Friday, October 26, 2007

Markets W/O States|Stateless Markets

I have been engrossed in a discussion about Zero-Sum Games and then the question came up that 'can markets be formed without the control of the Government'? I do make a distinct and important difference between the formation of a Government that creates rules and laws that enables and facilitates the peaceful trade between peoples and that what it is called as the State or as I like to call it "Police State". I use that phrase since it gives the importance that this State not only manages the functioning of government but also has a force beyond what people voluntarily provide in government functions-like volunteer firefighters. The inspiration for the above distinctions comes from a book by Albert J. Nock called Our Enemy, The State. From the link: His Classic Critique Distinguishing 'Government' from the 'STATE'.

So I got to thinking of times that neither Governments or States are there to administer rules for trade, and this is what this post tries to do. One of the most ubiquitous trade that happens without intervention is the actions of young people that look for odd jobs and such. Obviously it takes a certain person to willingly rip off a young person. Social norms are the binding force that prevents most contracts from being broken. Word of mouth and community discussions usual ferret out the people that are likely to take advantage of even the simplest contracts. Our conversations got a little interesting around here.
...It is the police state that perverts markets. You are right that drug dealers do not have property rights that the courts will support. But if there was no penalties for individuals to trade then adults would behave like adults and trade. Many trades in our society are below the level that Police want to get involved in. Just get the wrong change at a store and see if you get your money back. The local person that mows lawns for a few dollars, does he need the state to protect his rights?

Before passing prohibition, many people made moonshine and traded but only with passing of the constitution did it make it profitable for criminals to get involved. I would suggest you read the book "Free Market Environmentalism". RR
This self quote brings us to another way of looking at this as the issue of what happens when Police States try to prevent trade between consenting adults. The following is from Arnold Kling, an economist that I truly look up to.
Drug Prohibition
What difference does it make whether you address substance abuse with taxes, as we do with alcohol and tobacco, or with prohibition, as we do with cocaine and heroin? There is a sense in which the two approaches lead to similar results--an increase in price and a reduction in available supply. However, the tax maintains order while prohibition produces disorder.

As Richard E. Wagner points out in the essay quoted at the beginning of this article, the spontaneous order of the market can adapt to a tax relatively easily. However, when government tries to control supply, disorder emerges. Profit opportunities are created in crime and corruption. Compare the crime and mayhem in the market for drugs with that in the market for cigarettes. Or compare the disorder that resulted from alcohol Prohibition with the order that prevails today.
So governments can enhance a market but it takes a lot for a State to prevent such trade actions. A phenomenon that even Communist Countries have problems controlling. Which ironically shows that even Libertarian Economists (actually a Masonomist) believe in libertarian paternalism. Of course this assumes that the social good of minor manipulation of the market is better than just letting the markets solve the problems.

Before the US States were even established, settlers, farmers, ranchers and others had to resolve property rights issues. This was especially true with regard to water rights. The following link entitled Montana Water Rights has a good history of what techniques were used in Montana (Pages 1-10) and more broadly across the Western States. I remembered this from the book Free Market Environmentalism by Anderson and Leal. They also write for PERC.

Another area that is getting more attention lately is ungoverned areas of Africa with the rise in discussions of Africom. One market that is doing well is Telecommunications as the article Telecoms thriving in lawless Somalia shows. Even in lawless areas telecommunication is important. As I see it the capital that is used in building up networks has very low value for most to try and steal, but provides an important service that nearly everyone needs including the ones with more power. Incentives are low to steal but the benefits are high. The structure is almost like roads, how many people try to steal a road?

The Development of the U.S. Currency System has a short excerpt on Barter and commodity money:
The best known form of commodity money among the Native Americans is the wampum: beads of polished shells strung in strands, belts or sashes. The use of wampum was widespread in North America and it became one of the major forms of commodity money used extensively by the American colonies (established by the French, English and Spaniard).

The reason that wampum and other forms of commodity were used as a medium of exchange is because the colonial governments in Europe fear that the colonies will become financially independent if they have the power to coin money. As a result, wampum became a money substitute (in the colonies) together with beaver skins, tobacco, corn, rice, and other commodities.
Without getting into a specific tribe and type of trade, I would conclude that forms of government were non-existent or failed to be formalized for most issues like trade.

And lastly humans are basically cooperative beings and thus cooperation results better returns than competition or in other words playing the Scorpion in trade will not likely result in very high returns. I found the following paper (PDF) really interesting: Cooperation versus Competition.
Among cooperative populations, Generous TFT is sometimes the dominant strategy, but much more frequently, an altogether different strategy, the Pavlov strategy, dominates.8 A Pavlov player cooperates after experiencing a reward or a punishment and never otherwise. After experiencing a reward for mutual cooperation (3 points each), the two players repeat the former cooperative move; after being punished for mutual defection (1 point each), they both switch to cooperation; after getting away with a unilateral defection (5 points), a player repeats the defecting move; and after being subject to the sucker’s payoff for unilaterally cooperating (0 points), a player reacts by defecting. At first, this rule may seem odd: It tells you to defect if your coplayer’s move was different from your move in the previous round. A second glance reveals that the rule makes sense: The Pavlov rule tells you to stick to your former move if it earned you a high payoff but change your behavior if it brought you a low return.
Basically then society needs governments only for occasional protections from The Scorpions as in the parable of the Scorpion and the Frog. And even the approach by Gandhi may not be enough to prevent the Scorpions from getting the upper hand...



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