The Enterprise of Law

The

Enterprise

of Law

Justice Without the State

Bruce L. Benson

Copyright © 2011 The Independent Institute Previously published © 1990 by the Pacific Research Institute

for Public Policy Cover Design: Roland de Beque Cover Image: © Gary S. Chapman / Getty Images All

rights reserved. No part of this book may be reproduced or transmitted in any form by electronic or

mechanical means now known or to be invented, including photocopying, recording, or information storage

and retrieval systems, without permission in writing from the publisher, except by a reviewer who may

quote brief passages in a review. Nothing herein should be construed as necessarily reflecting the views of

the Institute or as an attempt to aid or hinder the passage of any bill before Congress.

The Independent Institute

100 Swan Way, Oakland, CA 94621-1428

Telephone: 510-632-1366 · Fax: 510-568-6040

Email: [email protected]

Website: www.independent.org

Library of Congress Cataloging-in-Publication Data available

ISBN: 978-1-59813-069-0

15 14 13 12 11 5 4 3 2 1

CONTENTS

Preface: The Enterprise of Law after Twenty Years

Acknowledgments

1 Introduction

Part I From Voluntary to Authoritarian Law

2 Customary Legal Systems with Voluntary Enforcement

3 The Rise of Authoritarian Law

Part II A Public Choice Approach to Authoritarian Law

4 Law and Justice as a Political Market

5 The Demand Side of the Political Market

6 The Supply Side of the Political Market

7 Corruption of Law Enforcement Officials

Part III Reemergence of Private Alternatives

8 Contracting Out for Law and Justice

9 Current Trends in Privatization

10 Benefits of Privatization

Appendix to Chapter 10

Part IV Rationalizing Authoritarian Law

11 Market Failure in Law and Justice

12 The Legal Monopoly on Coercion

Appendix to Chapter 12

Part V From Authoritarian to Private Law

13 Political Barriers to Privatization

14 Envisioning a Private System

Index

About the Author

Praise for The Enterprise of Law

About the Independent Institute

Independent Studies in Political Economy

PREFACE

THE ENTERPRISE OF LAW AFTER TWENTY

YEARS

This is being written on the twentieth anniversary of the first publication of The

Enterprise of Law: Justice Without the State (hereafter, Enterprise). Much has

happened over these two decades. I have continued to engage in research on

justice without the state and on government failure in the provision of law. As a

consequence, my own understanding of these issues has evolved. Furthermore,

while very few legal and economic scholars considered the idea of justice

without the state to be a legitimate research issue in 1990, this is no longer the

case. In fact, the academic literature on topics discussed in Enterprise has

expanded dramatically.

1 Much of this literature corroborates various conclusions

from the book,

2 but there are also growing numbers of critics who apparently

recognize that their command theory of law and their efforts to justify state￾made law are facing serious challenges.

3 As usual, however, the most important

developments have been outside academia.

People’s disgust with many public legal institutions is greater today than it

was in 1990. The reasons for government failure in law are the same as they

were two decades ago, as little has been done to change the fundamental

institutionalized incentives facing government decision-makers detailed in

Enterprise. Voters cannot seem to decide which political party they like the

least, so they put one party in power for a few years, get fed up with its

performance, and put the other party in power. Similar disgust with the public

courts can be seen in the ubiquitous legislative battles over tort reform4 and the

political backlash against decisions like Kelo v. City of New London (545 U.S.

469 (2005)).

5 Dissatisfaction with public policing services grows with each new

procedure imposed in airports by the Transportation Safety Administration and

the never-ending stories of police shootings of unarmed civilians. Political

corruption is so prevalent that it has become an expected part of the process in

states like New York, New Jersey, and Louisiana, not to mention Washington,

DC.

As government failure in the provision of law and justice has continued, the

private sector has responded with innovation in and growth of non-state

alternatives for government creation of and changes in rules, enforcement of

these rules, and adjudication of disputes. Consider Table 9.3, for instance, as it

reports growth in the number of firms offering detective and protection services

in the United States, and number of employees of those firms from 1964 to

1981.

6 The number of firms increased by 285 percent over this period from 1988

to 7126, while the number of employees rose from 62,170 to 331,294, a 423

percent increase. The following Table provides a sampling of these same annual

counts in the 1990s and into the new century, comparing them to both 1964 and

1981.

