services/police and courts/security, etc. This is a mistake: since markets presuppose a legal framework, the very question being discussed is whether there can be a “market” in legal services. The analysis should instead begin in the state of nature, i.e., in the absence of formal legal institutions, and should end by deriving a market in legal services as a conclusion of the model. Since it precludes any circularity problems, this approach is superior.

Market Anarchism and the Circularity Problem

July 4, 2012 6 comments

One common objection to market anarchism is the charge of circular reasoning: in attempting to explain how a market anarchist system would work, market anarchists illegitimately assume the enforcement of property rights and contracts, which is precisely what they need to prove. Hence Lee (2008):

Anarchistic libertarianism illegitimately and self-defeatingly presupposes the existence of contract law in its account of how law and its enforcement would come to exist and have an ongoing role in an anarchistic society. (18)

And Morris (1998):

To suppose, for the purpose of demonstration, that there exists a perfectly competitive market for protective services would be, in effect, to suppose that basic security of person and goods—at least that necessary for the existence of a perfectly competitive market for protective services—is already established. The argument would be circular. (65)

(See also Holcombe 2004, p.332.)

These critics seem to take this circularity problem to decisively refute, or at least create substantial doubts about market anarchism. While I don’t think circularity rules out the possibility of market anarchism, I do believe it is an important problem for market anarchist theory, and that solving it will require considerable revisions to the theory, especially with regards to the role of market competition.

Analytically, the market anarchist project involves endogenizing the legal system and deriving the market anarchist system as an equilibrium outcome. In other words, we start from the state of nature, or the “market for protection”: a context with no enforcement of property rights or contracts. From this setting, the task is to show how anarchist legal institutions could emerge and persist. This means that it is invalid to assume that property rights are enforceable, or to assume the existence of institutions or mechanisms (such as market competition) which presuppose enforcement of property rights.

The circularity problem

Market anarchist theory puts a heavy analytical burden on market competition to show that market anarchism would have good consequences. Roderick Long (2008) argues that market competition provides a stronger constitutional constraint on power than any governmental constitution. This is because of the standard benefits of competition: producers must sell a product that consumers are willing to purchase; unsatisfied customers can take their business elsewhere; new competitors can enter the market and attract away customers; and firms that satisfy customers earn profits while firms that do not incur losses. Hence market competition provides a powerful constraint on the ability of protection agencies to use force. In law as in everything else, competition beats monopoly.

Note, however, that this argument runs into the circularity problem: since market competition presupposes enforceable property rights, the argument implicitly assumes a legal structure. But this is exactly what the market anarchist project must show, namely, how an anarchist legal structure could arise. When we analyze normal markets, we assume a legal framework, i.e., enforcement of property rights and contracts. Standard economic theory has worked out in detail what will happen in this institutional setting. In contrast, in the market for protection, we explicitly assume the absence of a legal framework; we want to derive enforcement of property rights as an equilibrium outcome. Hence, since market competition presupposes a framework of law, it doesn’t make sense to talk about competition in the market for protection as if it were the same as competition in normal markets. More formally:

  1. When treating the legal system as endogenous, enforcement of property rights is an equilibrium outcome to be derived, not a starting assumption.
  2. Market competition presupposes a framework of law, and especially enforcement of property rights and contracts.
  3. Hence, from 1 and 2, when treating the legal system as endogenous, market competition cannot be used to explain how enforcement of property rights is an equilibrium outcome.

In other words, without some reasons to think that competition in the market for protection works like it does in normal markets, appeals to market competition are illegitimately circular. (It seems obvious to me that competition in the absence of enforceable property rights and contracts does not work the same as competition in the presence of these things.) Long’s constitutionalist argument would work if it could be shown that competition in the market for protection has the same nice properties as competition in normal markets. But again, to avoid circular reasoning, this task must be accomplished without appealing to market competition.

But what about Long’s claim (141) that “a functioning market and a functioning legal order arise together; it’s not as though one shows up on the scene first and then paves the way for the other”? I disagree. If we take the chicken and egg question, it seems to me that law comes first.  Consider a state of nature: as Friedman (1994) argues, individuals could establish, without a state, at least limited property rights in possessions and land. This de facto law is the basis for market exchange, which then allows the development of more advanced legal institutions, which in turn fosters further market expansion, and so on in a virtuous circle. Hence I would define markets so that they presuppose a legal structure, which implies that law cannot be produced by the market.

