 Our guest this weekend is Edward Stringham. He's a professor of economics at Trinity College in Hartford, Connecticut and he is the author of a fantastic new book called Private Governance. And what this book does is it looks back at the history of private legal systems and in so doing it really demolishes this idea that only the state can deal with human conflicts and adjudicate those conflicts. And Ed gives some concrete examples, some real-world examples today of how private governance operates even in a statist world. So if you're interested in Rothbardian and Hoppean anarcho-capitalism, I think you'll find Ed's book, a great addition to your library and I think you'll enjoy hearing this interview with Edward Stringham. Stay tuned. Ed Stringham, thanks for joining us and welcome to Mises Weekends. Nice to be here. Thanks so much for having me. Well, first and foremost, I want to say congratulations. Your new book, Private Governance, has been out a couple months now. The subtitle is Creating Order in Economic and Social Life. Now, this is an Oxford University Press book so it's obviously a great publisher. Now, I have to say it's a physically beautiful book. I mean, they did a fantastic job on it. I love the cover and I'm impressed by the lineup of the blurbs you managed to get on the back. We've got Peter Teo, we've got Andrew Napolitano, Leonard Ligio, Walter Block, Tom Woods, all saying good things about the book. So tell us a little bit about how the book came to pass. Thanks so much. I'm really honored and flattered that all those people said good things. The idea behind the book is asking whether markets depend on government. The most crucial question, I think, of all is to what extent do markets depend on government? And my own opinion is, and this is what I've found throughout history in all the research examples in this book, is time and time again, markets working even when government is not underpinning them. So the standard idea is government needs to enforce contracts, protect property rights. And you look throughout history and you find tons and tons of examples where government either is unknowledgeable about supporting markets or uninterested in supporting markets, or even when government exists just incapable of solving private problems in a low-cost way. So instead of people sitting around and doing nothing about the problem, you see tons of examples of private parties figuring out ways to protect their property rights and facilitate exchange. Well, I'm interested in the title you chose. Someone, I believe it was Jim Ostrowski, talked about the term anarcho-capitalism and how unfortunately that term contains two words that have negative connotations in the minds of a lot of people, whether we like that or not. Private governance, I think it's a great term. Is it something you coined or is it just something that you've heard? Well, there have been uses of that historically here and there. So I'm not the first person to come up with that term. But I will say that they've mostly been in passing and I would say that I'd like to see a more systematic use of this term. I think that it does describe what the term you were talking, anarcho-capitalism, does have a lot of negative connotations and this term is very, I think, compatible with that term. But it provides a more positive description of how things actually work in a positive way. So rather than saying, well, we can't do that, you can't do that, this is trying to describe how things actually do work when we have governments, when we don't have governments, we do have lots of private governance. Well, I noticed you did a take off of Hayek's road to serfdom. You dedicated this book to legal centralists of all parties. Tell us about what you were thinking there. So I think that most people could be described what Williamson, Glantz, and a lot of other people define as legal centralism. And legal centralism is the idea that all market exchange must be underpinned by government. Otherwise, you're not going to see it. And so to a legal centralist, they look out at the world and they say, okay, there's markets, must be government-enforcing properties, right? Must be government-enforcing contracts when there's a problem. The legal centralists say, well, okay, let's look to government to solve it. Let's have a new law. Let's have a new cop. Let's have a new regulator step in to solve this problem. And to me, that whole view is erroneous and it makes a lot of assumptions that are just wildly optimistic about the state. And so I dedicate the book to legal centralists of all parties because this view is common, not just among extreme left-wing people. It's common among extreme right-wing people. It's common among a high percentage of libertarians where they assume you cannot have markets without the state. You can't have exchange without government enforcement. And I'd like to just question that whole line of thinking. Well, maybe the thought today should be that as we move beyond, hopefully left versus right, that maybe the real issue of our day is centralized versus decentralized. I think decentralized is important. But I'd really like to focus on the voluntary, contractual nature of private governance. So let me just give an example. When you opt in to eBay, they have a bunch of private rules and regulations that everybody who does exchange in that market, everybody agrees to. When you live in the United States, you're not really ever given a choice to opt