Clearly the private security industry has continued to grow at a tremendous

rate. The same is true for private dispute resolution services. While a few

examples of arbitration for disputes between firms and their consumers were

noted in Chapter 9, for instance, today it is difficult to find a contract between

firms and consumers that does not have an arbitration clause in it. An entirely

new arena for the private development of rules and enforcement mechanisms has

developed with the emergence of markets on the Internet,

7 but similar

developments also are occurring in emerging markets in Eastern Europe and

Asia.

8

In the process of my ongoing research, I have found weaknesses and/or gaps

in some of my original arguments that I now know can be strengthened and

filled. Other shortcomings that can also be dealt with or have already been

addressed,

9 have been pointed out by critics. None of these problems change the

primary conclusions expressed in the book. In fact, by addressing the problems, I

have solidified my views about the potential benefits of private provision of

justice and the inevitable failure of state legal systems to provide justice. The

only part of Enterprise that I wish I had written differently is the concluding

chapter’s predictions about what a system of justice without the state might look

like. I noted that many predictions about the technology, institutions, processes,

and organizations that might arise are likely to be very inaccurate, but I am now

even more convinced that unshackling the private sector creates such strong

incentives for entrepreneurial discovery that no one can predict the resulting

technological, institutional, and organizational innovations. One need only read

predictions about today’s technology, institutions, and organizations made a few

decades ago by very intelligent and imaginative people to see that this is correct.

Nobel Laureate in Economics, Paul Samuelson, obviously a much more

intelligent person than I am, so misunderstood the market discovery process that

in the 1973 edition of his famous textbook Economics he predicted that the

Soviet Union, which supposedly had a per capita income equal to about 50

percent of the United States’ at the time, should catch up by 1990, and clearly

this would occur by 2015. In the 1989 13th edition of Economics he stated that,

“The Soviet economy is proof that . . . a socialist command economy can

function and even thrive.”

10 The Soviet economy and the command economies in

Eastern Europe that were styled after it collapsed over the next two years. I am

not suggesting that the general predictions of the chapter and Enterprise as a

whole are wrong: private provision of law would be both more efficient and

more just. I am simply saying that what such a legal system might actually look

like is beyond my powers to imagine, so I expect that the picture I drew in 1990

is likely to be much too simplistic.

ENDNOTES

1. For a few of many examples, see Lisa Bernstein, “Opting Out of the Legal System: Extralegal

Contractual Relations in the Diamond Industry,” Journal of Legal Studies, 21 (1992), 115–158;

Avner Greif, “Contract Enforceability and Economic Institutions in Early Trade,” American

Economic Review, 83 (1993), 525–548; Avner Grief, Institutions and the Path to the Modern

Economy: Lessons from Medieval Trade (New York, Cambridge University Press, 2006); Robert C.

Ellickson, Order Without Law: How Neighbors Settle Disputes (Cambridge, MA, 1991); Robert C.

Ellickson, “Property in Land,” Yale Law Journal, 102 (1993): 1315–400; Peter Leeson, “An-arrgh￾chy: The Law and Economics of Pirate Organization,” Journal of Political Economy, 115 (2007),

1049–1094; Paul Milgrom, Douglas North, and Barry Weingast, “The Role of Institutions in the

Revival of Trade: the Law Merchant, Private Judges, and the Champagne Fairs,” Economics and

Politics 2 (1990), 1–23; D. Johnson and D. Post, “Surveying Law and Borders—Law And Borders

—The Rise of Law in Cyberspace,” Stanford Law Review, 48 (1996), 1367–1402; Matt Ridley, The

Origins of Virtue: Human Instincts and the Evolution of Cooperation (New York, 1996); Andrew

Morriss, “Miners, Vigilantes & Cattlemen: Overcoming Free Rider Problems in the Private

Provision of Law,” Land and Water Law Review 33 (1998), 581–696; Andrew Morriss, “Private

Actors and Structural Balance: Militia and the Free Rider Problem in Private Provision of Law,”

Montana Law Review 58 (1997), 115–166; Todd Zywicki, “The Rise and Fall of Efficiency in the

