Tuesday, April 4, 2017

Freedom of contract requires the government

There's a very real sense in which any sort of free market you could have can only exist when it is created by a government.  Without government there might be no third party to prevent me from selling my goods to the person over the hill but at the same time there's nothing preventing that person from just taking my goods and not paying me if he feels that he has a greater capacity for violence.  A world without government doesn't look like the "war of all against all" that Hobbes described in Leviathan since people still have their senses of friendship and kinship but those only extend so far.  Trading without the arm of the state to preclude violence takes trust that has to be built up over long periods of time and tends to occur in very stereotyped forms.  You can't run a modern supply multi-stage supply chain or anything like it without the umbrella of a state unless, against all odds, Nozick's ideas about capitalist anarchy actually work out in practice.

But beyond protecting us and our property from violence governments do something else to enable markets which I think is commonly underappreciated.  They're willing to enforce contracts.

Not all contracts of course.  You can't sell yourself into slavery, to take just one example.  But in general if you and another person come to a formal agreement then if one of you breaks it you can go to the government and it will use all its vast power to make sure the breaker either fulfills their obligations or pays up.  That's a lot of bother on the government's part but it's proven absolutely vital in the development of commercial economies and in the end led to success for the governments which were willing to go to that trouble.

Lets say that I'm really good at making widgets.  And this guy I know knows who wants to buy widgets.  Ideally we'd go into business together and form a widget company.  But if later I could learn from our business who was buying the widgets I could just drop my partner and sell to them directly.  Knowing this that guy might never go into business with me and might have to resort to complicated and inefficient means to prevent me from knowing who the buyers are.  So the ability to create a contract between us preventing this can make us both better off.

Or look at capital.  When I was reading Medieval Machines I was struck by how many of the milling developments in the high medieval era were the result of a bunch of people pooling their money into joint ventures like damning a river to use water power to grind grain.  Without prior and enforceable agreements as to who can use what how the development of large mechanical projects in Europe might not have gotten as far as it did as quickly as it did.

That the industrial revolution happened in Europe rather than China presents a bit of a puzzle.  China in wasn't as wealthy as England with as high wages, but the Yangtze delta was and that was an area as large as England.  Markets were about as free in China on average as they were in England.  The people were as educated though you can quibble about different emphases.  Coal, coal near population centers was certainly a difference I'll grant.  But another important difference was that the English bureaucracy wasn't nearly as selective as the Chinese one.

The idea of selecting officials by written examination was introduced early in Chinese history and it worked really, amazingly well allowing China to amass a unified state far larger than its neighbors and create far greater prosperity as well.  But the very selectiveness of China's meritocracy ended up being a problem because by the early modern era France and England had been expanding their bureaucracies to have roughly ten times as many officials per capita as Russia or China did.  The quality might not have been as high as in China but greater numbers meant more attention to more things and part of that was the enforcement of commercial law between merchants.

In theory Chinese merchants could have contracts but in practice the courts were busy and couldn't be bothered.  There were stories of merchants pretending that a murder had occurred in order to get a judge to see them so they could ask the judge to adjudicate a commercial dispute.  And I wonder if that, along with China's coal deposits being far away from its developed areas, can explain why the industrial revolution happened in Europe.

In the modern day we still see that different people have different access to commercial law, though basically every country cares about it at least in theory.  Fernando de Soto wrote a book, The Mystery of Capital, on how in many third world countries capitalism exists for the rich but not for the poor who have no title to their property and no real access to the court system.  The elites have real contracts but the poor don't and as a consequence inequality is redoubled.

One heartening trend in recent year is the introduction of widespread biometrics in India.  This is still a long way from all the tools of capitalism being widely available but legal identity is the first step and is an encouraging sign.

UPDATE:  And this is the sort of thing that identity provided by biometrics could hopefully help with.  Enough people have been declared legally dead and their land seized that there's a support group for them.

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