into or opt out of the Dog Frank Act. The same thing is the case with a local government legislation. You don't have a choice if the local town hall annexes a new law on your property that's going to affect how you can do business. And so to me, eBay is much bigger than your local town hall. But the main difference is that eBay is a private voluntary association, whereas the United States government or your local town hall is imposing legislation on people whether they like it or not. Well, I think eBay is really a fascinating example. My wife's a big eBayer. And people who operate on eBay within the rules, within the parameters to which they agree, they really are not thinking or motivated by external constraints like, well, if I don't do this, I'm going to fall outside of eBay's rules and get into a lawsuit or someone's going to call the police or something. I mean, the vast majority of eBayers really do comply. They really do sell what they say they're selling. They really do send the money. They really do ship the product. I mean, the amount of transactions on eBay that occur without a hitch must be 99.9%. It's really staggering. I think it's a fascinating example. Yeah. So a lot of people predicted that it would be impossible before it existed. But the founders of eBay said, hey, look, first of all, people tend to be honest. Second of all, we can rely on certain private mechanisms to ensure and encourage that honesty. So they have the well-known ratings system. If you don't follow through with your order or you ship bad goods, you'll get a bad rating. So that's the first line of defense. The first private rule and regulation is simply a reputation mechanism. After that, in the very few cases where there actually are problems, and sometimes they do exist, eBay does have a private dispute resolution system where they'll step in and do a small investigation. That happened to me once. Actually, I was trying to buy a tie. I got the wrong tie and the guy just didn't respond to any of my emails. And because of that, eBay realized that the person was not acting in good faith, and they simply just returned my money. So you've got basically all of the functions that people assume must be done by the court system. It's done privately. Rather than relying on a thousand-dollar or multi-thousand-dollar legal trial, you have a very streamlined and private system to solve the problem. Well, let's think about that on a bigger scale. You're not just buying a necktie on eBay between two parties, but what about large multi-national corporations? They do business around the world and they have established complex private arbitration schemes because for them, it's just not practicable to litigate problems in all these different jurisdictions. They have an inherent self-interest just like the eBay or has a self-interest of creating rules that get rid of all these transaction costs and that people follow from self-interest. That's exactly right. So private government is very important for very small transactions like a necktie where the cost of going to court would dwarf the value of what's at stake. But it's also extremely important for large transactions, which there's tons at stake and oftentimes very timely issues. A multi-national corporation that does thousands of deals in a day, they can't afford to have that money tied up in a court case that might take months or internationally some court cases will take years or even decades. And I've chatted with plenty of businessmen who've been involved with this stuff and they said, never again do I want to get involved with a trial. It's just a nightmare. So people don't want to do that. It's just too costly. So instead, people rely on tons and tons of private rules and regulations to avoid that. And one of the simple ex-post ways of dealing with things is through an arbitration clause, mediation, alternative dispute resolution where people say, hey, look, you and I have an incentive to follow through with our word. But if there's ever any misunderstanding, let's have a private third party who understands this business look at things rather than having us get assigned to some random government judge who really has no idea how this business works. Well, you mentioned earlier this kind of blind faith that we need the state to, for instance, enforce contracts. Patrick Byrne, the Overstocks CEO, is recently at Mises Institute talking about how encryption and blockchain technology might make it possible to have like land transfer titles to ensure payment, that sort of thing. Talk a little bit about how technology might make private governance easier and lower transaction costs. So the cool thing about private governance is not a one-size-fits-all solution. And people are always searching for new and better ways of doing things. And I'll share a couple of stories about the advent of electronic commerce and the role that companies like PayPal played. At first, the internet was like the wild, wild west and it was great. It opened up trade to everybody around the globe and that's great. But it also exposed companies like PayPal to fraudsters from around the globe. And whether we like it or not, whether they like it or not, it's not possible to call the government and say, hey, look, some anonymous fraudster, we don't know who it is, just stole our money, go track them down. Or even if you track the person down, some fraudster located in Kazakhstan stole our money, please recover our money. Those