Common Law: A Supply-Side Analysis,” Northwestern Law Review, 97 (2003), 1551–1634; Randy

E. Barnett, The Structure of Liberty: Justice and the Rule of Law (Oxford, UK: Oxford University

Press, 1998); “Daniel B. Klein, ed. Reputation: Studies in the Voluntary Elicitation of Good

Behavior (Ann Arbor, MI: University of Michigan Press, 1997); Terry L. Anderson and P. J. Hill,

The Not so Wild, Wild West: Property Rights on the Frontier (Stanford University Press, 2004); and

Edward Stringham, ed. Anarchy and the Law (New Brunswick, NJ: Transaction for The

Independent Institute, 2007).

2. Examples include O. Volckart and A. Mangels, “Are the Roots of the Modern Lex Mercatoria

Really Medieval?” Southern Economic Journal, 65 (1999), 427–450; C. Fassberg, “The Empirical

and Theoretical Underpinnings of the Law Merchant: Lex Mercatoria—Hoist with Its Own Petard?”

University of Chicago Journal of International Law, 5 (2004), 67–82; E. Kadens, “The Empirical

and Theoretical Underpinnings of the Law Merchant: Order within Law, Variety within Custom:

The Character of the Medieval Merchant Law,” University of Chicago Journal of International Law,

5 (2004), 39–65; C. Donahue, Jr., “The Empirical and Theoretical Underpinnings of the Law

Merchant: Medieval and Early Modern Lex mercatoria: An Attempt at the probatio diabolica,”

University of Chicago Journal of International Law, 5 (2004), 21–37; C. Drahozal, “Competing and

Complementary Rule Systems: Civil Procedure and ADR: Contracting out of National Law: an

Empirical Look at the New Law Merchant,” Notre Dame Law Review, 80 (2005), 523–552; C.

Drahozal, “Busting Arbitration Myths,” Kansas Law Review, 56 (2008), 663–677; and S. Sachs,

“From St. Ives to Cyberspace: The Modern Distortions of the Medieval Law Merchant,” American

University International Law Review, 21 (2006), 685–812. These and other criticisms are being

rebutted in Bruce L. Benson, “Yes Virginia, there is a Law Merchant,” a partially completed book

manuscript, Department of Economics, Florida State University.

3. Bruce L. Benson, “Uncertainty, the Race for Property Rights, and Rent Dissipation due to Judicial

Changes in Product Liability Tort Law,” Cultural Dynamics, 8 (November 1996), 333–351.

4. For detailed discussion see various chapters in Bruce L. Benson (ed.), Property Rights: Eminent

Domain and Regulatory Takings Re-Examined (Palgrave/Macmillan for The Independent Institute,

2010).

5. These data were collected from the annual County Business Patterns reports from the Bureau of the

Census.

6. Note that these figures do not include security employment working directly for non-security firms

like banks, malls, casinos and other recreational firms like nightclubs and Disney World, and so on.

Total employment of private security personnel is substantially higher. A recent newspaper article

contends that there are more than a million contract security officers and another million or more

private security guards in the U.S. compared to about 700,000 public police (Amy Goldstein, “More

security firms getting police powers: Some see benefits to public safety, but others are wary,” San

Francisco Chronicle, January 7, 2007) [most recently viewed, December 19, 2010, at

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/01/07/MNGVENCASV1.DTL].

7. Bruce L. Benson, “The Spontaneous Evolution of Cyber Law: Norms, Property Rights, Contracting,

Dispute Resolution, and Enforcement without State Involvement,” Journal of Law, Economics and

Policy, 1(Winter 2005), 269–348.

8. Bruce L. Benson, “It Takes Two Invisible Hands to Make a Market: Lex Mercatoria (Law

Merchant) Always Emerges to Facilitate Emerging Markets,” Studies in Emergent Order, Spring

2010, Vol. 3, 100–128.

9. See notes 2 and 8, for example, as well as David W. Rasmussen and Bruce L. Benson, The

Economic Anatomy of a Drug War: Criminal Justice in the Commons (Lanham, MD: Rowman and

Littlefield, 1994); Bruce L. Benson, To Serve and Protect: Privatization and Community in

Criminal Justice (New York: New York University Press for The Independent Institute, 1998), and

numerous other publications listed at http://garnet.acns.fsu.edu/~bbenson/.

