Academic journal article Atlantic Economic Journal

Extending the Analysis of Spontaneous Market Order to Governance

Academic journal article Atlantic Economic Journal

Extending the Analysis of Spontaneous Market Order to Governance

Article excerpt

Introduction

How much do markets depend on the state? Austrian economists from Carl Menger and Eugen Bohm-Bawerk to Ludwig Mises and Friedrich Hayek argued that markets can effectively handle much more important functions than pretty much all non-economists and most economists assume (Boettke 1995; Salerno 2002). They discussed how people with seemingly different interests can actually coordinate through a market system. A system that relies on private property, prices, and profits and losses encourage people to work together and create an amazingly complex decentralized order, and the government need not design the system or direct individuals at every turn. At the same time, however, these same economists believe that the state plays a crucial role in creating the framework. Without government enforcing property rights and contracts, a market order could not emerge. Mises (1927/2002, p.39) writes: "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." Hayek (1978) states, "Our spontaneous order of society is made up of a great many organizations, in a technical sense, and within an organization design is needed. And that some degree of design is even needed in the framework within which this spontaneous order operates, I would always concede; I have no doubt about this. Of course, here it gets into a certain conflict with some of the modern anarchists." (1) To these economists, the market may work wonders but markets have their limits and ultimately depend on the state.

But if one looks back in history, the rules for many of the most important markets came from markets. Since time immemorial government officials have had little understanding or respect for advanced financial markets, yet these markets emerged long before government was enforcing contracts therein. In the world's first stock market, in seventeenth century Amsterdam, government officials considered all but the simplest transactions as forms of gambling, and thus unenforceable. Nevertheless, an amazingly complex market with forward contracts, short sales, and options emerged (Stringham 2003). Likewise in eighteenth century London, government officials passed various prohibitions on the stock market, but brokers traded anyway and transformed coffeehouses into private clubs to create and enforce rules (Stringham 2002). Similarly the New York stock market emerged out of Tontine Tavern and Coffee House on Wall and Water Street and the brokers gradually adopted more rules for brokers and listing companies. Mises is quoted as saying that the most fundamental type of markets in a capitalist society is the stock market: "A stock market is crucial to the existence of capitalism and private property. For it means that there is a functioning market in the exchange of private titles to the means of production. There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist" (Rothbard 1995, p.426). Yet it turns out that the rules for this most fundamental market were created and enforced by what I will call private governance.

These are just a couple of the examples of private rules and regulations that economists have been documenting for the past couple of decades (Anderson and Hill 2004; Benson 1988, 1989, 1990, 1994, 1998; Bernstein 1992; Clay 1997; Curott and Stringham 2010; Ellickson 1991; Foldvary 1994; Greif 2006; Johnsen 1986; Landa 1994; Leeson 2007, 2008, 2009, 2014; Powell et al. 2008; Schaeffer 2008; Skarbek 2014; Smith 2014; Stringham 1999,2007; Stringham and Zywicki 2011a, b). (2) I think it is accurate to say that among self-professed Austrian economists in America today, most believe that the rules and regulations for markets can be created by markets. The same may be true in some other countries. …

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