Dani Rodrik blogs today on the possibility of anarcho-capitalism. Although he comes down on the side that it won't work, I'm delighted to see an economist of his quality and caliber engaging this issue directly. As Rodrik summarizes his skepticism of market anarchy:
"My mind cannot stretch that far. We know from game theory that self-enforcing agreements become impossible to maintain as the number of participants increases and mobility rises--precisely the conditions under which markets deliver the goods. The alternative is third-party enforcement of contracts. And I would rather rely on a democratic state than on the mafia to do the third-party enforcing."
His comment points to the two critical obstacles that market anarchists must confront: (1) the problem that large, socially heterogeneous populations pose for self-enforcing arrangements;(2) the problem that violence/strength disparities pose for these arrangements of self governance.
Standard folk theorem-type mechanisms, such as reputation, can secure 'good' conduct when populations are small, agents are socially homogeneous, and individuals have roughly equal physical strengths. However, as I have pointed out in previous research, such mechanisms break down when these conditions are violated.
Unlike Rodrik, however, I believe that economic logic and evidence support the contention that anarchy is capable of overcoming both of these obstacles, which would otherwise prevent widespread cooperation without government.
This argument is the focus of my research. "Social Distance and Self-Enforcing Exchange" (forthcoming in the Journal of Legal Studies) deals with how anarchy solves the problem associated with large and socially heterogeneous populations. "Trading with Bandits" (forthcoming in the Journal of Law and Economics) deals with how anarchy solves the problem associated with threat of violence when agents have disparate strengths.
These papers argue that the breakdown of folk theorem-type mechanisms of cooperation under conditions of large numbers, social distance, and disparate strengths does not prevent individuals from developing alternative (non-folk theorem based), private institutional arrangements to enable cooperation and make exchange agreements self-enforcing in the absence of government.