10. Paul Samuelson and William Nordhaus, Economics, 13th ed. (McGraw Hill, 1989), 837. For

discussion of other erroneous predictions by Samuelson and references to sources dealing with

similar issues, see Alan Ebenstein, “The Poverty of Samuelson’s Economics,” Liberty 17:4 (April

2003), 37–38, http://freedomkeys.com/samuelson.htm last viewed December 18, 2010.

ACKNOWLEDGEMENTS

This project has taken several years to complete, and a large number of people

have either been significantly affected by it or had significant effects on it. I

would like to acknowledge as many of them as I can recall. First, I must thank

my wife Terrie and daughter Lacey for their ongoing support. They put up with

me as I tried to juggle an over-committed research agenda that ate up many of

the weekends and evenings I should have spent with them. The secretaries at

Montana State University and Florida State University typed several very

different drafts of the book, transferred various drafts from one word processing

system to another twice, and finally, one of them taught me to do my own word

processing. But some of the secretaries also got interested in what I was writing

and began to comment on it and ask questions about it. Three deserve special

thanks in this regard: Anne Phillips, Vickie Garland, and Carol Bullock.

Over the course of its evolution, this manuscript benefited greatly from a

number of reviews. In particular, Randy Barnett reviewed the first draft of the

book, and from the perspective of a legal scholar, he recommended much of the

literature on legal theory and history that I have since drawn on extensively.

Furthermore, from the perspective of a former prosecuting attorney, Professor

Barnett corrected numerous misperceptions I had about the criminal justice

process. Finally his extensive comments and organizational suggestions were

invaluable.

Several other reviewers were also very helpful in guiding this book’s

development, including Terry Anderson, Gordon Tullock, Marshall Fritz, Harold

Berman, and C. S. Cockbum. Terry Anderson, in his capacity as the Pacific

Research Institute’s economic advisor, was particularly instrumental in

determining the book’s final form and content. With his help and advice, and

with Marianne Keddington’s editing of the final draft, the book was made

considerably more readable (and much shorter). Other people affiliated with the

Pacific Research Institute provided me with useful comments and reference

material, including Chip Mellor, Charles Baird, David Theroux, and Greg

Christainsen. In addition, correspondence and conversations with Leonard

Liggio (and several other people affiliated with the Institute for Humane

Studies), Murray Rothbard, Lawrence Sherman, and Chuck Logan led me to

explore useful references that I probably would have missed. Encouraging

comments by P. J. Hill and others (again including Gordon Tullock and Charles

Baird) on a chapter I wrote for a Pacific Research Institute book (“Guns for

Protection and Other Private Sector Responses to the Fear of Violent Crime,” in

Firearms and Violence: Issues of Regulation, Don Kates, Jr., ed. [Cambridge,

Mass.: Ballinger Press, 1984]) actually led to my further investigation of the

issues examined in this book. Many discussions with colleagues at Montana

State and Florida State, such as Ron Johnson, Merle Faminow, Terry Anderson,

Rick Stroup, Dick Wagner, Larry Wollen, Tom McCaleb, Randy Holcombe,

Dave Rasmussen, and others I apologize for forgetting to mention, also helped

me formulate and sharpen my arguments. Parts of the book were presented at the

Legal Studies Workshop and the Political Economy Seminar Series at Florida

State University, as well as the Public Choice Seminar Series at George Mason

University, the Austrian Economics Colloquium at New York University, the

Public Choice Society meetings, and the Southern Economic Association

meetings. Discussion following those presentations was very beneficial. The

Liberty Fund also sponsored a conference organized by the Pacific Research

Institute on “Law, Liberty, and Responsible Individuals” in June of 1989. That

conference provided me with an opportunity to subject part of my work to

critical evaluation by a gathering of eminent legal and economic scholars.

Indeed, much of the book has undergone considerable indirect peer review.