are just not feasible options in the modern world. The government in PayPal's case did some investigations and they basically were pretty much all but clueless about the technology. There's this one story Peter Thiel tells where they did the investigation and then they went to PayPal and asked questions like, what's a banner ad? So just really simple technological things where they were way behind the curve. So rather than relying on government, which was not providing any solution at all, PayPal figured out how to detect and predict fraud and assign likelihoods to each transaction of whether or not it was legitimate or illegitimate and basically protect the problem of online fraud ex ante rather than relying on government. And this is a nice story because it actually has now spread to tons and tons of other companies to credit card companies use a lot of the same types of technology with prediction ex ante. So beforehand, rather than relying on government courts after the fact. So because there was so much at stake, private party figured out a way to solve it. And I would say the same thing is likely going to happen or not the exact same thing, but something similar is likely going to happen in the future with these examples you mentioned as new technology gets invented. There might be new challenges, but that's going to open up a lot of opportunities for people to figure out better ways of protecting their property rights or facilitating exchange. What I really love about your book is that, you know, as libertarians, we understand the difficulty in changing people's minds in political ways or in ideological ways. But with private governance, we can take a third tech. We can say, hey, here's what works. And I think Uber is a great example of that, right? Highly regulated taxicabs, the medallion system, all that. It's hard to get a cab. The driver's bad. He don't know where he is. He doesn't come. And Uber comes along and with no ideology whatsoever, people just get that it works and they get that, you know, the driver has a self-interest in being nice and in not having you leave a bad review, et cetera. Do you see the sort of the potential as libertarians for us to sort of sell people on private approaches without having to change their minds politically? Yeah, I think that philosophical discussions are necessary and useful. But for a lot of discussions, showing people, pointing people to examples to say, hey, look, this is not some abstract theoretical, philosophical idea that I'm having. I'm not saying, well, ideally in some science fiction world that I'm imagining markets could solve things in some theoretically better way than the current state. We can actually look out the window and say, hey, this is not a pipe dream. This is actually how commerce has existed for hundreds of years. It has not been backed up by the state. The example that we can chat about perhaps in a minute, the stock market government did not enforce those contracts for hundreds of years. People figured out how to privately enforce them and to say, look, this is a private innovation and private innovation has made the modern world possible. And yes, the same thing is true with Uber. I imagine a lot of chicken littles would have predicted, oh, my goodness, if we allow a private company to let private parties get in their cars, everybody's going to die and it's going to be terrible. But we can look at this and say, this is actually amazing. It's lowered the time to get a car. It's lowered costs for the consumers. It's actually increased the income for the driver. So all around you can show that the market has produced all these great things. Well, you mentioned the stock market. Let's talk about the great crash of 08. Of course, the progressive narrative is that that was caused by a lack of regulation and greedy capitalists investing in CDO obligations, that sort of thing. But really what occurred, I think, is that the natural regulator of companies and investors, which is bankruptcy and liquidation, was not allowed. That process was not allowed to take place. Yeah, I totally agree. So I had an article in public choice last winter where I call it, it's not you, it's me. So no, it's not me, it's you, the non-failure of Wall Street during the 2008 economic downturn. And the idea is that government regulators are always claiming to know things that they don't necessarily understand. And when they enact a bunch of bad policies and then things go awry, they never look at the mirror and say, oh my goodness, we made a mistake. They always look at the private sector and say, you, you did it. And that definitely was the case, I would say, with the 2008 economic downturn. There were a lot of regulations that were introduced, some very funny monetary policy, raising interest rates very rapidly over just a few quarters. And then afterwards to then saying, oh, see, look at Wall Street, Wall Street did it. It's not our fault, it's Wall Street. So I think this is kind of a longstanding deploy that the government officials have done for hundreds of years. But I think we need to start questioning them and saying, hey, are you guys as omniscient as you really say you are and are the private parties really as bad as you say they are? Both Rothbard and Hoppe talked a lot about an insurance model. And I want to get your thoughts on this. It seems to me that insurance could do two things in a system of private governance. First, of course, it could compensate people