(One might object: if some property rights can arise in the state of nature, why can’t competition be based on that? I agree that some beneficial competition could emerge; but this isn’t enough to warrant drawing on the strong results about normal market competition, as Long does. Regardless, this is a crucial question for future research: how does market competition work with imperfect property rights?)

None of this means that it’s impossible for an anarchist legal system to emerge in the market for protection (i.e., the state of nature); it just means that attempts to show this by appealing to market competition are invalid. The fact that a market presupposes a legal system does not rule out the possibility of a polycentric legal system.

Implications

Although the circularity problem does not mean market anarchism is impossible, I think it does show that the dominant approach to market anarchism is the wrong way to think about the issue. Up to now, most (all?) theorists have conceptualized market anarchism as privatizing the legal system, privatizing the police and courts, or turning the legal system over to the market. But due to the circularity problem, I think these approaches are incoherent: since the market presupposes a legal framework, it doesn’t make sense to talk about having the legal framework produced by the market. In general, any analysis of the market for protection that simply assumes that competition works like it does in normal markets is invalid.

What about David Friedman’s theoretical approach (e.g., Friedman 1996)? In principle, it is sound: assume an institutional setting, then derive the equilibrium. But it seems he too runs into the circularity problem. He beings his analysis as follows: “Imagine a society with no government. Individuals purchase law enforcement from private firms.” But the very act of “purchasing” requires that contracts are enforced, which in turn requires some pre-existing legal system, which is precisely what he needs to show. Maybe Friedman can show that these contracts would be self-enforcing, or that some other legal institution could enforce them, but until he does, his analysis fails to get off the ground.

So how should we think about market anarchism? I think a better approach to the question of anarchy vs. government is: the organization of violence in society. Here, market anarchism is just a polycentric organization of violence, whereas government is a monocentric organization of violence. Instead of viewing the anarchism debate as government vs. markets or monopoly vs. competition, see it as monocentric vs. polycentric organizations of violence. This approach avoids the circularity problem and allows us to get at the central issue: the properties of competition in the market for protection, or in other words, the properties of competition under imperfect property rights.

This approach is already being developed by the economics of conflict (see Bates et. al., 2002; Hirshleifer, 1995; Humphrey, 2010; and Konrad and Skaperdas, 2010). In this literature, the standard story is that unorganized violence is bad, but organized violence can be socially beneficial. Under unorganized violence, where all individuals use violence to defend property rights, the security of property claims depends on each individual’s ability to use violence to protect their property. Each individual must invest resources away from production and towards protection, which undermines the division of labor. Adding in the effects of the uncertainty of property claims and the possibility of violent conflict, unorganized violence appears to be wholly unsuitable for promoting economic prosperity.

In contrast, organized violence can be efficient if violence is used to protect property rights, and not for predation. Think of Olson’s stationary bandit, who has an incentive to provide security and enforce property rights in order to maximize his tax revenues. By having a specialist in violence, individuals can specialize in production, allowing an extended division of labor and thereby prosperity.

It seems to me that market anarchists can and should engage this literature on the question: which form of organized violence is best? As noted above, market anarchism is equivalent to a polycentric organization of violence. If anarchy is superior to the state, then it must be shown that a polycentric organization of violence is better than a monocentric one.

Bibliography

Bates, Robert, Avner Greif, and Smita Singh. (2002). “Organizing Violence.” Journal of Conflict Resolution, 46(5): 599-628.

Friedman, David D. (1994). “A Positive Account of Property Rights.” Social Philosophy and Policy, 11(2).

Friedman, David D. (1996). “Anarchy and Efficient Law.” In Sanders and Narveson (Eds.), For and Against the State.

Hirshleifer, Jack. (1995). “Anarchy and its Breakdown.” Journal of Political Economy, 103(1): 26-52.

Holcombe, Randall. (2004). “Government: Unnecessary but Inevitable.” Independent Review (3): 325-342.

Humphrey, Shawn. (2010). “Political Economy of Violence.” In Rhona Free (Ed.), 21st Century Economics: A Reference Handbook.

Konrad, Kai and Stergios Skaperdas. (2010). “The Market for Protection and the Origin of the State.” Economic Theory.

Lee, John Roger. (2008). “Libertarianism, Limited Government, and Anarchy.” In Long and Machan (Eds.), Anarchism/Minarchism: Is a Government Part of a Free Country?

Long, Roderick. (2008). “Market Anarchism as Constitutionalism.” In Long, Machan (Eds.) Anarchism/Minarchism: Is a Government Part of a Free Country?

Morris, Christopher. (1998). An Essay on the Modern State.

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