Certain sections draw on earlier publications of mine in the Journal of

Libertarian Studies, the Antitrust Bulletin, the Southern Economic Journal, the

Journal of Legal Studies (written with John Baden), the Pacific Research

Institute sponsored book Firearms and Violence: Issues of Regulation, edited by

Don Kates, Jr., and in a chapter (written with M. L. Greenhut) for Antitrust and

Regulation, edited by Ronald Grieson (Lexington Books, 1986). In addition,

materials developed and written for this book have already been published in the

Madison Papers Series, the Harvard Journal of Law and Public Policy, the

Journal of Libertarian Studies, the International Review of Law and Economics,

the Cato Journal, the Journal of Institutional and Theoretical Economics, and

the Southern Economic Journal. I thank all of these book publishers and

journals, their editors and referees, and my coauthors for their contributions. The

Southern Economic Journal’s choice of my paper drawn from this book (“The

Spontaneous Evolution of Commercial Law”) to receive the Georgescu-Roegen

Prize as the best article published in the journal during 1988-1989 is a

particularly pleasing recognition by my peers that my work on this subject might

be worthy of attention.

Several institutions must also be acknowledged. My departments and

department chairmen at both Montana State and Florida State were always very

supportive. The Institute for Humane Studies provided financial support in the

form of an F. Leroy Hill Summer Fellowship, that allowed me to explore a

number of related issues much more deeply than I might have, and much of the

work they supported ultimately found its way into the book. The Political

Economy Research Center also supported the development of several papers that

I have drawn upon for the book. Finally, and most significantly, I wish to

explicitly acknowledge the vital contributions made by people affiliated with the

Pacific Research Institute. I have already mentioned the valuable reviews and

comments on the book from Institute associates, but their contributions go far

beyond that. To start with, the Institute’s willingness to fund the book was what

convinced me that it was a project worth pursuing. The Institute’s continued

support of the project over what turned out to be a much longer period than

anyone anticipated has involved many people. In particular: Chip Mellor’s

behind the scenes efforts to keep the project on track, and to provide the kind of

technical and intellectual inputs I needed, were clearly essential (he also

proposed, organized, and ran the Liberty Fund Conference mentioned above);

Terry Anderson saw to it that the book was written and packaged in a fashion

that would maximize its chances of being marketable (subject to the constraints

arising from the limited abilities of the author); Pam Riley prepared the market

to receive the book; and Linda Clumeck prepared the book for the market. I am

sure that I am unaware of the full extent and importance of the efforts made by

these individuals and others at the Institute. Thank you all for your invaluable

contributions.

Bruce L. Benson

Department of Economics, Florida State University

ACKNOWLEDGEMENTS UPDATE

What goes around comes around. I initiated the project that led to this book at

the urging of David Theroux who was President of the Pacific Research Institute

at the time. In fact, the contract to publish the book was actually signed by

David. David had moved on before publication, but he remained very supportive

throughout the process and since then. This reprinting also was instigated by

David, however, as it was due to his urging that I continued to ask the Pacific

Research Institute to turn the copyright over to me when they were no longer

interested in producing the book. With advice and assistance from Roy M.

Carlisle and David, I was finally able to obtain the copyright, and we

immediately began discussing a reprint.

In addition to David, Roy, and the Independent Institute, other individuals and

organizations also must be acknowledged and thanked for their efforts to keep

The Enterprise of Law alive and circulating. The book never was heavily

advertised, but recognition and readership have grown fairly steadily for years,

largely through word of mouth. Leonard Liggio has always been one of my

strongest supporters and an advocate for the book, even using it in law school

classes. Moreover, the Institute for Humane Studies has done more over the

years to advertise and distribute the book than any other organization. They gave

copies of the book to hundreds of students going through their summer

programs, and information about the book spread from there. More recently, the

Ludwig von Mises Institute has been a primary market source for the book. They

purchased a large number of copies from the last printing done by the Pacific

Research Institute and have been advertising it and offering it for sale at a very

reasonable price on their web page since then.

Many friends around the country have also generously recommended the book

and/or cited it favorably, including Edward Stringham, Benjamin Powell, Peter

Boettke, Peter Leeson, P. J. Hill, Alberto Benegas Lynch, and Nicholas Dykes,

as well as several people at Francisco Marroquin University, George Mason

University and the University of Aix-en-Provence, José Igncio del Catillo and

Jesús Gomez who translated the book into Spanish, and others who deserve to be

named. Thanks to all of you, named and unnamed.