The Amsterdam Stock Exchange, built in 1608 PRIVATE ORDER The history of private governance offers a glimpse into a world of social and economic freedom, writes Darcy Allen.

Enter ’s Private Governance: Creating Order in Economic and Social Life. This book DARCY ALLEN is an excellent addition to a small Research Fellow at the Institute of Public Affairs but growing collection of private governance literature—including Unbound by Pete Leeson and ibertarians hail the The Social Order of the Underworld by wonders of ‘private David Skarbek—analysing situations governance’—the idea that where governments don’t have the left to their own devices, ability, knowledge or incentive to solve L Private Governance: free people will organise themselves societal problems. without needing the coercive power Creating Order in Economic For centuries, Stringham claims and Social Life of the state. To others, however, this private individuals have filled the libertarian view is akin to riding By Edward Stringham void where government regulation is Oxford University Press, June 2015, 296pp unicorns—no one can quite see too costly, too time consuming or is any tangible examples. All they can simply unable to be effective. This is see is the power of government, Can the cooperation, trust, private governance. a potent force solving almost all and voluntary agreements of Most research with a focus on societal problems. Everywhere they private institutions outperform cooperation in the face of conflict uses look—from zoning to drug laws— coercive government alternatives? abstract economic game-theoretic the government is there to help. This is fundamentally an methods (often observing people Supposedly, the fabric of society will empirical question. Such empirical cooperating in a lab). In contrast, be torn apart without state coercion. evidence, however, has long Stringham analyses the real world, But how do we really know? been lacking. asking key questions. How do markets

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work? What are the mechanisms This private governance worked There is one important omission in employed to overcome trust issues? long before governments could even the book—a discussion on blockchain Must a coercive state provide a shadow understand what it was. (or bitcoin) technology. A chapter over private dealings? How is social Stringham also touches on on this would have added depth to order provided where the government historical examples of private , Stringham’s discussion on private is either ineffective or simply such as the San Francisco Patrol governance. The blockchain brings to uninterested in facilitating exchange? . These examples, life the competitive rivalry between The earliest stock exchanges from however, raise messy questions. governance structures, removing Amsterdam to New York thrived, When does ‘private governance’ monopoly and enabling competition. despite governments explicitly become ‘public governance’? At Leaving the provision of governance banning exchange. Brokers in these what point is a private police in the monopolist hands of the nascent stock markets with growing force no different from a coercive state means there is little feedback market capitalisation devised their state one? The difference is that (democratic voting is slow and own rules with no recourse to the private governance mechanisms expensive) to discover the optimum state. These arrangements were must compete for their customers. level of rules for society. The best essential in underpinning exchange Monopoly state governments do system enables different governance and making the markets work. not. For instance, when you choose mechanisms, each with their own At the London Stock Exchange, a credit card, you’re choosing unique level and quality of rules to for example, rules emerged from between governance mechanisms. compete. May the best protocol win. within because brokers realised The difference between private and New technologies are they could make their markets public governance, then, is a matter increasingly bringing competition more efficient. Brokers met in of degree, namely the cost of ‘exiting’ back into governance. And when coffeehouses (which later became one governance mechanism and we have competing providers of the bustling exchanges we know entering another. It seems relatively rules, just like there was between today) and enforced listing easy to change credit cards. It’s not so the New York Stock Exchange and requirements, screened each firms’ easy to change cities. the London Stock Exchange, there’s credibility and required disclosure. an incentive to produce a ‘club’ As membership grew, the cost SUPPOSEDLY, THE good which best suits its members. of defecting on agreements rose. FABRIC OF SOCIETY Technologies such as the blockchain Cooperation was incentivised before > WILL BE TORN APART will only make private governance a the courts become necessary. The WITHOUT STATE more effective and pervasive force in rules became a crucial backbone COERCION. BUT HOW the years to come, taking away the for the development of some of the DO WE REALLY KNOW? government’s monopoly position on world’s largest financial dealings. provision of rules. Even now, in the face of what Definitions aside, the best chapter Governments are, of course, seems like an omnipresent state, of the book focuses on the poignant not always there to help. They are private governance is widespread— lessons of the great Friedrich often absent, unknowledgeable, it’s just hard to see. Take for Hayek on the market as a discovery incompetent or simply instance the fast-moving technology process. In regular goods markets, uninterested. In this book, sector. In early 2001, PayPal was monopoly positions tend to be Stringham provides real examples losing over $10 million a month undesirable because they offer no of where the market has filled that to fraud. While fraud is of course feedback mechanism. No feedback void through private governance. illegal, the tools of government are means less discovery of what the This private order often solves ineffective at catching criminals market wants. The same story problems before they happen online, especially across multiple applies for governance. Competitive (rather than use the courts after the jurisdictions. Governments simply governance is a fantastic mechanism fact) and it’s much more widespread cannot keep pace. With their because feedback creates an than commonly believed. As business in jeopardy, PayPal chose evolutionary selection process. One research progresses, it will provide a different path—prevent fraud bank might be cheap and dirty, the irrefutable evidence on the benefits before it happens. They developed other expensive and secure: The of private governance. Hopefully monitoring systems to detect optimum governance mechanism for libertarians, they won’t have to suspicious transactions in real time. sits somewhere on this spectrum. ride unicorns much longer. R

NOVEMBER 2016 | IPA Review 63