In a recent paper, Efficient Anarchy, Peter Leeson examines the conditions under which anarchy is efficient. There are, essentially, two reasons for the existence of anarchy as a means to organize a society. Either the costs of government exceed the gains from government, or the gains from government are so minimal that, taking transaction costs into account, individual agents lack the incentive to create one.
What are the costs of government?
• Organizing collective action, including, of course, the opportunitiy cost of those whose individual choices are being replaced by collective action.
• Enforcing the rules promulgated by the government, which requires courts, police, and an admininstrative system.
• The costs of providing traditional public goods such as roads and education.
The primary gains from government are the reduction of uncertainty and the lowering of transaction costs for exchanges among strangers. A simple formula captures this framework. L (= low) is the net welfare in a state where government is absent. H (= high) is the net welfare in a state where government is present. G is the cost of government. It follows that government is rational only if H - L > G. Where H - L < G, anarchy is efficient. There are certain common environmental factors that influence both the direct costs of government and the indirect gains from government. Here is a partial list. • Population size. The greater the population size, the higher the cost of organizing and enforcing collective action and the greater the potential benefits from trade. • Diversity. The more diverse a population in terms of endowments, preferences, and productive abilities, the higher the cost of achieving consensus and the greater the benefits from trade • Social norms facilitating exchange. If such norms are present (e.g., arbitration, non-communal possessions), trade will yield greater benefits, which diminishes the potential gains from formal government. Against this backdrop, Leeson proceeds to outline the two types of efficient anarchy: Having established what affects the cost of government and what affects the benefits government provides by moving society from a lower trade equilibrium to a higher trade one, it is now possible to distinguish two types of efficient anarchy: (1) “big G anarchy,” in which despite the presence of a substantial gap between social wealth in the higher vs. lower trade equilibrium, government is too costly to justify its emergence, and (2) “small H – L anarchy,” in which even though government may be inexpensive to create, the difference between social wealth in the higher and lower trade equilibrium is so small as to make the state inefficient on cost-benefit grounds. At least theoretically then, these are situations in which statelessness is socially optimal. A society of rationally self-interested agents operating in either environment would thus (rationally) choose anarchy over government. One of the most intriguing aspects of Leeson’s paper is that he is unafraid of applying his theoretical framework to the real world. “Small H - L anarchy,” Leeson proposes, is observed in small, primitive societies … such as the Eskimo tribes of the North American Arctic, Pygmies in Zaire, Indian tribes like the Yoruk of North America, the Ifugao of the Philippines, the Massims of East Paupo-Melanesia, Indian tribes of South America like the Kuikuru, the Kabyle Berbers of Algeria, the Land Dyaks of Sarawak and the tribal Santals of India, none of which had governments. In these societies, because of their relatively small population size, exclusionary social norms, and homogeneity of endowments, preferences, and productive abilities, the markets are so thin that the benefits from government (moving from L to H) are not sufficient to outweigh the costs G of forming even the most minimal state. Leeson’s example for “big G” anarchy is international relations. Given the world’s population of 6.5 billion and significant differences in endowments, preferences, and abilities, the potential gains from trade are enormous. International anarchy, consequently, must be the result of the costs of truly global government outweighing even those massive gains. In Leeson’s words: Organizational costs [of a world government] would also rise considerably because of the vast increase in the heterogeneity of the relevant population. If it is difficult to arrive at a decision regarding where a new police station is to be located within a community of 20,000 suburbanites, imagine the difficulty of coming to a much larger decision when over a billion people are involved from Beirut to Mexico City. What is one to make of Leeson’s argument? I find the explanation for “small H - L” anarchy more compelling than the case for “big G” anarchy. One of the main problems with “international anarchy” is that we are leaving the individual as the unit of analysis. Nation states are not individuals and applying an incentive based framework to analyze and explain their actions is fraught with methodological problems. In other words, “big G” anarchy is a very different kind of anarchy than “small H - L” anarchy, the former more metaphoric, the latter more directly rooted in the behavioral postulates of economics. In practical terms, it makes little sense to identify elements of anarchy in the relations between a German and a US citizen, just because their respective nation states relate to each other in a metaphorical state of nature. Rather than looking to the international domain, “big G” anarchy is probably much more prevalent at the micro-level of interpersonal exchanges for which the costs of legal enforcement are too high. There must be millions of exchanges taking place in the US every day, where one party is wronged but effectively left without recourse because the costs of accessing the legal system are too great. For example, few plaintiffs lawyers would take a $1,000 case, and for many, the opportunity costs of going to a small claims court far outstrip the potential gains from winning the case. That’s not a “small H - L” problem, because the gains from moving to the higher level of trade would be considerable. Rather, the cost of providing access to the legal system for minimal “sub-legal” claims is too high. Leeson’s paper is worth reading, if only because the question “Why have government at all?” is no longer seriously asked by mainstream political science. There is no good reason for ignoring this fundamental question. Let’s not forget that modern political science originated with the problem of anarchy in the 17th Century, when Hobbes broke with political Aristotelianism. Of course, Hobbes incorrectly conceived of the natural state as a zero sum game, which led him down the path of government as the necessary enabler of trade. But the fact that Hobbes got the answer (or at least some fundamental assumptions of his analysis) wrong doesn’t mean that he didn’t ask the right question.
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