when bad things happen in a way that it just involves private contract and doesn't involve the state. But second, private insurance can act as a regulator, a governor on behavior of sorts because unlike the situation now where you can sort of offload the choices, your lifestyle choices onto the public in an insurance model, sort of the riskier activities you engage and the more your premium goes up. So give me your thoughts on the role insurance can play in private governance. Yeah, I agree with that. For the most part, we can look at this in the collateralized debt market, credit default swap market, where you see riskier products had to basically have insurance, which was called the credit default swap. And the people who had very good credit risk had lower insurance premiums. People had higher default risk, had higher insurance premiums as in the cost of ensuring that debt was much higher. And a lot of people look at these markets and say, oh, look, there was payouts that happened. And I actually look at it and says, well, payouts did happen, but in many of the cases, we've got a case of a riskier venture or riskier investment going bad. And that risk was priced into the transaction. We can also look at that with credit card payment processors. Credit cards are very good at looking at which types of products and transactions are more likely to have fraud involved with them or things called charge backs where somebody claims that they didn't actually purchase the product. So the average product, the loss ratio is less than 1%, but certain products, there's a lot more fraud and there's certain products that might surprise you. Fortune tellers have a lot higher rate of charge backs against them. So I guess they can't perfectly predict the future. And those riskier products get pulled into high risk payment processors. So the better that people are at assessing the risk ahead of time, they can actually basically charge a premium for those types of products. And it's essentially acting as pooling risks, charging people for risk in the exact same way that an insurance market charges for risk, pools risks. And you've got the payment processor in many cases assuming those risks and managing those risks on the behalf of everybody else. So you don't have to have each individual saying, I'm going to do all the calculations myself. You can hire another company to actually act as your insurer. Ed, we just have time for one more question. So I'll leave you with this. Let me play devil's advocate for a moment. You and I can point to an example of a private community like eBay or even almost a private city for a day like Disney World that has its own security, its own processes, etc. And talk about how well those systems work without the state. But I know what the critic would think. The critic who does not agree with your book who has questions about your book would say, aha, but you know what? Underlying it all is the knowledge and tacit understanding that we can always go to the state if everything breaks down. In other words, there's still going to be a state court or a state police officer underlying all of this in case your private systems don't work out. So how would you respond to this kind of criticism? Yeah, that's a standard assumption of a legal centralist. And to see why that's not true, we can look at tons of examples where government explicitly refuses to enforce contracts or government is by all means incapable of enforcing contracts. And we can see that in modern times across nations when people interact, it's theoretically possible for people, two parties in different countries to establish jurisdiction in the other country and start a trial and have that trial litigated in the other country. As a practical matter, these things will take years or decades. So I don't think we can say, oh, it's because of the government. But assume that government is backing up those contracts, which I think is a very fanciful assumption. But historically, we can look at entire markets where government did not understand them. Government refused to enforce contracts in them. And the one that I like to highlight is stock markets. People thought that government official size forms are gambling. They thought it was used to manipulate prices. And in those markets, government simply was not involved. They said, we're not going to enforce contracts. And for hundreds of years, stock brokers developed very sophisticated forms of trading, short sales, forward contracts, option contracts, even though none of them were enforceable by law. So one would have to make the argument that the stock brokers from the 1600s knew that hundreds of years later, the government was going to theoretically enforce these contracts. And that was what was making these things work. Whereas in reality, private parties were governing themselves successfully for hundreds and hundreds of years. Well, ladies and gentlemen, if you're interested in this topic, I really recommend Edward's new book. Again, it's called Private Governance. It has some great historical examples of how private marketplaces can work and have worked. It'll challenge a lot of your assumptions, or at least your friends and family's assumptions. It's available from Oxford University Press. No doubt it is on Amazon. It's also available for sale through Mises.org on our own bookstore website. And Ed Schringer, I want to thank you so much for your time today. Ladies and gentlemen, have a great weekend.